[Timberland Logo Appears Here]
Table of Contents
FINANCIAL REVIEW
Five Year Summary of Selected Financial Data..................... 30
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 31
Consolidated Balance Sheets...................................... 39
Consolidated Statements of Income................................ 40
Consolidated Statements of Changes in Stockholders' Equity....... 41
Consolidated Statements of Cash Flows............................ 42
Notes to Consolidated Financial Statements....................... 43
INDEPENDENT AUDITORS' REPORT............................................. 55
CORPORATE INFORMATION.................................................... 56
29
FINANCIAL REVIEW
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
Selected Statement of Income Data
(Dollars in Thousands, Except Per Share Data)
Years Ended December 31, 2002 2001 2000 1999 1998
- ------------------------ ------ ------ ------ ------ ------
Revenue $1,190,896 $1,183,623 $1,091,478 $917,216 $862,168
Net income before extraordinary
item and cumulative effect of
change in accounting principle 90,200 106,741 124,124 75,247 59,156
Net income(1) 95,113 106,741 121,998 75,247 59,156
Earnings per share before
extraordinary item and cumulative
effect of change in accounting
principle
Basic $2.42 $2.73 $3.09 $1.75 $1.29
Diluted $2.36 $2.65 $2.91 $1.70 $1.26
Earnings per share after
extraordinary item and cumulative
effect of change in accounting
principle
Basic $2.55 $2.73 $3.04 $1.75 $1.29
Diluted $2.49 $2.65 $2.86 $1.70 $1.26
---------- ---------- --------- ------- -------
(1) In 2002, the Company recorded a $4,913 after-tax cumulative effect of change
in accounting principle gain.
In 2000, the Company recorded a $2,126 after-tax extraordinary loss related
to the early redemption of $100,000 in senior notes.
Selected Balance Sheet Data
(Dollars in Thousands)
December 31, 2002 2001 2000 1999 1998
- ------------ ------ ------ ------ ------ ------
Cash and equivalents $141,195 $105,658 $114,852 $196,085 $151,889
Working capital 286,027 277,041 236,687 302,286 291,835
Total assets 538,671 504,612 476,311 493,311 469,467
Total long-term debt - - - 100,000 100,000
Stockholders' equity 372,785 359,238 316,751 272,368 266,193
-------- -------- -------- -------- --------
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discusses The Timberland Company's (the "Company") results of
operations and liquidity and capital resources. The discussion, including known
trends and uncertainties identified by management, should be read in conjunction
with the consolidated financial statements and related notes.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to sales returns and allowances,
realizability of outstanding accounts receivable, the carrying value of
inventories, derivatives, other contingencies, impairment of assets and the
provision for income taxes. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Historically, actual results have not been
materially different from the Company's estimates. However, results may differ
from these estimates under different assumptions or conditions. The Company's
significant accounting policies are described in Note 1 to the Company's
consolidated financial statements.
The Company has identified the following as critical accounting policies, based
on the significant judgments and estimates used in determining the amounts
reported in its consolidated financial statements:
Sales Returns and Allowances
The Company's revenue consists of sales to customers, license fees and
royalties. Revenue is recognized either upon shipment of product to customers
or, for retail customers, at point of sale. License fees and royalties are
recognized when earned. The Company records reductions to revenue for estimated
customer returns and allowances. The Company bases its estimates on historical
rates of customer returns and allowances, as well as the specific identification
of outstanding returns and allowances, which are known to the Company but which
have not yet been received. The actual amount of customer returns or allowances,
which is inherently uncertain, may differ from the Company's estimates. If the
Company were to determine that increases or decreases to sales returns and
allowances were appropriate, the Company would record either a reduction or
increase to net sales in the period in which it made such a determination.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company estimates potential losses primarily based upon the Company's historical
rate of credit losses and its knowledge of the financial condition of its
customers. Historically, losses have been within the Company's expectations. If
the financial condition of the Company's customers were to change, adjustments
may be required to these estimates. Furthermore, the Company provides for
estimated losses resulting from disputes which arise with respect to the gross
carrying value of its receivables and the amounts which customers estimate are
owed to the Company. The settlement or resolution of these differences could
result in future changes to these estimates. If the Company were to determine
that increases or decreases to the allowance for doubtful accounts were
appropriate, the Company would record either an increase or decrease to selling
expense in the period the Company made such a determination.
Inventory Valuation
The Company values its inventory at the lower of cost (first-in, first-out) or
market. Market value is estimated based upon assumptions made about future
demand and retail market conditions. If the Company were to determine that the
estimated market value of its inventory is less than the carrying value of such
inventory, the Company would provide a reserve for such difference as a charge
to cost of sales. If actual market conditions are more or less favorable than
those projected by the Company, adjustments to those inventory reserves may be
required. The adjustments would decrease or increase the Company's cost of sales
and net income in the period in which they were realized or recorded.
Derivatives
The Company is routinely subject to currency rate movements on non-U.S. dollar
denominated assets, liabilities and income as the Company purchases and sells
goods in local currencies. Derivative instruments, specifically forward
contracts, are used by the Company in its hedging of forecasted foreign currency
transactions. The Company uses its operating budget and periodic forecasts to
estimate its future economic exposure and to determine the appropriate levels
and timing of its related hedging transactions. The
31
Company closely monitors its foreign currency exposure and adjusts its hedge
positions accordingly. By their very nature, the Company's estimates of
anticipated transactions may fluctuate over time and may vary from the ultimate
transactions (see Note 2). Future operating results may be impacted by
adjustments to these estimates.
Contingencies
In the ordinary course of business, the Company is involved in legal proceedings
involving contractual and employment relationships, product liability claims,
trademark rights and a variety of other matters. The Company records contingent
liabilities resulting from claims when it is probable that a liability has been
incurred and the amount of the loss is reasonably estimable. Estimating probable
losses requires analysis of multiple factors, in some cases including judgments
about the potential actions of third party claimants and courts. Therefore,
actual losses in any future period are inherently uncertain. The Company
believes that its contingent liabilities adequately reserve for any pending
legal proceedings or claims. However, if actual or estimated probable future
losses exceed, or are less than, the recorded liability for such claims, the
Company would record an adjustment during the period in which the actual loss or
change in estimate occurred.
Long-lived Assets
When events or circumstances indicate that the carrying value of a long-lived
asset may be impaired, the Company estimates the future undiscounted cash flows
to be derived from the asset to determine whether or not a potential impairment
exists. If the carrying value exceeds the estimate of future undiscounted cash
flows, an impairment is calculated as the excess of the carrying value of the
asset over the estimate of its fair market value. The Company estimates future
undiscounted cash flows using assumptions about expected future operating
performance. Those estimates of undiscounted cash flows may differ from actual
cash flows due to, among other things, technological changes, economic
conditions, or changes to business operations. For fiscal 2002, other than
immaterial retail store closing charges, no significant impairment related to
the carrying value of the Company's long-lived assets has been recorded.
Goodwill
The Company is required to test its goodwill for impairment at least on an
annual basis. That test requires that the fair value of a reporting unit is
compared with its carrying amount, including goodwill. The Company establishes
fair value by calculating the present value of the future cash flows of the
reporting unit. The Company uses assumptions about expected future operating
performance in determining estimates of those cash flows. Those estimates of
cash flows may differ from actual cash flows. For fiscal 2002, there was no
impairment of the Company's goodwill.
Income Taxes
The Company generates deferred tax assets and liabilities based upon book to tax
differences. The carrying value of the Company's net deferred tax assets assumes
that the Company will be able to generate sufficient future taxable income in
certain tax jurisdictions to realize the value of these assets. If the Company
is unable to generate sufficient future taxable income in these jurisdictions,
an adjustment may be required in the net carrying value of the deferred tax
assets, which would result in additional income tax expense in the Company's
consolidated statements of income. Management evaluates the realizability of the
deferred tax assets and assesses the need for any valuation adjustment
quarterly.
On an interim basis, the Company estimates what the effective tax rate will be
for the full fiscal year and records a quarterly income tax provision in
accordance with the anticipated annual rate. As the fiscal year progresses, that
estimate is continually refined based upon actual events and earnings by
jurisdiction during the year. This continual estimation process periodically
results in a change to the expected effective tax rate for the fiscal year. When
this occurs, the Company adjusts the income tax provision during the quarter in
which the change in estimate occurs so that the year-to-date provision equals
the expected annual rate (see Note 12).
32
RESULTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
Years Ended December 31, 2002 2001 2000
--------------------- --------------------- -----------------------
Revenue $1,190,896 100.0% $1,183,623 100.0% $1,091,478 100.0%
Gross profit 518,286 43.5 520,775 44.0 508,512 46.6
Operating expense 379,461 31.9 357,682 30.2 324,340 29.7
Operating income 138,825 11.7 163,093 13.8 184,172 16.9
Interest expense 884 0.1 1,560 0.1 5,648 0.5
Other, net (828) 0.1 (196) 0.0 (8,128) 0.7
Net income before
extraordinary item
and cumulative effect
of change in accounting
principle ---------- -------- --------- ------ --------- ------
90,200 7.6 106,741 9.0 124,124 11.4
Extraordinary item - loss
on debt extinguishment,
net of tax benefit of $1,071 - - - - (2,126) (0.2)
Cumulative effect of change
in accounting principle 4,913 0.4 - - - -
---------- -------- --------- ------ --------- ------
Net income $ 95,113 8.0 $ 106,741 9.0 $ 121,998 11.2
========== ======== ========= ====== ========= ======
Earnings per share before
extraordinary item and
cumulative effect of
change in accounting
principle
Basic $2.42 $2.73 $3.09
Diluted $2.36 $2.65 $2.91
Earnings per share after
extraordinary item and
cumulative effect of
change in accounting
principle
Basic $2.55 $2.73 $3.04
Diluted $2.49 $2.65 $2.86
Weighted-average shares
outstanding
Basic 37,208 39,043 40,119
Diluted 38,142 40,247 42,647
---------- --------- ---------
Revenue
Overview
Revenue increased to $1,190.9 million in 2002, from $1,183.6 million in 2001 and
$1,091.5 million in 2000. This represents an increase of 0.6% in 2002 and an
8.4% increase in 2001, each compared with the prior year.
In 2002, compared with 2001, domestic revenue, which comprised 66.0% of the
Company's business, declined 5.8%. This decline, which occurred primarily in the
wholesale boot business, reflects the steps the Company has taken to control
supply in order to position for future growth. The mix impact of the boot
decline adversely impacted the Company's average selling prices. Additionally,
U.S. Consumer Direct revenue declined 6.5%, in part due to aggressive promotions
by competitors and the overall weakness in the U.S. retail climate. Offsetting
these declines domestically, the U.S. wholesale apparel business increased by
9.2%. Internationally, revenue increased 16.0%, primarily due to Europe's growth
across all products, channels and markets. Additionally, the increased strength
of the euro, in relation to the dollar, resulted in revenue improvement related
to foreign exchange. Asia had mid single-digit growth for the year.
