-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eh3CH7J2GVGRsgh0Tl9Ul2ppvJGRs+XmPR4Wz66EEVns4RhqVN7yu6Eqjk1q5wlM +iK1DOLlZUq8fPPjJDK8GQ== 0000950135-00-001678.txt : 20000329 0000950135-00-001678.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950135-00-001678 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIMBERLAND CO CENTRAL INDEX KEY: 0000814361 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 020312554 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09548 FILM NUMBER: 580459 BUSINESS ADDRESS: STREET 1: 200 DOMAIN DR CITY: STRATHAM STATE: NH ZIP: 03885 BUSINESS PHONE: 6037729500 MAIL ADDRESS: STREET 1: 200 DOMAIN DR CITY: STRATHAM STATE: NH ZIP: 03885 10-K 1 THE TIMBERLAND COMPANY 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission File Number 1-9548 The Timberland Company ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 02-0312554 - --------------------------------- ------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 200 Domain Drive, Stratham, New Hampshire 03885 - ----------------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: (603) 772-9500 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Class A Common Stock, par value $.01 per share New York Stock Exchange - ---------------------------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Class A Common Stock of the Company held by non-affiliates of the Company was approximately $594,479,521 on February 25, 2000. For purposes of the foregoing sentence, the term "affiliate" includes each director and executive officer of the Company. See Item 12 of this Form 10-K. 15,758,230 shares of Class A Common Stock and 4,675,200 shares of Class B Common Stock of the Company were outstanding on February 25, 2000. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's Annual Report to security holders for the fiscal year ended December 31, 1999 are incorporated by reference in Part I, Item 1, and Part II, Items 5, 6, 7, 7A and 8, of this Form 10-K. Portions of the Company's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference in Part III, Items 10, 11, 12 and 13, of this Form 10-K. - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS OVERVIEW The Timberland Company was incorporated in Delaware on December 20, 1978. It is the successor to Abington Shoe Company, which was incorporated in Massachusetts in 1933 (The Timberland Company, together with its subsidiaries, is referred to herein as "Timberland" or the "Company," unless the context indicates otherwise). The Company designs, develops, engineers, markets and distributes, under the Timberland(R), Mountain Athletics(TM) by Timberland, and Timberland PRO(TM) brands, premium-quality footwear and apparel and accessories products for men, women and children. These products provide functional performance, classic styling and lasting protection from the elements. The Company believes that the combination of these features makes Timberland's products an outstanding value and distinguishes Timberland from its competitors. Timberland's products are sold primarily through independent retailers, better-grade department stores and athletic stores that reinforce the high level of quality, performance and service associated with Timberland. In addition, Timberland's products are sold in Timberland(R) specialty stores and Timberland(R) factory outlet stores dedicated exclusively to selling Timberland products. CURRENT PRODUCTS The Company's products fall into two primary groups: (1) footwear and (2) apparel and accessories (including product care and licensed products). The following table presents the percentage of the Company's total product revenue (excluding royalties from third party distributors and licensees) derived from the Company's sales of footwear and of apparel and accessories for the past three years:
Product 1999 1998 1997 ------- ---- ---- ---- Footwear 79.1% 76.9% 75.4% Apparel and Accessories 20.9 23.1 24.6
FOOTWEAR In 1973, the Company produced its first pair of waterproof leather boots under the Timberland brand. The Company currently offers a broad variety of footwear products for men, women and children, featuring premium materials, state-of-the-art functional design and components and advanced construction methods. The Company's footwear design and development group is organized into the following teams: men's, women's, kids, boots/Timberland PRO, performance and Mountain Athletics. Each team is responsible for all aspects of the footwear development process. 