In 2001, compared with 2000, domestic revenue, which comprised 70.5% of the
Company's business, increased 6.0%. This increase occurred primarily in the
wholesale boot business and reflected a strong first-half performance. In the
second half of 2001, softness in U.S. market conditions and a negative impact
from the Company's disciplined approach to the management of the boot business
led to a lesser increase in boot revenue than in the first-half of 2001. That
impacted sales allowances and affected product mix, reducing wholesale footwear
average selling prices for the year, compared with 2000. In apparel and
accessories, the domestic wholesale business had strong performance, with a
24.9% revenue improvement over 2000. U.S. Consumer Direct revenue increased 2.2%
in 2001, compared with 2000. Although unit volumes increased in both footwear
and apparel and accessories, average selling prices declined, primarily as a
result of the Company's focus on managing inventory levels and, to a lesser
degree, product mix, both in part resulting from the soft U.S. market
conditions. Internationally, the 14.7% revenue increase reflected increases in
apparel and accessories and footwear across all channels and markets. These
increases were partially offset by a negative impact from the euro weakening in
relation to the dollar, when compared with 2000.
Segments
The Company has three reportable business segments (see Note 15): U.S.
Wholesale, U.S. Consumer Direct (formerly U.S. Retail-commencing in 2001, U.S.
Consumer Direct includes the Company's e-commerce business) and International.
Domestic revenue, comprised of the U.S. Wholesale and U.S. Consumer Direct
segments, amounted to $785.7 million in 2002, $834.2 million in 2001 and $787.0
million in 2000, or 66.0%, 70.5% and 72.1% of total revenue for each of the
three years, respectively. U.S. Wholesale segment revenue decreased to $595.2
33
million in 2002, from $630.6 million in 2001, and increased from $587.7 million
in 2000. This represents a decrease of 5.6% in 2002, compared with 2001,
primarily due to footwear average selling prices, resulting from the mix of
product sold, primarily reflecting a reduction in boot revenue, driven by the
steps that the Company has taken to control the supply of boot products in order
to position the boot business for future growth. Additionally, the Company
experienced increased off-price sales in a difficult retail market. The increase
of 7.3% in 2001, compared with 2000, was primarily due to footwear unit sales
and, to a lesser degree, apparel and accessories unit sales. The increases in
2001, compared with 2000, were partially offset by a reduction in footwear
average selling prices, primarily due to sales and allowances and, to a lesser
degree, product mix.
U.S. Consumer Direct segment revenue decreased to $190.4 million in 2002, from
$203.6 million in 2001 and $199.3 million in 2000. This represents a decrease of
6.5% in 2002, compared with 2001. The decrease was primarily due to a reduction
in apparel and accessories unit sales, in part due to aggressive promotions by
competitors and overall weakness in the U.S. retail climate. Given the economic
conditions in the U.S., the Company intends to control store growth in its U.S.
retail business and focus on enhancing returns at current locations. U.S.
Consumer Direct segment revenue increased 2.2% in 2001, compared with 2000,
primarily due to footwear unit sales and, to a lesser degree, apparel and
accessories unit sales, primarily offset by a reduction in average selling
prices. This reduction in average selling prices was primarily the result of the
Company's effort to manage inventory levels and, to a lesser degree, mix of
product sold. Comparable domestic store sales decreased 8.5% in 2002, compared
with 2001, and decreased 4.5% in 2001, compared with 2000.
International segment revenue increased to $405.2 million in 2002, from $349.4
million in 2001 and $304.5 million in 2000. This represents an increase of 16.0%
in 2002, compared with 2001, and 14.7% in 2001, compared with 2000. The increase
in 2002, compared with 2001, was primarily due to European footwear and, to a
lesser degree, apparel and accessories unit volume increases across all channels
and markets, most predominantly in wholesale, and to the impact of foreign
exchange. Asia had mid single-digit growth for the year. The increase in 2001,
compared with 2000, was due to unit volume increases in apparel and accessories
and footwear across all channels, partially offset by the impact of foreign
exchange. On a constant dollar basis, which restates current year revenue at
prior year foreign exchange rates, International segment revenue increased 12.3%
in 2002 and 19.6% in 2001, each compared to the prior year.
Products
Worldwide footwear revenue was $888.6 million in 2002, $898.7 million in 2001
and $838.0 million in 2000. This represents a decrease of 1.1% in 2002 and an
increase of 7.2% in 2001, each compared with the prior year. The revenue
decrease in 2002, compared with 2001, was primarily related to lower U.S. Boot
revenue, which contributed to an overall reduction in U.S. Wholesale average
selling prices, as discussed previously, partially offset by increased unit
sales in worldwide wholesale and International retail and, to a lesser degree,
the impact of foreign exchange. By product, the decrease was primarily
attributable to unit volume declines in U.S. Wholesale Boots and, to a lesser
degree, Outdoor Performance. These decreases were partially offset by revenue
increases in worldwide Kids', Women's casual and the Timberland PRO(TM) series.
The revenue increase in 2001, compared with 2000, was primarily due to U.S.
Wholesale unit sales and, to a lesser degree, International wholesale unit
sales. These increases were partially offset by a decline in average selling
prices, primarily due to sales allowances and, to a lesser degree, product mix
and the impact of foreign exchange. By product, the increase in 2001 was
primarily attributable to unit volume growth in U.S. Wholesale Boots and, to a
lesser degree, Kids', the Timberland PRO(TM) series, Boots within U.S. Consumer
Direct and European Men's casual. These increases were partially offset by
revenue declines in worldwide Outdoor Performance and domestic Men's casual.
Worldwide footwear revenue represented 75.6%, 76.8% and 77.5% of total product
revenue in 2002, 2001 and 2000, respectively.
Revenue attributable to apparel and accessories was $287.4 million in 2002,
$272.0 million in 2001 and $242.9 million in 2000. The revenue increase of 5.7%
in 2002, compared with 2001, was primarily due to unit volume growth in Europe
and, to a lesser degree, the impact of foreign exchange, partially offset by the
unit volume decline in the U.S. Consumer Direct segment, as discussed
previously. The revenue increase of 12.0% in 2001, compared with 2000, reflects
double-digit increases in worldwide wholesale and, to a lesser degree,
International retail. These increases were partially offset by a reduction in
U.S. Consumer Direct average selling prices and, to a lesser degree, the impact
of foreign exchange. The reduction in average selling prices was primarily due
to product mix and to markdowns related to inventory control efforts. Worldwide
apparel and accessories revenue represented 24.4%, 23.2% and 22.5% of total
product revenue in 2002, 2001 and 2000, respectively.
Channels
Worldwide wholesale revenue was $886.8 million in 2002, $879.1 million in 2001
and $810.8 million in 2000. This represents an increase of 0.9% in 2002 and 8.4%
in 2001, each compared with the prior year. The increase in 2002, compared with
2001, was primarily due to worldwide footwear and, to a lesser degree,
International apparel and accessories unit sales and the impact of foreign
exchange. These increases were primarily offset by the decline in U.S. Wholesale
footwear average selling prices, as discussed previously. Both domestic and
International footwear and apparel and accessories wholesale businesses
increased in 2001, compared with the prior year. The increase in footwear was
primarily due to U.S. Wholesale footwear unit volume increases, partially offset
by a decline in average selling prices primarily due to sales allowances and, to
a lesser degree, product mix. The increase in apparel and accessories wholesale
revenue was primarily due to European and U.S. Wholesale unit volumes.
34
<Page>
Worldwide revenue from Company-operated specialty and factory outlet stores,
along with the Company's e-commerce business, was $304.1 million in 2002, $304.6
million in 2001 and $280.7 million in 2000. This represents a decrease of 0.1%
in 2002 and an increase of 8.5% in 2001, each compared with the prior year. The
decrease in 2002, compared with 2001, was primarily due to U.S. Consumer Direct
apparel and accessories unit sales, as discussed previously, partially offset by
increased International footwear and apparel and accessories unit volumes and,
to a lesser degree, the impact of foreign exchange. The Company intends to
control store growth in its U.S. retail business and to focus on enhancing
returns at current locations. The increase in revenue in 2001, compared with
2000, was primarily due to footwear and, to a lesser degree, apparel and
accessories unit volumes, partially offset by lower domestic average selling
prices and the impact of foreign exchange. These increases were partially due to
the addition of new retail locations. Worldwide retail revenue represented
25.5%, 25.7% and 25.7% of total revenue in 2002, 2001 and 2000, respectively.
Worldwide, the Company opened 27 stores and closed 9 stores in 2002, opened 22
stores and closed 7 stores in 2001 and opened 27 stores and closed 3 stores in
2000.
Gross Profit
Gross profit as a percentage of revenue was 43.5% in 2002, 44.0% in 2001 and
46.6% in 2000. The decrease in 2002, compared with 2001, was primarily due to a
0.8 percentage point year over year impact of foreign currency hedging, a 0.7
percentage point impact of increased U.S. Wholesale footwear off-price sales and
a 0.5 percentage point impact of incremental transportation costs related to the
U.S. west coast port work stoppage during the fourth quarter of 2002. These were
partially offset by a 0.5 percentage point impact from leather cost decreases
and other cost reductions. At current levels, the Company expects recent
improvements in foreign exchange rates to yield incremental benefits in 2003.
The decrease in margin percentage in 2001, compared with 2000, was primarily due
to increases in leather costs, U.S. Wholesale footwear sales returns and
allowances and pressure from foreign exchange declines. Each lowered the gross
margin rate by approximately 1.1 percentage points. These declines in gross
margin were partially offset by the impact of mix and other cost reductions. The
Company continues to review, develop and implement cost efficiencies across the
supply chain in its efforts to improve gross margins.
Operating Expense
Operating expense was $379.5 million, or 31.9% of revenue in 2002, $357.7
million, or 30.2% of revenue in 2001 and $324.3 million, or 29.7% of revenue in
2000. The 6.1% increase in operating expense in 2002, compared with 2001, was
primarily due to incentive compensation related charges (see Note 13),
investment in the Company's International business, the impact of foreign
exchange and other costs related to company-wide activities. Going forward, the
Company expects that its initiatives to grow the International and U.S.
Wholesale apparel businesses, as well as support for the Company's global brand
initiatives, will likely drive expense increases at or above the rate of revenue
growth. The 10.3% increase in operating expense in 2001, compared with 2000, was
primarily due to investments in key growth drivers such as the expansion of the
Company's Asian business, the expansion of its domestic retail business and
additional sales and marketing efforts.
Operating Income
Operating income, which is pretax earnings before interest expense and other,
net, was $138.8 million in 2002, $163.1 million in 2001 and $184.2 million in
2000. As a percentage of revenue, operating income was 11.7% in 2002, 13.8% in
2001 and 16.9% in 2000. The Company is targeting modest improvement in operating
margins in 2003, excluding comparisons to the one-time U.S. west coast port work
stoppage impact, as discussed previously.
Segment operating income decreased in the U.S. Wholesale segment in 2002,
compared with 2001. The decrease was primarily driven by a 6.5% decrease in
footwear revenue, as discussed previously, on a 0.7 percentage point decrease in
gross margin rates, primarily due to increased off-price sales, and an increase
in operating expense rates. This decrease was partially offset by improved
performance in apparel revenue, gross margin rates and operating expense rates.
In the U.S. Consumer Direct segment, although revenue decreased 6.5%, improved
gross margin rates generated an 8.2% increase in operating income. These
improvements reflect benefits from proactive strategies to improve margins
through reduced discounting and lower product costs. In the International
segment, a 12.3% constant dollar revenue increase, primarily attributable to
European performance, along with improved gross margin and expense rates, drove
the 26.1% improvement in operating income. This performance was partially offset
by the year over year impact of foreign currency hedging. The increase in the
Unallocated Corporate operating loss was primarily due to incentive compensation
related charges and other costs incurred in support of company-wide activities.
Segment operating income decreased in the domestic segments in 2001 and improved
in the International segment, compared with the prior year. In the U.S.
Wholesale segment, mid single-digit revenue increases in footwear were offset by
lower gross margin rates, as discussed previously, and higher expense rates,
which reduced operating income by 3.0%, compared with the prior year. In the
U.S. Consumer Direct segment, a 2.2% increase in revenue, combined with a
decrease in gross margin rates and an increase in operating expense rates,
lowered operating income by 21.1%, compared with the prior year.
Internationally, segment operating income increased by 5.1% over the prior year.
This increase was primarily due to improved gross margin dollars on double-digit
increases in apparel and accessories and footwear revenue and, to a lesser
degree, improved operating expense rates. The increase in the Unallocated
Corporate operating loss in 2001, compared with 2000, was
35
<Page>
primarily due to increased marketing and other costs incurred in support of
company-wide activities.
Interest, Other, Net and Taxes
Interest expense, which is comprised of fees related to the establishment and
maintenance of the Company's revolving credit facility plus interest paid on
short-term borrowings and interest on long-term debt, was $0.9 million in 2002,
compared with $1.6 million in 2001 and $5.6 million in 2000. The decrease in
interest expense in 2002, compared with 2001, was due to lower average
borrowings at lower interest rates. In 2001, the decrease in interest expense
was primarily due to the prepayment of the $100.0 million senior notes in 2000
(see Note 6).
Other, net includes interest income of $1.0 million in 2002, $1.2 million in
2001 and $4.9 million in 2000. Interest income in 2002 reflects lower average
interest rates but higher average investments than in 2001. The decrease in
interest income in 2001, compared with 2000, reflects lower cash balances
resulting from the prepayment of the senior notes in 2000 and the generation of
lower cash flow from operations in 2001, compared with 2000. Other, net in 2001
includes the negative impact of foreign exchange and, in 2000, reflects the
receipt of $5.1 million from the Company's former Asian distributor (see Note
5).
The effective income tax rate was 35.0% in 2002, 34.0% in 2001 and 33.5% in
2000. The increase in the rate is primarily due to a combination of a federal
tax law change, which reduced the tax benefits associated with the Company's
Puerto Rico operations and to U.S. federal tax exempt Puerto Rico income
comprising a lower percentage of consolidated income. For an analysis of the
effective tax rate, see the "Income Taxes" note (Note 12) 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 $137.9 million in 2002, $88.9 million
in 2001 and $141.3 million in 2000. The increase in cash generated in 2002,
compared with 2001, was primarily due to a higher level of expense accruals and
a lower receivable balance, net of the impact of foreign exchange. The increase
in accruals was primarily due to incentive compensation accruals being at
approximately 2000 levels, in comparison to low 2001 levels, and, to a lesser
degree, accrued hedging contract losses in 2002 whose trades had not settled,
compared with receivable balances in previous years, and higher cooperative
advertising activity. These increases in cash were partially offset by lower
earnings in 2002, compared with the prior years. In 2001, compared with 2000,
higher working capital, primarily from decreases in accounts payable and accrued
expense, and lower earnings were the principal causes of the reduction in cash
generated by operations. The reduction in accounts payable was primarily due to
the timing of receipt and payment of inventory in the fourth quarter of 2001,
compared with 2000, while the reduction in accrued expense primarily reflects
lower compensation related accruals, compared with the prior year. In 2001,
compared with 2000, the increase in receivables primarily reflects sales timing
changes in the U.S., as retailers ordered closer to need, as well as some
erosion in collections. Inventory position improved in 2001, compared with 2000,
as a result of disciplined inventory management in the challenging U.S. market.
Inventory turns were 4.6 times in 2002, compared with 4.2 times in 2001 and 4.0
times in 2000. Days sales outstanding at December 31, 2002 were 33 days,
compared with 35 days at December 31, 2001 and 29 days at December 31, 2000.
Wholesale days sales outstanding were 43 days, 44 days and 32 days at the end of
2002, 2001 and 2000, respectively.
Net cash used by investing activities amounted to $17.6 million in 2002, $24.6
million in 2001 and $32.4 million in 2000. Of the net cash used by investing
activities, capital expenditures were $17.9 million in 2002, $22.4 million in
2001 and $35.4 million in 2000. A majority of capital expenditures during the
three years ended December 31, 2002, 2001 and 2000 were for retail store
additions and building improvements, transportation and distribution equipment,
manufacturing machinery and equipment and information system enhancements. In
2000, the acquisition of the Asian subsidiaries generated $5.2 million of cash
(see Note 5).
During 2002, 2001 and 2000, net cash used in financing activities amounted to
$88.7 million, $71.9 million and $188.5 million, respectively. In 2002, 2001 and
2000, $101.2 million, $80.4 million and $101.7 million was used to repurchase
outstanding shares of the Company's Class A Common Stock, respectively.
Financing activities in 2001 include costs related to the establishment of the
Company's new revolving credit facility. On May 3, 2001, the Company entered
into a new, unsecured committed revolving credit agreement (the "Agreement")
with a group of banks, effective until May 3, 2004. The Agreement provides for
$200.0 million of committed borrowings, of which up to $125.0 million may be
used for letters of credit (see Note 7). Financing activities in 2000 include
the prepayment of $100.0 million in senior notes. The extraordinary item
associated with this debt prepayment is included in financing activities (see
Note 6). The Company had no outstanding debt at December 31, 2002, 2001 and
2000.
As of December 31, 2002, 2001 and 2000, the Company had letters of credit
outstanding of $23.0 million, $39.0 million and $56.0 million, respectively. All
were issued for the purchase of inventory.
36
The Company has the following off-balance sheet contractual obligations
due by period:
(Dollars in Millions)
Less Than
December 31, 2002 Total 1 Year 1-3 Years 4-5 Years After 5 Years
------- ----------- ---------- ---------- -------------
Long-term debt $ - $ - $ - $ - $ -
Operating leases
(see Note 14) 134.6 27.9 43.5 27.2 36.0
------ ----- ----- ----- -----
Total $134.6 $27.9 $43.5 $27.2 $36.0
------ ----- ----- ----- -----
The Company has the following off-balance sheet commercial commitments by
expiration period:
(Dollars in Millions)
Total Amounts Less Than
December 31, 2002 Committed 1 Year 1-3 Years 4-5 Years After 5 Years
------------- ---------- ---------- ---------- -------------
Lines of credit $ - $ - $ - $ - $ -
Letters of credit 23.0 23.0 - - -
Hedging contracts
(see Note 2) 152.3 126.7 25.6 - -
------ ------ ----- ------ ------
Total $175.3 $149.7 $25.6 $ - $ -
------ ------ ----- ------ ------
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. Long-term debt, if required, is generally used to
finance long-term investments. The Company's principal risks to these sources of
financing are the impact on the Company's financial condition from economic
downturns, a decrease in the demand for the Company's products, increases in the
prices of raw materials and a variety of other factors. The Company anticipates
that capital requirements for 2003 will be met through the use of its current
cash balances, through its existing credit facilities (which places certain
limitations on additional debt, stock repurchases, acquisitions and on the
amount of dividends the Company may pay, and also contains certain other
financial and operating covenants) 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 interest rate movements on borrowings and
investments and currency rate movements on non-U.S. dollar denominated assets,
liabilities and income. The Company regularly assesses these risks and has
established policies and business practices that should result in an appropriate
level of protection 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, if required, is
generally 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 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 either lenders'
cost of funds, plus an applicable spread, or prevailing money market rates. At
December 31, 2002, December 31, 2001 and December 31, 2000, the Company had no
short-term or long-term debt outstanding.
The Company's foreign currency exposure is generated primarily from its European
operating subsidiaries and, to a lesser degree, its Asian operating
subsidiaries. The Company seeks to minimize the impact of these foreign currency
fluctuations by hedging the related transactions with foreign currency forward
contracts. Currently, these foreign currency forward contracts will expire in 15
months or less. Based upon sensitivity analysis as of December 31, 2002, a 10%
change in foreign exchange rates would cause the fair value of the Company's
financial instruments to increase/decrease by approximately $16.6 million,
compared with $12.3 million at December 31, 2001. The increase at December 31,
2002 is primarily due to the amount of foreign currency contracts held at
December 31, 2002, compared with December 31, 2001.
EURO
Effective January 1, 1999, the European Monetary Union created a single
currency, the euro, for its member countries. A transition period, from
January 1, 1999 through December 31, 2001, allowed the member countries
37
to methodically eliminate their local currencies and to convert to the euro.
As of December 31, 2001, the Company was completely euro compliant. The
Company has monitored, and will continue to monitor, the euro conversion. The
Company has not experienced any material business disruptions as a result of
the euro conversion.
FORWARD-LOOKING INFORMATION
As discussed in Exhibit 99.3, 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, but are not limited to: (i) the Company's ability to
successfully market and sell its products in view of changing consumer trends,
consumer acceptance of products, and other factors affecting retail market
conditions, including the current U.S. economic environment and the global
economic and political uncertainties resulting from the continuing war on
terrorism; (ii) the Company's ability to manage its foreign exchange rate risks;
(iii) the Company's ability to obtain adequate raw materials at competitive
prices; (iv) the Company's ability to successfully invest in its infrastructure
and product based upon its advance sales forecasts; (v) the Company's ability to
locate and retain independent manufacturers to produce lower cost, high-quality
products with rapid turnaround times; (vi) the Company's ability to recover its
investment in, and expenditures of, its retail organization through adequate
sales at such retail locations; and (vii) the Company's ability to respond to
actions of the Company's competitors, some of whom have substantially greater
resources than those of the Company. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
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.