3 Timberland(R) men's 1999 footwear products included the Work Casual, Casual, Boat Shoes, Sandals and Rugged collections. Timberland(R) women's 1999 footwear products included the Work Casual, Rugged Casual, Casual and Sandals collections. Timberland(R) kids' footwear products are scaled-down versions of the Company's high-quality adult footwear products. Timberland(R) performance footwear products for men and women included the Enthusiast, Recreational and Classic Day Hiking collections and the Walking, Amphibious and Travel Adventure Collections in 1999. Timberland(R) boots include the classic work boots for which the Company is widely recognized. In 1999, Timberland introduced its Timberland PRO(TM) and Mountain Athletics(TM) by Timberland sub-brands. The Timberland PRO(TM) series of work boots provides the professional tradesman with footwear that meets the specific needs of his or her trade and the quality and innovation of Timberland(R) work boots. Mountain Athletics by Timberland footwear is engineered to meet the demanding needs of the outdoor athlete, and includes technical features designed specifically for such outdoor sports as trail running, fastpacking, bouldering and scrambling. Most Timberland(R) performance footwear products and many other Timberland(R) footwear products offer advanced technologies such as Active Comfort Technology(TM) (ACT(TM)), an integrated system developed by the Company that combines some or all of the following features: - - Advanced Combination Construction - designed to deliver forefoot flexibility for maneuverability and rear-foot stability for rugged terrain; - - B.S.F.P.(TM) motion efficiency system - Timberland's patent pending technology designed to deliver improved traction, energy-return and length of wear; - - Guaranteed Waterproof Construction; and - - Climate Control - moisture-wicking, breathable linings to help control foot perspiration. APPAREL AND ACCESSORIES Timberland(R) adult apparel products consist primarily of rugged outerwear, sweaters, shirts, pants and shorts for men. These products feature, in certain models, premium waterproof leathers, waterproof and water resistant fabric, rust-proof hardware, canvas, denim, high-quality specialty cotton, wool and other quality performance materials. Timberland(R) boys' apparel products are designed, manufactured and distributed pursuant to a license agreement. While the Company currently does not manufacture or distribute women's apparel, it is evaluating alternatives for women's apparel, including third party licensing. Timberland will also offer Mountain Athletics(TM) apparel products for Fall 2000. Timberland(R) and Mountain Athletics(TM) by Timberland accessories products for men, women and children include all products other than footwear and apparel products. Many of these products, including watches, men's belts, day packs and travel gear, socks and legwear, gloves, sunglasses and ophthalmic frames, hats and caps, and men's small leather goods, are designed, manufactured and distributed pursuant to licensing agreements with third parties. 4 Timberland receives a royalty on sales of these licensed products. Third-party licensing enables the Company to expand Timberland's reach to appropriate and well-defined product categories and to benefit from the expertise of the licensees, in a manner that reduces the risks to the Company associated with pursuing such opportunities. Timberland(R) accessories also include leather care products and a limited collection of leather goods, including luggage, briefcases, handbags, wardrobe accessories and small leather goods. PRODUCT SALES; BUSINESS SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREA Timberland's products are sold in the United States and internationally primarily through independent retailers, better-grade department stores and athletic stores which reinforce the high level of quality, performance and service associated with Timberland. In addition, Timberland's products are sold in Timberland(R) specialty stores and Timberland(R) factory outlet stores dedicated exclusively to selling Timberland(R) products. The Company operates in an industry which includes the designing, engineering, marketing and distribution of footwear and apparel and accessories products for men, women and children. The Company has five revenue generating business units with separate management teams and financial reporting accountability. For financial reporting purposes, the Company aggregates these business units into the following three reportable segments, each sharing similar product, distribution, marketing and economic conditions: U.S. Wholesale, U.S. Retail and International. The U.S. Wholesale segment is comprised of the Company's worldwide product development and manufacturing/sourcing for footwear and apparel and accessories, and the sale of such products to wholesale customers in the United States. The U.S. Wholesale 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. Retail segment includes the Company-operated specialty and factory outlet stores in the United States. The International segment consists of the marketing, selling and distribution of footwear, apparel and accessories and licensed products outside of the United States, including the Company's subsidiaries and operating divisions (which use wholesale and retail channels to sell footwear and apparel and accessories), independent distributors and licensees. The following table presents the percentage of the Company's total revenue generated by each of these reporting segments for the past three years:
1999 1998 1997 ---- ---- ---- U.S. Wholesale 53.2% 52.3% 53.7% U.S. Retail 19.0 18.5 18.9 International 27.8 29.2 27.4