2002 2001
---------------- -----------------
High Low High Low
------ ------ ------ ------
First Quarter $42.25 $31.59 $73.25 $49.20
Second Quarter 45.89 35.16 52.10 38.70
Third Quarter 38.89 31.98 41.50 26.15
Fourth Quarter 38.99 27.07 38.25 26.84
As of February 21, 2003, the number of record holders of the Company's Class A
Common Stock was approximately 830 and the number of record holders of the
Company's Class B Common Stock was 7. The closing sales price of the Company's
Class A Common Stock on February 21, 2003 was $38.26 per share.
The Company has never declared a dividend on either the Company's Class A or
Class B Common Stock. In addition, the Company's ability to pay cash dividends
is limited pursuant to loan agreements (see notes to the Company's consolidated
financial statements).
38
CONSOLIDATED BALANCE SHEETS
As of December 31, 2002 and 2001
(Amounts in Thousands, Except Share and Per Share Data)
2002 2001
---------- ----------
Assets
Current assets
Cash and equivalents $ 141,195 $105,658
Accounts receivable, net of allowance for
doubtful accounts of $7,487 in 2002 and
$5,934 in 2001 132,110 132,751
Inventory 122,417 127,172
Prepaid expense 21,493 17,093
Deferred income taxes 24,568 19,822
Derivative assets - 3,047
--------- ---------
Total current assets 441,783 405,543
--------- ---------
Property, plant and equipment 176,415 166,365
Less accumulated depreciation and amortization (103,045) (90,157)
--------- ---------
Net property, plant and equipment 73,370 76,208
Excess of cost over fair value of net assets
acquired, net 14,163 14,163
Intangible assets 3,732 3,456
Other assets, net 5,623 5,242
--------- ---------
Total assets $ 538,671 $ 504,612
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 33,678 $ 40,637
Accrued expense
Payroll and related 39,879 23,918
Other and interest 49,551 42,611
Income taxes payable 20,134 21,336
Derivative liabilities 12,514 -
--------- ---------
Total current liabilities 155,756 128,502
--------- ---------
Deferred compensation 3,072 2,610
Deferred income taxes 7,058 9,349
Excess of fair value of acquired assets
over cost, net - 4,913
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);
120,000,000 shares authorized;
41,518,667 shares issued at
December 31, 2002 and 40,487,893 shares
issued at December 31, 2001 415 405
Class B Common Stock, $.01 par value
(10 votes per share);
convertible into Class A shares
on a one-for-one basis; 20,000,000
shares authorized; 7,561,185 shares
issued at December 31, 2002
and 7,911,185 shares issued at
December 31, 2001 76 79
Additional paid-in capital 142,883 125,648
Deferred compensation (3,078) (3,226)
Retained earnings 605,826 510,713
Accumulated other comprehensive income/(loss) (9,837) (9,372)
Treasury stock at cost; 12,773,521 Class A
shares at December 31, 2002 and 10,064,847
Class A shares at December 31, 2001 (363,500) (265,009)
--------- ---------
Total stockholders' equity 372,785 359,238
--------- ---------
Total liabilities and stockholders' equity $ 538,671 $ 504,612
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
39
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2002, 2001 and 2000
(Amounts in Thousands, Except Per Share Data)
2002 2001 2000
---------- ---------- ----------
Revenue $1,190,896 $1,183,623 $1,091,478
Cost of goods sold 672,610 662,848 582,966
---------- ---------- ----------
Gross profit 518,286 520,775 508,512
---------- ---------- ----------
Operating expense
Selling 306,962 291,953 258,081
General and administrative 72,499 64,644 65,129
Amortization of goodwill - 1,085 1,130
---------- ---------- ----------
Total operating expense 379,461 357,682 324,340
---------- ---------- ----------
Operating income 138,825 163,093 184,172
---------- ---------- ----------
Other expense/(income)
Interest expense 884 1,560 5,648
Other, net (828) (196) (8,128)
---------- ---------- ----------
Total other expense/(income) 56 1,364 (2,480)
---------- ---------- ----------
Income before income taxes 138,769 161,729 186,652
Provision for income taxes 48,569 54,988 62,528
---------- ---------- ----------
Net income before extraordinary item and
cumulative effect of change in
accounting principle $ 90,200 $ 106,741 $ 124,124
---------- ---------- ----------
Extraordinary item - loss on debt
extinguishment, net of tax benefit
of $1,071 (see Note 6) - - (2,126)
Cumulative effect of change in
accounting principle 4,913 - -
---------- ---------- ----------
Net income $ 95,113 $ 106,741 $ 121,998
========== ========== ==========
Earnings per share before extraordinary
item and cumulative effect of change
in accounting principle
Basic $2.42 $2.73 $3.09
Diluted $2.36 $2.65 $2.91
Earnings per share after extraordinary
item and cumulative effect of change
in accounting principle
Basic $2.55 $2.73 $3.04
Diluted $2.49 $2.65 $2.86
Weighted-average shares outstanding
Basic 37,308 39,043 40,119
Diluted 38,142 40,247 42,647
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
40
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands) Accumulated
Class A Class B Additional
Common Common Paid-in Deferred Retained
Stock Stock Capital Compensation Earnings
------- ------- ---------- ------------ --------
Balance, January 1, 2000 $187 $47 $ 82,755 $(3,658) $282,209
---- ---- -------- ------- --------
Issuance of shares under
employee stock plans 17 (9) 14,401 (404) -
Amortization of deferred
compensation - - - 799 -
Loan on restricted stock
issuance - - - (1,110) -
Repurchase of common stock - - - - -
Tax benefit from stock
option plans - - 12,600 - -
2-for-1 stock split 194 41 - - (235)
Comprehensive income:
Net income - - - - 121,998
Translation adjustment - - - - -
Comprehensive income - - - - -
---- ---- -------- ------- --------
Balance, December 31, 2000 398 79 109,756 (4,373) 403,972
---- ---- -------- ------- --------
Issuance of shares under
employee stock plans 7 - 8,222 - -
Amortization of deferred
compensation - - - 822 -
Reduction in loan on
restricted stock - - - 325 -
Repurchase of common stock - - - - -
Tax benefit from stock
option plans - - 7,670 - -
Comprehensive income:
Net income - - - - 106,741
Translation adjustment - - - - -
Derivative transition
adjustment - - - - -
Change in fair value of
derivatives, net of
taxes - - - - -
Comprehensive income - - - - -
---- ---- -------- ------- --------
Balance, December 31, 2001 405 79 125,648 (3,226) 510,713
---- ---- -------- ------- --------
Issuance of shares under
employee stock plans 10 (3) 11,024 (1,428) -
Amortization of deferred
compensation - - - 1,314 -
Reduction in loan on
restricted stock - - - 262 -
Repurchase of common stock - - - - -
Tax benefit from stock
option plans - - 6,211 - -
Comprehensive income:
Net income - - - - 95,113
Translation adjustment - - - - -
Change in fair value of
derivatives, net of taxes - - - - -
Comprehensive income - - - - -
---- ---- -------- ------- --------
Balance, December 31, 2002 $415 $76 $142,883 $(3,078) $605,826
---- ---- -------- ------- --------
Accumulated
Other Total
Comprehensive Treasury Comprehensive Stockholders'
Income/(Loss) Stock Income Equity
------------- -------- ------------- -------------
Balance, January 1, 2000 $(4,151) $ (85,021) $272,368
------- --------- -------- ---------
Issuance of shares under
employee stock plans - 950 14,955
Amortization of deferred
compensation - - 799
Loan on restricted stock
issuance - - (1,110)
Repurchase of common stock - (101,718) (101,718)
Tax benefit from stock
option plans - - 12,600
2-for-1 stock split - - -
Comprehensive income:
Net income - - $121,998 121,998
Translation adjustment (3,141) - (3,141) (3,141)
--------
Comprehensive income - - $118,857 -
------- --------- -------- ---------
Balance, December 31, 2000 (7,292) (185,789) 316,751
------- --------- -------- ---------
Issuance of shares under
employee stock plans - 1,152 9,381
Amortization of deferred
compensation - - 822
Reduction in loan on
restricted stock - - 325
Repurchase of common stock - (80,372) (80,372)
Tax benefit from stock
option plans - - 7,670
Comprehensive income:
Net income - - $106,741 106,741
Translation adjustment (3,924) - (3,924) (3,924)
Derivative transition
adjustment 577 - 577 577
Change in fair value of
derivatives, net of
taxes 1,267 - 1,267 1,267
--------
Comprehensive income - - $104,661 -
------- --------- -------- ---------
Balance, December 31, 2001 (9,372) (265,009) 359,238
------- --------- -------- ---------
Issuance of shares under
employee stock plans - 2,683 12,286
Amortization of deferred
compensation - - 1,314
Reduction in loan on
restricted stock - - 262
Repurchase of common stock - (101,174) (101,174)
Tax benefit from stock
option plans - - 6,211
Comprehensive income:
Net income - - $ 95,113 95,113
Translation adjustment 9,013 - 9,013 9,013
Change in fair value of
derivatives, net of taxes (9,478) - (9,478) (9,478)
--------
Comprehensive income - - $ 94,648 -
------- --------- -------- ---------
Balance, December 31, 2002 $(9,837) $(363,500) $372,785
------- --------- -------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
41
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands)
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net income $ 95,113 $106,741 $121,998
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes (954) (5,104) 137
Depreciation and amortization 22,503 22,107 19,291
Loss/(gain) on disposal of property,
plant and equipment 1,836 664 (131)
Extraordinary item - - 2,126
Cumulative effect of change in
accounting principle (4,913) - -
Tax benefit from stock option plans 6,211 7,670 12,600
Increase/(decrease) in cash from
changes in working capital:
Accounts receivable 7,150 (29,574) (24,419)
Inventory 6,313 3,772 (10,479)
Prepaid expense (3,279) (3,706) (1,104)
Accounts payable (11,088) (7,264) 14,120
Accrued expense 20,548 (8,919) 7,681
Income taxes (1,546) 2,496 (507)
-------- -------- --------
Net cash provided by operating
activities 137,894 88,883 141,313
-------- -------- --------
Cash flows from investing activities:
Acquisition of Asian distributor business - - 5,237
Additions to property, plant and equipment (17,930) (22,428) (35,444)
Other, net 291 (2,174) (2,169)
-------- -------- --------
Net cash used by investing activities (17,639) (24,602) (32,376)
-------- -------- --------
Cash flows from financing activities:
Extinguishment of debt - - (100,000)
Extraordinary item - - (2,126)
Establishment of new revolving credit
facility - (919) -
Common stock repurchases (101,174) (80,372) (101,718)
Issuance of common stock 12,478 9,381 15,359
-------- -------- --------
Net cash used by financing activities (88,696) (71,910) (188,485)
-------- -------- --------
Effect of exchange rate changes on cash 3,978 (1,565) (1,685)
-------- -------- --------
Net increase/(decrease) in cash and
equivalents 35,537 (9,194) (81,233)
Cash and equivalents at beginning of year 105,658 114,852 196,085
-------- -------- --------
Cash and equivalents at end of year $141,195 $105,658 $114,852
-------- -------- --------
Supplemental disclosures of cash
flow information:
Interest paid $ 567 $ 1,272 $ 5,863
Income taxes paid 44,512 50,435 55,471
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
42
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.