More detailed information regarding these reportable segments and each of the geographic areas in which the Company operates, is set forth in Note 10 to the Company's consolidated financial statements, entitled "Business Segments and Geographical Information," appearing in the Company's 1999 Annual Report, which information is incorporated herein by reference. 5 U.S. WHOLESALE The Company's wholesale customer accounts within the United States range from better-grade department and retail stores to athletic stores. Many of these wholesale accounts merchandise Timberland's products in selling areas dedicated exclusively to Timberland's products, or "concept shops." These accounts are serviced through a combination of field and corporate-based sales teams responsible for these distribution channels. The Company also services its wholesale accounts through its principal showroom in New York City and a regional showroom in Dallas, Texas. U.S. RETAIL At December 31, 1999, the Company operated 19 specialty stores and 45 factory outlet stores in the United States. TIMBERLAND(R) SPECIALTY STORES. These stores carry current season, first quality merchandise and provide: - - an environment to showcase Timberland's products as an integrated source of footwear and apparel and accessories; - - sales and consumer-trend information which assists the Company in developing its marketing strategies, including point-of-purchase marketing materials; and - - an opportunity to develop training and customer service programs, which also serve as models which may be adopted by the Company's wholesale customers. TIMBERLAND(R) FACTORY OUTLET STORES. These stores serve as a primary channel for the sale of excess, damaged or discontinued products. The Company views these factory outlet stores as a way to preserve the integrity of the Timberland name, while maximizing the return associated with the sale of such products. INTERNATIONAL The Company sells its products internationally through its operating divisions in the United Kingdom, France, Germany, Italy, Spain, Austria and Chile. These operating divisions provide support for the sale of Timberland's products to wholesale customers and operate Timberland specialty stores and factory outlet stores in their respective countries. At December 31, 1999, the Company operated 19 specialty stores and seven factory outlet stores in Europe and Chile. Timberland(R) products are sold elsewhere in Europe and in the Middle East, Africa, Central America and South America by distributors, franchisees and commission agents, some of which also may operate Timberland specialty and factory outlet stores located in their respective countries. The Company recently announced that it signed an agreement under which it will re-acquire the exclusive distribution rights for the Asia-Pacific region from Inchcape plc. The Company will manage the sale of 6 Timberland(R) products in Japan, Singapore, Malaysia and Hong Kong through subsidiaries. The Company plans to pursue arrangements with appropriate distributors in other markets in the Asia-Pacific region. DISTRIBUTION The Company distributes its products through three Company-managed distribution facilities which are located in Danville, Kentucky, Ontario, California, and Enschede, Holland. ADVERTISING AND MARKETING The Company designs its advertising campaigns to increase brand awareness among consumers and to emphasize the attributes that distinguish the Timberland(R) brand from competing brands and make the Company's products an outstanding value. The Company's distributors and licensees also fund marketing campaigns, over which the Company maintains approval rights to ensure consistent and effective brand presentation. During 1999, the Company's national and regional advertising campaigns mainly appeared in the following media: television; active-lifestyle, fashion, business and sports-oriented consumer periodicals; trade press outlets; and outdoor advertising placements. The Company's advertising campaigns focused on the second half of 1999, particularly on the third quarter, when the Company's revenue historically has been highest. The Company reinforced these advertising efforts with a variety of promotional campaigns, retail promotions, point-of-purchase displays and materials, public relations efforts, and cooperative advertising programs with its retailers, as well as retail sales clerk training and other sales incentive programs. The Company maintains internet web sites at www.timberland.com and www.mountainathletics.com for use in its marketing efforts. The Company also promotes its products at various industry trade shows in the United States and internationally. SEASONALITY In 1999, as has been historically the case, the Company's revenue was higher in the last two quarters of the year than in the first two quarters. Accordingly, the amount of fixed costs related to the Company's operations typically represented a larger percentage of revenue in the first two quarters of 1999 than in the last two quarters of 1999. The Company expects this seasonality to continue in 2000. BACKLOG At December 31, 1999, Timberland's backlog