Nature of Operations
The Company designs, develops, engineers, markets and distributes
premium-quality footwear, apparel and accessories products for men, women and
children. The Company's products are sold primarily through independent
retailers, better grade department stores and athletic stores. In addition, the
Company's products are sold in Timberland(R) specialty stores, Timberland(R)
factory outlet stores, on timberland.com and franchisees in Europe. The
Company's products are sold throughout the U.S., Canada, Europe, Asia, Latin
America and the Middle East.
The Company's footwear, apparel and accessories products are marketed in highly
competitive environments that are subject to change in consumer preferences.
Historically, footwear has accounted for approximately 75% of the Company's
revenue. Geographically, approximately two-thirds of the Company's revenue is
from its domestic businesses. From a channel perspective, approximately 75% of
the Company's revenue is from its wholesale business.
The Company manages its business in three major segments, each sharing similar
product, distribution, marketing and economic conditions: U.S. Wholesale, U.S.
Consumer Direct, and International. The Company sources approximately 85% of its
footwear products. The remainder are produced in the Company's manufacturing
facilities in the Caribbean. All of the Company's apparel and accessories
products are sourced.
Recognition of Revenue
Revenue consists of sales to customers, license fees and royalties. Sales are
recognized either upon shipment of product to customers or, for retail
customers, at the point of sale. License fees and royalties are recognized when
earned. The Company records reductions to revenue for estimated sales returns
and allowances. The Company bases its estimates on historical rates of customer
returns and allowances, as well as the specific identification of outstanding
returns and allowances.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company estimates potential losses primarily based on the Company's historical
rate of credit losses and its knowledge of the financial condition of its
customers.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market. Market
value is estimated based upon assumptions made about future demand and retail
market conditions. If the Company determines that the actual market value
differs from the carrying value of its inventory, the Company will make an
adjustment to reduce the value of its inventory.
Translation of Foreign Currencies
The Company translates financial statements denominated in foreign currencies by
translating balance sheet accounts at the end of period exchange rates and
statement of income accounts at the average exchange rates for the period.
Translation gains and losses are recorded in stockholders' equity and reflected
in other comprehensive income/(loss). Transaction gains and losses are reflected
in net income.
Derivatives
The Company is exposed to foreign exchange risk when it purchases and sells
goods in local currencies. 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. Those derivative instruments are viewed as risk management tools
and are not used for trading or speculative purposes. The Company uses its
operating budget and periodic forecasts to estimate its economic exposure and to
determine its hedging commitments, and the timing of those commitments.
Derivatives are recognized at fair value and included in either "Derivative
liabilities" or "Derivative assets" on the Company's balance sheet. Derivatives
that are not designated as hedges are adjusted to fair value through income. If
a derivative is designated as a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset by the change
in fair value of the hedged asset, liability, or firm commitment through
43
earnings or recognized in other comprehensive income/(loss) until the hedged
item is recognized in earnings. The ineffective portion, if any, of a
derivative's change in fair value is immediately recognized in earnings.
Income Taxes
Income taxes are determined based on the income reported in the Company's
financial statements, regardless of when such taxes are payable. Tax assets and
liabilities are adjusted to reflect the changes in U.S. and applicable foreign
income tax laws when enacted. Future tax benefits are recognized to the extent
that realization of such benefits is more likely to occur than not.
Cash and Equivalents
Cash and equivalents consist of short-term, highly liquid investments that
have original maturities to the Company of three months or less.
Property, Plant and Equipment
Property, plant and equipment are recorded 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 20 years; machinery
and equipment, 3 to 12 years; lasts, patterns and dies, 3 years.
Excess of Cost Over Fair Value of Net Assets Acquired
In the second quarter of 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets." The Company adopted this statement
effective January 1, 2002. SFAS No. 142 requires the cessation of goodwill
amortization and, instead, the carrying value of goodwill will be evaluated
for impairment on at least an annual basis. The provisions of this statement
require the completion of a transitional impairment test within six months of
adoption, with any impairments identified treated as a cumulative effect of a
change in accounting principle. The Company has completed that transitional
impairment test and has determined that there was no impairment of reported
goodwill existing at January 1, 2002. The statement also requires that an
impairment test be completed at least annually. The Company completed its
annual impairment test and, at June 28, 2002 determined that no impairment of
reported goodwill had occurred (see Note 3).
Excess of Fair Value of Acquired Assets Over Cost
In the second quarter of 2001, the FASB issued SFAS No. 141, "Business
Combinations." The Company adopted this statement effective January 1, 2002.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. In addition, SFAS No. 141
requires that any excess of fair value of net assets over cost arising from
acquisitions occurring prior to adoption of this statement will be recognized as
the cumulative effect of a change in accounting principle. Accordingly, in the
first quarter of 2002, the Company recognized a cumulative effect of a change in
accounting principle gain of $4,913 ($0.13 per share diluted and basic) for the
unamortized balance of the excess of fair value of net assets over cost as of
December 31, 2001.
Accrued Insurance Costs
The Company is self-insured for workers' compensation, healthcare 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.
Accounting for Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires the
Company to make assumptions that affect the estimates reported in these
consolidated financial statements. Actual results may differ from these
estimates. Some of the more important assumptions and estimates made by the
Company are for sales returns and allowances, allowance for doubtful accounts
receivable, market value of inventory, contingent liabilities, impairment of
long-lived assets and goodwill, realizable value of deferred tax assets and
the Company's annual effective tax rate.
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
44
dilution that would occur if securities such as stock options were
exercised. Dilutive securities (see Note 18) included in the calculation of
diluted weighted-average shares were 833,585 in 2002, 1,203,996 in 2001 and
2,527,353 in 2000. Anti-dilutive securities excluded from the calculation of
diluted weighted-average shares were 764,649 in 2002, 693,580 in 2001 and 0
in 2000.
Long-lived Assets
The Company periodically 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 recoverable. The Company
adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," on January 1, 2002. This statement supersedes SFAS No. 121 but retains
the fundamental provisions of SFAS No. 121 for recognition and measurement of
the impairment of long-lived assets to be held and used and measurement of
long-lived assets to be disposed of by sale. However, SFAS No. 144 applies the
fair value method for test of impairment, which differs from SFAS No. 121. SFAS
No. 144 also supersedes the accounting and reporting provisions of Accounting
Principles Board ("APB") Opinion No. 30, as it pertains to disposal of a
business segment, but retains the requirement of that opinion to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale.
Stock-based Compensation
The Company accounts for stock-based compensation using the method prescribed by
APB Opinion No. 25 and related interpretations. The Company follows SFAS No. 123
"Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for
Stock-Based Compensation - Transitional and Disclosure - An Amendment of FASB
Statement No. 123" for disclosure purposes. SFAS No. 148, issued in December
2002, provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require disclosures in the annual and interim financial statements regarding the
accounting method for stock-based employee compensation and the effect of the
method used on reported results (see New Accounting Pronouncements).
Comprehensive Income
Comprehensive income, in the case of the Company, is the combination of reported
net income and other comprehensive income/(loss), which is comprised of foreign
currency translation adjustments and changes in the fair value of derivatives.
Contingencies
In the ordinary course of business, the Company is involved in legal proceedings
involving contractual and employment relationships, product liability claims,
trademark rights and a variety of other matters. The Company records contingent
liabilities resulting from claims when it is probable that a liability has been
incurred and the amount of the loss is reasonably estimable.
New Accounting Pronouncements
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
became effective for the Company on January 1, 2002. SFAS No. 144 had no impact
on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The rescission of Statement 4 refers to any gain or loss on extinguishment of
debt classified as an extraordinary item in prior periods presented. If that
does not meet the criteria in APB Opinion No. 30 for classification as an
extraordinary item, it shall be reclassified. The provisions, which relate to
the rescission of Statement 4, shall be applied in fiscal years beginning after
May 15, 2002. The Company is currently evaluating its disclosure related to SFAS
No. 145. The rescission of FASB Statements 4, 44 and 64, and the amendment of
SFAS No. 13, had no impact on the Company's 2002 consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement supercedes Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability is recognized at the
date an entity commits to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. The
provisions of SFAS No. 146 are effective for any exit or disposal activities
initiated after December 31, 2002.
45
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transitional and Disclosure - An Amendment of FASB Statement No.
123." This statement is effective for fiscal years ending after December 15,
2002 and provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, this statement amends the disclosure requirements of SFAS No. 123
to require disclosures in the annual and interim financial statements regarding
the accounting method for stock-based employee compensation and the effect of
the method used on reported results. The Company has not elected to transition
to the fair value based method of accounting for stock-based employee
compensation at this time. See Note 18 for a discussion and required
disclosures.
2. Derivatives
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of SFAS No. 133 - An Amendment of SFAS No. 133," and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - An Amendment
of SFAS No. 133" (collectively referred to as the "Statement"). The Statement
requires the Company to recognize all derivatives on its balance sheet at fair
value. Derivatives that are not designated as hedges must be adjusted to fair
value through income. If the derivative is designated as a hedge, depending on
the nature of the hedge, changes in the fair value of the derivative will be
either offset by the change in fair value of the hedged asset, liability, or
firm commitment through earnings or recognized in other comprehensive
income/(loss) until the hedged item is recognized in earnings. The Company
measures hedge effectiveness based on changes in the fair value of those
contracts and underlying exposures attributable to changes in the forward
exchange rate. Changes in the expected future cash flows of the forecasted
hedged transaction and changes in the fair value of the forward contract are
both measured from the contract rate to the forward exchange rate associated
with the forward contract's maturity date. The ineffective portion, if any, of a
derivative's change in fair value will be immediately recognized in earnings. In
the case of the Company, its hedges are considered effective under SFAS No.133
since the gains/(losses) on the hedges offset the gains/(losses) on the
designated economic exposures. The application of SFAS No. 133 resulted in an
increase in other comprehensive income/(loss) in 2001 of $1,844, which is net of
taxes of $1,203.
In the normal course of business, the financial position and results of
operations of the Company are routinely subject to currency rate movements on
non-U.S. dollar denominated assets, liabilities and income as the Company sells
goods in local currencies. The Company has established policies and business
practices that should result in an appropriate level of protection against the
adverse effect of these exposures. Derivative instruments, specifically forward
contracts, are used by the Company in its hedging of forecasted foreign currency
transactions, typically for a period not greater than 24 months. Those
derivative instruments are viewed as risk management tools and are not used for
trading or speculative purposes. As of December 31, 2002, the Company had
forward contracts maturing at various dates through 2004 to sell the equivalent
of approximately $159,300 in foreign currencies at contracted rates and to buy
the equivalent of approximately $7,000 in foreign currencies at contracted
rates. As of December 31, 2001, the Company had forward contracts maturing at
various dates through March 2004 to sell the equivalent of approximately
$127,000 in foreign currencies at contracted rates. The increase in the value of
contracts held at December 31, 2002, compared with December 31, 2001, is the
result of the Company having elected to hedge a greater portion of its
forecasted 2003 foreign currency exposure at December 31, 2002 than the portion
of its forecasted 2002 exposure that was hedged at December 31, 2001, as
permitted in accordance with the Company's hedging policy, and to the growth in
the International business.