of orders from its customers was approximately $216 million, compared to $188 million at December 31, 1998 and $186 million at December 31, 1997. While all orders in the backlog are subject to cancellation by customers, the Company expects that the majority of such orders will be filled in 2000. The Company does not believe that its order backlog at year-end is representative of the orders which will be filled during 2000. The lack of reliability of backlog as an indication of orders to be filled is due to the 7 risk of cancellation associated with such orders, the seasonality of the Company's revenue and the difficulty of planning in advance orders scheduled for immediate fulfillment. MANUFACTURING The Company has two manufacturing facilities located in Puerto Rico and the Dominican Republic. During 1999, the Company manufactured approximately 18% of its footwear unit volume, compared to approximately 20% during 1998 and 28% during 1997. The remainder of the Company's footwear products and all of its apparel and accessories products were produced by independent manufacturers and licensees in Asia, Europe, South America and Mexico. Approximately 51% of the Company's 1999 footwear unit volume was produced by independent manufacturers in China and Taiwan. Three of these manufacturers produced approximately 10% to 18% each of the Company's 1999 footwear volume. The Company currently plans to retain its internal manufacturing capability in order to continue benefiting from reduced lead times, favorable duty rates and tax benefits. To the extent that the Company manufactures its products outside the United States or is dependent upon foreign operations with unaffiliated parties, the Company is subject to the usual risks of doing business abroad. These risks potentially include, among other risks, foreign exchange rate fluctuations, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. The Company maintains a quality management group, which develops, reviews and updates the Company's quality and production standards. To help ensure such standards are met, the group also conducts product quality audits at the Company's and independent manufacturers' factories and distribution centers. The Company has offices in Bangkok, Thailand, Taichung, Taiwan, and Zhu Hai, China, to supervise the Company's sourcing activities conducted in the Asia-Pacific region. RAW MATERIALS In 1999, five suppliers provided, in the aggregate, approximately 70% of the Company's leather purchases. One of these suppliers provided approximately 42% of the Company's leather purchases in 1999. The Company believes that leather will continue to be available from these or alternative sources. The Company has established a central network of suppliers through which the Company's manufacturing facilities and independent manufacturers can purchase raw materials. The Company seeks sources of raw materials local to manufacturers, in an effort to reduce lead times while maintaining the Company's high quality standards. The Company believes that key strategic alliances with leading raw materials vendors help reduce the cost and provide greater consistency of raw materials procured to produce Timberland(R) products and improve compliance with the Company's production standards. In 1999, the Company finalized contracts with global vendors for such raw materials as packaging, insole board, leather laces, handsewing thread and selected synthetic linings. 8 TRADEMARKS AND TRADE NAMES; PATENTS; RESEARCH & DEVELOPMENT The Company's principal trade name is The Timberland Company and the Company's principal trademarks are TIMBERLAND and the TREE DESIGN LOGO, which have been registered in the United States and several foreign countries. Other Company trademarks or registered trademarks are 24-7 Comfort Suspension, ACT, Active Comfort Technology, Aero Balm, Balm Shelter, Bootness, B.S.F.P., Cream Buff, Endoskeleton, Euro Rec, Euro TecRec, Fastpacker, Gear For Outdoor Athletes, Grime Squad, Guaranteed Waterproof Construction, Hydro Balm, ISN, Independent Suspension Network, Jackson Mountain, Lockseam, More Quality Than You May Ever Need, Mountain Athletics, Path of Service, Pull On Your Boots, Pull On Your Boots and Make a Difference, TBL, The Boot Company, This is a trip, This is not baggage, This is your new best friend, Timberland Pro, Trail Grip, Treeline, Waximum, Weathergear, Wind, Water, Earth and Sky, and Workboots For The Professional, and the following design logos: [TIMBERLAND PRODUCT LOGOS] The Company regards its trade name and trademarks as valuable assets and believes that they are important factors in marketing its products. The Company seeks to protect and defend vigorously its trade name and trademarks against infringement under the laws of the United States and other countries. In addition, the Company seeks to protect and defend vigorously its patents, designs, copyrights and all other proprietary rights under applicable laws. 9 The Company conducts research, design and development efforts for its products, including field testing of a number of its products to evaluate and improve product performance. However, the Company's expenses relating to research, design and development have not represented a material expenditure relative to its other expenses. COMPETITION The Company's footwear, apparel and accessories products are marketed in highly competitive environments that are subject to rapid changes in consumer preference. Although the footwear industry is fragmented to a great degree, many of the Company's competitors are larger and have substantially greater resources than the Company, including athletic shoe companies, many of which compete directly with some of the Company's products. In addition, the Company faces competition from retailers that are establishing products under private labels and from at least two direct mail companies in the United States. Product quality, performance, design, styling and pricing, as well as consumer awareness, are all important elements of competition in the footwear and the apparel and accessories markets served by the Company. Although changing fashion trends generally affect demand for particular products, the Company believes that, because of the functional performance, classic styling and high quality of Timberland(R) footwear products, demand for most Timberland footwear products is less sensitive to changing trends in fashion than other products that are designed specifically to meet such trends. The Company does not believe that any of its principal competitors offers a complete line of products that provide the same quality and performance as the complete line of Timberland footwear and apparel and accessories products. However, the Company does have a variety of major competitors, as follows:
Product Category Number of Competitors ---------------- --------------------- Footwear: work boots/Timberland PRO(TM) 9 casual and comfort 11 dress casual 12 Mountain Athletics(TM)/performance 13 kids' 6 Apparel: men's 12 kids' 10
ENVIRONMENTAL MATTERS Compliance with federal, state and local environmental regulations has not had, nor is it expected to have, any material effect on the capital expenditures, earnings or competitive position of the Company based on information and circumstances known to the Company at this time. 10 EMPLOYEES At December 31, 1999, the Company had approximately 4,800 employees worldwide. Management considers its employee relations to be good. None of the Company's employees is represented by a labor union, and the Company has never suffered a material interruption of business caused by labor disputes. ITEM 2. PROPERTIES Since April 1994, the Company has leased its worldwide headquarters located in Stratham, New Hampshire, under a lease that expires in September 2010, with the option to extend the term for two additional five-year periods. The Company considers its headquarters facilities adequate and suitable for its current needs. The Company leases its manufacturing facilities located in Isabela, Puerto Rico, and Santiago, Dominican Republic, under 11 leasing arrangements, which expire on various dates through April 2003. The Company owns its distribution facility in Danville, Kentucky, and leases its facilities in Ontario, California, and Enschede, Holland. The Company leases all of its specialty and factory outlet stores. The Company's subsidiaries also lease office and warehouse space to meet their individual requirements. ITEM 3. LEGAL PROCEEDINGS 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended December 31, 1999, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is included in the Company's 1999 Annual Report under the caption "Quarterly Market Information and Related Matters" and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included in the Company's 1999 Annual Report under the caption "Five Year Summary of Selected Financial Data" and is incorporated herein by reference. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included in the Company's 1999 Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is included in the Company's 1999 Annual Report under the caption "Quantitative and Qualitative Disclosures about Market Risk" and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included in the Company's 1999 Annual Report and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information set forth below and to the information under the caption "Information with Respect to Nominees" in the Company's definitive Proxy Statement (the "2000 Proxy Statement") relating to its 2000 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission (the "Commission") within 120 days after the close of the Company's fiscal year ended December 31, 1999, which information is incorporated herein by reference. Reference is also made to the information set forth in the Company's 2000 Proxy Statement with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which information is incorporated herein by reference. 12 EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the names, ages and principal occupations during the past five years of the Company's executive officers. All executive officers serve at the discretion of the Company's Board of Directors.