Forward contracts related to forecasted economic exposure are designated as cash
flow hedges at acquisition with the changes in the fair value of those contracts
recorded as a component of other comprehensive income/(loss) and subsequently
recognized in cost of goods sold in the period in which the hedged forecasted
economic exposure takes place. The Company also hedges the foreign currency
exchange risk on existing intercompany assets and liabilities using forward
contracts. Gains and losses related to forward contracts hedging foreign
currency exchange risk on intercompany asset and liability balances are
reflected in earnings immediately and largely offset the remeasurement of those
assets and liabilities.
On December 31, 2002, the Company had $12,514 in derivative liabilities on its
balance sheet. On December 31, 2001, the Company had $3,047 in derivative assets
on its balance sheet. Those amounts reflect the fair value of the Company's
foreign exchange contracts, which hedge forecasted future economic exposure, as
measured in accordance with SFAS No. 133. The fair value of the contracts is a
liability when the Company's contract rates are below current forward foreign
exchange rates and is an asset when the Company's contract rates are above
current forward foreign exchange rates. The offset to those liabilities and
assets is in other comprehensive income/(loss) and is discussed in Note 16 to
the Company's consolidated financial statements.
For the periods ended December 31, 2002, 2001 and 2000, the Company recorded, in
its income statement, after tax hedging (losses)/gains of $(7,110), $5,594 and
$7,753, respectively. For the periods ended December 31, 2002 and December 31,
2001, the after-tax hedging (losses)/gains reclassified to earnings were
$(6,763) and $6,217 respectively. The Company estimates that the $12,514 in
derivative liabilities on its balance sheet as of December 31, 2002 will be
reclassified to earnings in 2003.
3. Goodwill and Other Intangible Assets
The Company adopted SFAS No. 142 effective January 1, 2002. In conjunction with
the adoption of this statement, goodwill has not been amortized. Additionally,
the Company has completed both its transitional and annual
46
impairment tests and has determined that no impairment of reported goodwill
has occurred.
Had goodwill not been amortized in 2001 and 2000, the Company's net income,
diluted earnings per share and basic earnings per share (after the cumulative
effect of a change in accounting principle) for the years ended December 31,
2001 and 2000 would have been $107,457, $2.67 and $2.75, and $122,749, $2.88 and
$3.06, respectively. There were no changes in the carrying amount of goodwill
for the year ended December 31, 2002, compared with December 31, 2001. At
December 31, 2002 and December 31, 2001, accumulated amortization of the excess
of cost over the fair value of net assets acquired amounted to $17,612.
Information regarding the Company's other intangible assets follows:
December 31, 2002 2001
--------------------------------- -----------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ ----- -------- ------------ -----
Trademarks and
related expenses $7,537 $(3,805) $3,732 $7,038 $(3,582) $3,456
------ -------- ------ ------ -------- ------
Amortization expense for 2002, 2001 and 2000 was $1,278, $1,128 and $971,
respectively. The estimated amortization for existing intangible assets as of
December 31, 2002, for each of the five succeeding fiscal years is as follows:
2003: $1,265; 2004: $1,041; 2005: $785; 2006: $485; 2007: $156. The amortization
period for trademarks and related expenses is five years.
4. Deferred Compensation Plan
On January 1, 2001, the Company set up an irrevocable grantor's trust to hold
assets to cover benefit obligations under the Company's Deferred Compensation
Plan (the "Plan"). The obligations of the Company under the Plan consist of the
Company's unsecured contractual commitment to deliver, at a future date, any of
the following: (i) deferred compensation credited to an account under the Plan,
(ii) additional amounts, if any, that the Company may, from time to time, credit
to the Plan, and (iii) notional earnings on the foregoing amounts. The
obligations are payable in cash upon retirement, termination of employment
and/or at certain other times in a lump-sum distribution or in installments, as
elected by the participant in accordance with the Plan. The Plan assets and the
Company's liability for those assets reside in long-term "Other assets, net" and
"Deferred compensation," respectively, on the Company's consolidated balance
sheet. The securities that comprise the Plan assets are designated as trading
securities under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
5. Acquisition of Asian Distributor Business
On February 18, 2000, the Company signed an agreement pursuant to which it
reacquired the exclusive distribution rights for the sale of Timberland(R) brand
products throughout the Asia-Pacific region from its former distributor,
Inchcape plc. In connection with this transaction, the Company acquired the
stock of its former distributor's subsidiaries in Japan, Hong Kong, Malaysia and
Singapore (the "Asian subsidiaries"). The purchase price allocation is as
follows:
Acquisition of business:
Fair value of assets acquired $ 21,852
Fair value of liabilities assumed (14,082)
---------
Fair value of net assets acquired 7,770
Cash paid (1,223)
Acquisition costs (480)
---------
Excess of fair value of acquired net assets over cost $ 6,067
=========
The fair value of net assets acquired includes $6,460 of cash, resulting in net
cash received of $5,237.
This transaction was accounted for under the purchase method of accounting and,
accordingly, the results of operations for the Asian subsidiaries, for the
period from the acquisition date, are included in the accompanying consolidated
financial statements. The purchase price has been allocated to the assets
purchased and liabilities assumed based on fair values at the date of
acquisition. This transaction resulted in the initial recording of excess of
fair value of acquired net assets over cost. Subsequently, as a result of the
Company's adoption of SFAS No. 141 on January 1, 2002, that excess of fair value
of acquired net assets over cost has been recognized as the cumulative effect of
a change in accounting principle on the Company's consolidated statements of
income (see Note 1).
As part of this transaction, the Company released the distributor from its
obligations under the Distributorship, Supply and Retail Development Agreement
dated January 26, 1995. As part of this transaction, the Company received
$5,055, which represented a portion of the proceeds from the disposition of the
assets in Australia, New Zealand, Thailand and Taiwan. All proceeds were
recognized in other income.
On July 31, 2000, the Company acquired Inchcape plc's Taiwan based net assets
for $662. Taiwan is included in the Company's consolidated financial statements
from the period of acquisition forward and does not have a material impact on
those statements. Taiwan is included in all references to the Asian
subsidiaries.
47
6. Long-term Debt and Extraordinary Loss
As of December 31, 2002 and 2001, the Company had no long-term debt outstanding.
On June 30, 2000, the Company prepaid $100,000 of 8.94% senior notes with a
maturity of December 15, 2001. As a result of that prepayment, the Company
recorded an extraordinary loss of $2,126 after taxes, or $0.05 per share diluted
($0.05 basic). The loss consisted of a prepayment penalty and costs associated
with the early redemption of the debt combined with accelerated amortization of
bond issuance costs, net of tax benefits of $1,071.
7. Notes Payable
On May 3, 2001, the Company entered into a new, unsecured committed revolving
credit agreement (the "Agreement") with a group of banks, effective until May
3, 2004. The Agreement provides for $200,000 of committed borrowings, of
which up to $125,000 may be used for letters of credit. Under the terms of
the Agreement, the Company may borrow at interest rates based on eurodollar
rates (approximately 1.25% at December 31, 2002), plus an applicable margin
based on a fixed-charge coverage grid of between 47.5 and 95 basis points
that is adjusted quarterly. As of December 31, 2002, the applicable margin
under the facility was 75 basis points. The Company will pay a commitment fee
of 15 to 30 basis points per annum based on a fixed-charge coverage grid,
that is adjusted quarterly on the full commitment. As of December 31, 2002,
the fee was 25 basis points. The Agreement places certain limitations on
additional debt, stock repurchases, acquisitions 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 $30,000 at December 31, 2002. Borrowings under these lines are at
prevailing money market rates (1.75% at December 31, 2002). These arrangements
may be terminated at any time at the option of the banks or the Company.
As of December 31, 2002, 2001 and 2000, the Company had letters of credit
outstanding of $23,000, $39,000 and $56,000, respectively. All were issued for
the purchase of inventory.
8. Financial Instruments and Concentration of Credit Risk
The following table illustrates the U.S. dollar equivalent of foreign exchange
contracts at December 31, 2002 and 2001 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.
Contract Net
Amount Net Unrealized
(U.S. $ Maturity Unrealized Unrealized Unrealized Gain/(Loss)
December 31, 2002 Equivalent) Date Gross Gain Gross (Loss) Gain/(Loss) Deferred
- ----------------- ----------- -------- ---------- ------------ ----------- -----------
Pounds Sterling $ 10,250 2003 $ - $ (1,213) $ (1,213) $ (1,212)
Pounds Sterling 3,259 2004 - (181) (181) (181)
Euro 101,507 2003 - (9,584) (9,584) (9,576)
Euro 16,387 2004 - (1,131) (1,131) (1,131)
Japanese Yen 14,944 2003 16 (403) (387) (388)
Japanese Yen 5,931 2004 87 (337) (250) (26)
-------- ----- -------- -------- --------
Total $152,278 $ 103 $(12,849) $(12,746) $(12,514)
======== ===== ======== ======== ========
December 31, 2001
Pounds Sterling $ 15,608 2002 $ - $ (67) $ (67) $ (67)
Pounds Sterling 4,773 2003 - (9) (9) (9)
Euro 67,261 2002 1,179 (4) 1,175 1,179
Euro 9,107 2003 98 - 98 98
Japanese Yen 14,157 2002 1,414 - 1,414 1,414
Japanese Yen 5,337 2003 432 - 432 432
Japanese Yen 6,496 2004 37 - 37 -
Hong Kong Dollars 3,846 2002 1 - 1 -
-------- ----- -------- -------- --------
Total $126,585 $3,161 $ (80) $ 3,081 $ 3,047
======== ===== ======== ======== ========
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 $7,487 and $5,934
at December 31, 2002 and 2001, respectively.
9. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
December 31, 2002 2001
- ------------ ------------------------ ------------------------
Carrying Carrying
or Contract Fair or Contract Fair
Amount Value Amount Value
----------- ------- ----------- -------
Cash and equivalents(1) $141,195 $141,195 $105,658 $105,658
Foreign currency
contracts(2) 152,278 165,024 126,585 123,504
-------- -------- -------- --------
(1) The carrying amounts of cash and equivalents approximate their fair values.
(2) The fair value of foreign currency contracts is estimated by obtaining the
appropriate year end rates as of December 31, 2002 and 2001.