- ------------------------------------------------------------------------------------------------------------------ NAME AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------------------ Sidney W. Swartz 64 Chairman of the Board since June 1986; Chief Executive Officer and President, June 1986-June 1998. - ------------------------------------------------------------------------------------------------------------------ Jeffrey B. Swartz 40 President and Chief Executive Officer since June 1998; Chief Operating Officer, May 1991-June 1998; Executive Vice President, March 1990-June 1998. Jeffrey Swartz is the son of Sidney Swartz. - ------------------------------------------------------------------------------------------------------------------ Kenneth P. Pucker 37 Executive Vice President, Footwear and Apparel since September, 1999; Senior Vice President and General Manager-Footwear, December 1997-September 1999; Vice President and General Merchandising Manager-Footwear, April 1996-December 1997; Vice President-Strategic Initiatives, January 1995-April 1996; General Manager-The Outdoor Footwear Company (a subsidiary of the Company), October 1993-January 1995. - ------------------------------------------------------------------------------------------------------------------ Geoffrey J. Hibner 50 Senior Vice President - Finance and Administration and Chief Financial Officer, May 1997-March 2000. Frontier Technologies Corporation: Chief Financial Officer, August 1995-May 1997. Universal Foods Corporation: Vice President, Finance, July 1988-January 1995. - ------------------------------------------------------------------------------------------------------------------ Carden N. Welsh 46 Senior Vice President-International since May 1998; Treasurer, April 1991-May 1998. - ------------------------------------------------------------------------------------------------------------------ David N. Smith 43 Senior Vice President-Supply Chain since January 2000. The Estee Lauder Companies Inc.: Vice President-Strategy, Global Operations, August 1995-January 2000. Fisons, plc: General Manager, May 1992-August 1995. - ------------------------------------------------------------------------------------------------------------------ Dennis W. Hagele 56 Vice President-Finance and Corporate Controller (Chief Accounting Officer) since October 1994. - ------------------------------------------------------------------------------------------------------------------ Danette Wineberg 53 Vice President and General Counsel since October 1997. Little Caesar Enterprises, Inc.: General Counsel, November 1993-October 1997. - ------------------------------------------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION Reference is made to the information set forth under the caption "Executive Compensation" in the Company's 2000 Proxy Statement, which information is incorporated herein by reference. 13 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's 2000 Proxy Statement, which information is incorporated herein by reference. The aggregate market value of the Class A Common Stock held by non-affiliates of the Company appearing on the cover page of this report includes the shares owned by The Sidney W. Swartz 1982 Family Trust, The Swartz Foundation and The Sidney and Judith Swartz Charitable Remainder Unitrust. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the information set forth under the caption "Certain Relationships and Related Transactions" in the Company's 2000 Proxy Statement, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS. The following financial statements appearing in the Company's 1999 Annual Report are incorporated by reference in this report: ANNUAL REPORT
PAGE ---- Consolidated Balance Sheets as of December 31, 1999 and 1998 17 For the years ended December 31, 1999, 1998 and 1997: Consolidated Statements of Income 18 Consolidated Statements of Changes in Stockholders' Equity 19 Consolidated Statements of Cash Flows 20 Notes to Consolidated Financial Statements 21 Independent Auditors' Report 32
(a)(2) FINANCIAL STATEMENT SCHEDULE. The following additional financial data should be read in conjunction with the consolidated financial statements in the Company's 1999 Annual Report:
FORM 10-K PAGE -------------- Independent Auditors' Report on Schedule II F-1
14
Schedule II - Valuation and Qualifying Accounts F-2
All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable and have, therefore, been omitted. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Company during the fourth quarter of 1999. (c) EXHIBITS. Listed below are all the Exhibits filed as part of this report, some of which are incorporated by reference from documents previously filed by the Company with the Commission in accordance with the provisions of Rule 12b-32 of the Exchange Act.