48
10. Inventory
Inventory consists of the following:
December 31, 2002 2001
- ------------ ------ ------
Raw materials $ 2,065 $ 4,958
Work-in-process 1,745 1,566
Finished goods 118,607 120,648
-------- --------
Total $122,417 $127,172
======== ========
11. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31, 2002 2001
- ------------ ------ ------
Land and improvements $ 501 $ 501
Building and improvements 44,100 44,693
Machinery and equipment 111,501 104,023
Lasts, patterns and dies 20,313 17,148
-------- --------
Total $176,415 $166,365
======== ========
Depreciation expense was $19,564, $18,819 and $16,356 for the three years ended
December 31, 2002, 2001 and 2000, respectively.
12. Income Taxes
The components of the provision for income taxes are as follows:
December 31, 2002 2001 2000
- ------------ ----------------- ----------------- -----------------
Current Deferred Current Deferred Current Deferred
------- -------- ------- -------- ------- --------
Federal $36,240 $(1,254) $45,397 $(4,384) $43,758 $ 191
State 7,159 300 9,702 (720) 10,764 (54)
Puerto Rico 420 - 498 - 469 -
Foreign 5,704 - 4,495 - 6,329 -
------- ------- ------- ------- ------- -----
Total $49,523 $ (954) $60,092 $(5,104) $61,320 $ 137
======= ======= ======= ======= ======= =====
The 2000 current provision includes the $1,071 tax benefit from the prepayment
of the senior notes, which is reflected in the extraordinary item on the
Company's consolidated statements of income.
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate of 35% due to the following:
December 31, 2002 2001 2000
- ------------ ----------------- ----------------- -----------------
Federal income tax
at statutory rate $48,569 35.0% $56,605 35.0% $64,209 35.0%
Federal tax exempt
operations in
Puerto Rico (3,734) (2.7) (5,506) (3.4) (7,231) (3.9)
State taxes,
net of applicable
federal benefit 4,848 3.5 6,477 4.0 7,538 4.1
Other, net (1,114) (0.8) (2,588) (1.6) (3,059) (1.7)
------- ---- ------- ---- ------- ----
Total $48,569 35.0% $54,988 34.0% $61,457 33.5%
======= ==== ======= ==== ======= ====
The tax effects of temporary differences and carry-forwards that give rise to
significant portions of prepaid tax assets and deferred tax liabilities consist
of the following:
December 31, 2002 2001
- ------------ --------------------- ---------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Current:
Inventory $ 4,124 $ - $ 4,847 $ -
Receivable allowances 12,334 - 10,636 -
Employee benefits accruals 1,547 - 3,895 -
Forward currency contracts 4,880 - - (1,203)
Other 1,683 - 1,647 -
------- -------- ------- --------
Total current $24,568 $ - $21,025 $ (1,203)
======= ======== ======= ========
Non-current:
Accelerated depreciation
and amortization $ 4,531 $ - $ 4,143 $ -
Puerto Rico tollgate taxes - (2,470) - (2,470)
Undistributed foreign
earnings - (10,169) - (10,869)
Other 1,050 - - (153)
Net operating loss
carry-forwards 141 - 129 -
Less-valuation allowance (141) - (129) -
------- -------- ------- --------
Total non-current $ 5,581 $(12,639) $ 4,143 $(13,492)
======= ======== ======= ========
49
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.
13. Accruals
The Company's accrued liabilities are comprised of payroll related, freight,
advertising, rents, hedging contracts and a variety of other categories of
accruals. Specifically, incentive compensation accruals were $21,074 and $8,914
in 2002 and 2001, respectively. These accruals represent the expected
company-wide bonus program payouts to be made in the subsequent year. The
Company's bonus program, approved by the Board of Directors, is weighted heavily
toward earnings per share and cash flow performance. The increase in 2002,
compared with 2001, reflects the impact the Company's strong cash flow
performance.
14. 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 2013. The approximate minimum rental commitments under all
non-cancelable leases as of December 31, 2002 are as follows:
2003 $ 27,860
2004 24,085
2005 19,382
2006 15,253
2007 11,899
Thereafter 36,138
--------
Total $134,617
========
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. Base rent expense for all
operating leases was $31,877, $30,784 and $26,021 for the years ended December
31, 2002, 2001 and 2000, respectively. Percentage rent, based on sales levels,
for the years ended December 31, 2002, 2001 and 2000 was $5,314, $7,438 and
$6,488, respectively.
15. Business Segments and Geographic Information
The Company manages its business in three reportable segments, each sharing
similar product, distribution, marketing and economic conditions. The reportable
segments are U.S. Wholesale, U.S. Consumer Direct (formerly U.S. Retail) and
International. The U.S. Wholesale segment is comprised of the worldwide product
development 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.
The U.S. Consumer Direct segment includes the Company-operated specialty and
factory outlet stores in the United States and the Company's e-commerce
business, which began operations in 2001. 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,
United States distribution expenses, a majority of United States marketing
expenses and other costs incurred in support of company-wide activities.
Unallocated Corporate also includes other expense/(income), which is primarily
interest expense, interest income and other miscellaneous expense/(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 pretax 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 equivalents, manufacturing/sourcing assets,
computers and related equipment, and United States transportation and
distribution equipment.
50
U.S.
U.S. Consumer Unallocated
Wholesale Direct International Corporate Consolidated
--------- -------- ------------- ----------- ------------
2002
Revenue $595,240 $190,434 $405,222 $ - $1,190,896
Depreciation and
amortization 764 2,680 4,506 14,553 22,503
Operating income/(loss) 177,957 27,213 63,257 (129,602) 138,825
Interest expense - - - 884 884
Other, net - - - (828) (828)
-------- -------- -------- --------- ----------
Income/(loss) before
income taxes 177,957 27,213 63,257 (129,658) 138,769
-------- -------- -------- --------- ----------
Total assets 157,089 28,064 152,691 200,827 538,671
Goodwill 6,804 794 6,565 - 14,163
Expenditures for capital
additions 188 2,339 5,555 9,848 17,930
-------- -------- -------- --------- ----------
2001
Revenue $630,603 $203,578 $349,442 $ - $1,183,623
Depreciation and
amortization 579 2,684 4,371 14,473 22,107
Operating income/(loss) 200,161 25,157 50,167 (112,392) 163,093
Interest expense - - - 1,560 1,560
Other, net - - - (196) (196)
-------- -------- -------- --------- ----------
Income/(loss) before
income taxes 200,161 25,157 50,167 (113,756) 161,729
-------- -------- -------- --------- ----------
Total assets 176,924 26,769 141,135 159,784 504,612
Goodwill 6,804 794 6,565 - 14,163
Expenditures for capital
additions 378 3,362 6,099 12,589 22,428
-------- -------- -------- --------- ----------
2000
Revenue $587,676 $199,274 $304,528 $ - $1,091,478
Depreciation and
amortization 597 2,602 3,545 12,547 19,291
Operating income/(loss) 206,358 31,897 47,725 (101,808) 184,172
Interest expense - - - 5,648 5,648
Other, net - - - (8,128) (8,128)
-------- -------- -------- --------- ----------
Income/(loss) before
income taxes 206,358 31,897 47,725 (99,328) 186,652
-------- -------- -------- --------- ----------
Total assets 147,096 36,061 128,962 164,192 476,311
Goodwill 7,082 826 7,940 - 15,848
Expenditures for capital
additions 651 2,689 6,127 25,977 35,444
-------- -------- -------- --------- ----------
The following summarizes the Company's operations in different geographic areas
for the years ended December 31, 2002, 2001 and 2000, respectively:
United Other
States Europe Foreign Consolidated
------ ------ ------- ------------
2002
Revenue $785,675 $303,566 $101,655 $1,190,896
Long-lived assets 72,787 14,245 9,856 96,888
-------- -------- -------- ----------
2001
Revenue $834,181 $249,323 $100,119 $1,183,623
Long-lived assets 74,943 14,366 9,760 99,069
-------- -------- -------- ----------
2000
Revenue $786,950 $225,279 $ 79,249 $1,091,478
Long-lived assets 69,863 15,646 9,042 94,551
-------- -------- -------- ----------
The U.S. Wholesale and U.S. Consumer Direct 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 revenue
consists primarily of the Company's Asian subsidiaries and, to a lesser degree,
the Company's distributors. Other Foreign assets consist primarily of the
Company's owned manufacturing facilities in the Caribbean, assets related to the
Company's sourcing operations and the Company's Asian subsidiaries.
16. Accumulated Other Comprehensive Income/(Loss)
The components of accumulated other comprehensive income/(loss) as of December
31, 2002, 2001 and 2000 were:
2002 2001 2000
------ ------ ------
Cumulative translation adjustment $(2,203) $(11,216) $(7,292)
Fair value of derivatives, net of taxes (7,634) 1,844 -
------- -------- -------
Total $(9,837) $ (9,372) $(7,292)
======= ======== =======
17. 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 2002 and 2001, 350,000 and
21,715 shares of Class B Common Stock were converted to Class A Common Stock,
respectively.
On October 18, 2000, the Company's Board of Directors authorized the repurchase
of up to 4,000,000 shares of the Company's Class A Common Stock. As of December
31, 2000, the Company had repurchased 318,300 shares under that authorization.
During 2001 and 2002, the Company repurchased 1,958,500 and 1,723,200 shares
under that authorization, respectively. On May 16, 2002, the Board of Directors
approved an additional repurchase of up to 4,000,000 shares of the Company's
Class A Common Stock. As of December 31, 2002, the Company had
51
repurchased 1,082,300 shares under that new 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.
18. Stock and Employee Benefit Plans
Under the Company's 1997 Incentive Plan, as amended (the "1997 Plan"), 6,000,000
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 ("SAR"), 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.
Under the Company's 2001 Stock Option Plan for Non-Employee Directors (the "2001
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 2001 Plan, stock option grants are awarded on a
predetermined formula basis. Unless terminated by the Company's Board of
Directors, the 2001 Plan will be in effect until all shares available for
issuance have been issued, pursuant to the exercise of all options granted. The
exercise price of options granted under the 2001 Plan is the fair market value
of the stock on the date of the grant. Stock options granted under the 2001 Plan
become exercisable in equal installments over four years, beginning one year
after the grant date, and expire ten years after the date of grant.
Options to purchase an aggregate of 1,647,976, 1,525,265 and 1,213,986 shares
were exercisable under all option arrangements at December 31, 2002, 2001 and
2000, respectively. Under the existing stock option plans, there were 797,340
and 2,205,876 shares available for future grants at December 31, 2002 and 2001,
respectively.
The following summarizes transactions under all stock option arrangements for
the years ended December 31, 2002, 2001 and 2000:
Range of
Number of Excercise Weighted-Average
Shares Prices Exercise Price
--------- --------- ----------------
January 1, 2000 4,194,312 $ 1.60 - 24.63 $13.43
---------- -------------- ------
Granted 1,063,95 18.75 - 57.81 26.01
Exercised (1,107,522) 1.60 - 23.75 11.48
Canceled (425,804) 4.34 - 34.94 15.64
---------- -------------- ------
December 31, 2000 3,724,936 1.60 - 57.81 17.34
---------- -------------- ------
Granted 739,330 26.84 - 57.00 52.91
Exercised (601,058) 3.34 - 24.63 13.12
Canceled (147,050) 5.13 - 57.81 26.73
---------- -------------- ------
December 31, 2001 3,716,158 3.34 - 57.81 24.77
---------- -------------- ------
Granted 1,272,579 28.25 - 45.60 36.15
Exercised (743,166) 3.82 - 34.94 14.55
Canceled (225,435) 15.19 - 57.00 39.82
---------- -------------- ------
December 31, 2002 4,020,136 $ 3.82 - 57.00 $29.42
---------- -------------- ------
The following summarizes information about all stock options outstanding at
December 31, 2002:
Options Outstanding Options Excercisable
------------------------------------------------- ------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$ 4.34 - 12.53 354,637 3.29 Years $ 8.38 354,637 $ 8.38
12.59 - 15.19 553,350 6.13 15.16 343,350 15.14
16.00 - 20.52 454,650 5.40 18.38 425,950 18.42
20.73 - 22.75 518,375 7.07 22.61 213,125 22.55
23.31 - 34.94 398,485 8.06 31.27 142,662 30.23
35.05 - 35.48 816,194 9.16 35.48 949 35.36
35.61 - 50.35 419,750 9.17 39.90 33,021 42.72
52.28 - 54.44 29,500 7.94 54.40 14,561 54.42
55.35 - 55.35 5,500 8.20 55.35 1,375 55.35
57.00 - 57.00 469,695 8.16 57.00 118,346 57.00
- -------------- --------- ---- ------ --------- ------
$ 4.34 - 57.00 4,020,136 7.30 $29.42 1,647,976 $20.75
- -------------- --------- ---- ------ --------- ------
Pursuant to the terms of its 1991 Employee Stock Purchase Plan, as amended (the
"ESP Plan"), the Company is authorized to issue up to an aggregate of 1,200,000
shares of its Class A Common Stock to eligible employees electing to participate
in the ESP 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 51,826 shares in 2002, 44,692 shares in 2001 and 47,359
shares in 2000 at prices ranging from $21.20 to $33.59 per share. At December
31, 2002, a total of 282,710 shares were available for future purchases. The
weighted-average fair values of those purchase rights granted in 2002, 2001 and
2000 were $8.73, $13.53 and $8.92, respectively.
52
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock plans. The Company follows SFAS No. 123 "Accounting for
Stock-Based Compensation" and SFAS No. 148 "Accounting for Stock-Based
Compensation-Transitional and Disclosure-An Amendment of FASB Statement No. 123"
for disclosure purposes. SFAS No. 148, issued in December 2002, provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require
disclosures in the annual and interim financial statements regarding the
accounting method for stock-based employee compensation and the effect of the
method used on reported results.
In the Company's consolidated financial statements, 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 fair value method of SFAS No. 123, the Company's net income
and diluted earnings per share in 2002, 2001 and 2000 would have been:
2002 2001 2000
------ ------ ------
Net income before cumulative effect of
change in accounting principle and
extraordinary item $80,554 $97,218 $117,392
Earnings per share before cumulative
effect of change in accounting principle
and extraordinary item $2.11 $2.42 $2.75
Net income after cumulative effect of
change in accounting principle and
extraordinary item $85,467 $97,218 $115,266
Earnings per share after cumulative
effect of change in accounting
principle and extraordinary item $2.24 $2.42 $2.70
------- ------- -------
The fair value of each stock option granted in 2002, 2001 and 2000 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 2002, 2001 and 2000, respectively:
expected volatility of 48.3%, 54.8% and 54.1%; risk-free interest rates of 2.9%,
4.3% and 6.5%; expected lives of 4.6, 4.7 and 5.4 years; and no dividend
payments. The weighted-average fair values per share of stock options granted
during 2002, 2001 and 2000 were $15.53, $26.24 and $13.94, respectively.
In October 2002, the Company issued 25,000 restricted shares of Class A Common
Stock under the Company's 1997 Incentive Plan, as amended. These shares are
subject to restrictions on sale and transferability, a risk of forfeiture and
certain other terms and conditions. These restrictions lapse equally over the
next three years. In the fourth quarter of 2002, based upon the market value of
the shares at the date of the grant, unearned compensation was charged to
stockholders' equity for the restricted shares. The weighted-average fair value
of these shares was $26.37.
In February 2002, the Company issued 20,000 restricted shares of Class A Common
Stock under the Company's 1997 Incentive Plan, as amended. These shares are
subject to restrictions on sale and transferability, a risk of forfeiture and
certain other terms and conditions. These restrictions lapsed immediately on
one-third of the shares and lapse equally over the next two years for the
remaining two-thirds of the shares. Upon issuance of this stock, based upon the
market value of the shares at the date of the grant, compensation expense was
recognized for the unrestricted shares and unearned compensation was charged to
stockholders' equity for the restricted shares. The weighted-average fair value
of these shares was $20.61.
In the second quarter of 2000, the Company made a loan of approximately $1,100
securitized by a restricted stock issuance in December 1999. That amount is
included in deferred compensation in the consolidated balance sheets and
resulted in the revaluation of unearned compensation. The unearned compensation,
excluding the loan, is being amortized to expense over the five-year vesting
period. In the first quarters of 2001 and 2002, the Board of Directors forgave
$325 and $262 of principal payment on the loan, respectively.
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. 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 $1,552
in 2002, $1,403 in 2001 and $1,283 in 2000.
19. 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.
53
20. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 2002, 2001 and 2000, respectively:
2002 Quarter Ended March 29(1) June 28 September 27 December 31
- ------------------ ----------- ------- ------------ -----------
Revenue $225,697 $191,529 $416,641 $357,029
Gross profit 99,763 86,008 182,840 149,675
Net income before
cumulative effect
of change in accounting
principle 8,980 4,923 49,166 27,131
Net income 13,893 4,923 49,166 27,131
Earnings per share before
cumulative effect of
change in accounting
principle
Basic $.24 $.13 $1.33 $.74
Diluted $.23 $.13 $1.30 $.73
Earnings per share after
cumulative effect of
change in accounting
principle
Basic $.37 $.13 $1.33 $.74
Diluted $.36 $.13 $1.30 $.73
-------- -------- -------- --------
2001 Quarter Ended March 30 June 29 September 28 December 31
-------- ------- ------------ -----------
Revenue $245,429 $200,851 $396,219 $341,125
Gross profit 108,588 91,782 174,574 145,831
Net income 17,511 10,489 48,529 30,212
Basic earnings per share $.44 $.27 $1.25 $.79
Diluted earnings per share $.43 $.26 $1.22 $.77
-------- -------- -------- --------
2000 Quarter Ended March 31 June 30(2) September 29 December 31
-------- ---------- ------------ -----------
Revenue $208,604 $177,064 $375,246 $330,564
Gross profit 95,421 82,400 178,152 152,540
Net income before
extraordinary item 14,666 11,133 57,453 40,888
Net income 14,666 8,991 57,453 40,888
Earnings per share
before extraordinary
item
Basic $.36 $.28 $1.44 $1.03
Diluted $.34 $.26 $1.35 $ .96
Earnings per share after
extraordinary item
Basic $.36 $.22 $1.44 $1.03
Diluted $.34 $.21 $1.35 $ .96
-------- -------- -------- --------
(1) In the first quarter of 2002, the Company recorded a $4,913 after-tax
cumulative effect of change in accounting principle gain. The gain consisted
of the unamortized balance of the excess of fair value of net assets over
cost as of December 31, 2001.
(2) In the second quarter of 2000, the Company recorded a $2,126 after-tax
extraordinary loss. The loss consisted of a prepayment penalty and other
costs associated with the early redemption of $100,000 in senior notes.
54
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, 2002 and 2001 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2002
and 2001, and the results of its operations and cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for the excess of fair value of
acquired assets over cost to conform to the Statement of Financial Accounting
Standards ("SFAS") No. 141, and goodwill to conform to SFAS No. 142.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 2003
55
CORPORATE INFORMATION
DIRECTORS
Robert M. Agate
Retired Senior Executive Vice President
and Chief Financial Officer
Colgate-Palmolive Company
John E. Beard
Of Counsel
Ropes & Gray
John F. Brennan
President
Green Mountain College
Ian W. Diery
President and Chief Executive Officer
Electronic Scrip, Inc.
John A. Fitzsimmons
Retired Senior Vice President
Circuit City Stores, Inc.
Virginia H. Kent
Former Chief Executive Officer
reflect.com
Bill Shore
Founder and Executive Director
Share Our Strength
Jeffrey B. Swartz
President and Chief Executive Officer
The Timberland Company
Sidney W. Swartz
Chairman
The Timberland Company
Abraham Zaleznik
Professor Emeritus
Harvard Business School
CORPORATE OFFICERS
Sidney W. Swartz
Chairman
Jeffrey B. Swartz
President and Chief Executive Officer
Kenneth P. Pucker
Executive Vice President and
Chief Operating Officer
Brian P. McKeon
Chief Financial Officer and
Executive Vice President - Finance and Administration
Frank P. Bifulco, Jr.
Senior Vice President and
Chief Marketing Officer
Fabian T. Garcia
Senior Vice President - International
Marc Schneider
Senior Vice President - Product Management
Gary S. Smith
Senior Vice President - Supply Chain
John Crimmins
Vice President, Corporate Controller
and Chief Accounting Officer
Gregory M. Saltzberg
Vice President and Treasurer
Danette Wineberg
Vice President and General Counsel and Secretary
Thomas J. White
Assistant Secretary
CORPORATE COUNSEL
Ropes & Gray
Boston, Massachusetts
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Boston, Massachusetts
ANNUAL MEETING OF SHAREHOLDERS
Thursday, May 15, 2003, at 9:30 am
The Timberland Company
200 Domain Drive
Stratham, New Hampshire 03885
FINANCIAL INFORMATION
To request information, such as this annual report and Form 10-K for the fiscal
year ended December 31, 2002, as filed with the Securities and Exchange
Commission, please visit our website, www.timberland.com, call our investor
hotline at 603-773-1212, or send a written request to the attention of Investor
Relations at our corporate address or e-mail address,
investor_relations@timberland.com.
CLASS A COMMON STOCK LISTING
New York Stock Exchange: TBL
STOCK SPLITS
Record Date Effective Date Split
08/31/99 09/15/99 2 for 1
06/30/00 07/17/00 2 for 1
DIVIDEND POLICY
The Company has never declared a dividend on its Common Stock, and the Company's
ability to pay cash dividends is limited pursuant to loan agreements (see notes
to the Company's consolidated financial statements).
SSTOCK CERTIFICATE, NAME CHANGES, OR TRANSFERS
Equiserve Trust Company, N.A.
PO Box 43010
Providence, Rhode Island 02940-3010
800.730.6001
www.equiserve.com
56