EXHIBIT DESCRIPTION - ------- ----------- (3) ARTICLES OF INCORPORATION AND BY-LAWS 3.1 Restated Certificate of Incorporation(1) 3.2 By-Laws, as amended May 19, 1993(2) (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES (See also Exhibits 3.1 and 3.2) 4.1 Specimen stock certificate for shares of the Company's Class A Common Stock(3) (10) MATERIAL CONTRACTS 10.1 Agreement dated as of August 29, 1979 between The Timberland Company and Sidney W. Swartz(1) 10.2 (a) The Company's 1987 Stock Option Plan, as amended(4) (b) The Company's 1997 Stock Option Plan for Non-Executive Employees(5) (c) The Company's 1997 Incentive Plan(4) 10.3 The Company's 1991 Employee Stock Purchase Plan, as amended(6) 10.4 The Company's 1991 Stock Option Plan for Non-Employee Directors(7) 10.5 The Timberland Company Short Term Incentive Plan(2)
15
EXHIBIT DESCRIPTION - ------- ----------- 10.6 The Timberland Company Retirement Earnings 401(k) Plan and Trust Agreements(8) 10.7 The Timberland Company Profit Sharing Plan and Trust Agreements(8) 10.8 Credit Agreement dated as of April 30, 1998 among The Timberland Company, certain banks listed therein and Morgan Guaranty Trust Company of New York, as Agent(9) 10.9 (a) Note Agreements dated as of December 15, 1994 regarding 8.94% Senior Notes due December 15, 2001(10) (b) Amendment No. 1 dated as of April 1, 1995 to Note Agreements(11) (c) Amendment No. 2 dated as of June 28, 1995 to Note Agreements(11) (d) Amendment No. 3 dated as of June 21, 1996 to Amended and Restated Note Agreements(12) (13) ANNUAL REPORT TO SECURITY HOLDERS 13. Portions of the 1999 Annual Report as incorporated herein by reference, filed herewith (21) SUBSIDIARIES 21. List of subsidiaries of the registrant, filed herewith (23) CONSENT OF EXPERTS AND COUNSEL 23. Consent of Deloitte & Touche LLP, filed herewith (27) FINANCIAL DATA SCHEDULE 27. Financial Data Schedule for the year ended December 31, 1999, filed herewith (99) ADDITIONAL EXHIBIT 99. Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, filed herewith
Pursuant to paragraph 4(iii) of Item 601(b), Regulation S-K, the Company has filed as Exhibits only the instruments defining the rights of holders of long-term debt of the Company and its consolidated subsidiaries with respect to which the total amount of securities authorized thereunder exceeds 10% of the total assets of the Company and its subsidiaries on a consolidated 16 EXHIBIT DESCRIPTION - ------- ----------- basis. The Company agrees to furnish to the Commission, upon its request, copies of other instruments defining the rights of holders of long-term debt of the Company and its subsidiaries, with respect to which the total amount does not exceed 10% of such assets. The Company also agrees to furnish to the Commission, upon its request, copies of any omitted schedule or exhibit to any Exhibit filed herewith. - --------------------------- (1) Filed as an exhibit to Registration Statement on Form S-1, numbered 33-14319, and incorporated herein by reference. (2) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and incorporated herein by reference. (3) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference. (4) Filed on June 21, 1995, as an exhibit to Registration Statement on Form S-8, numbered 33-60457, and incorporated herein by reference. (5) Filed on September 9, 1997 as an exhibit to Registration Statement on Form S-8, numbered 333-35223, and incorporated herein by reference. (6) Filed on June 21, 1995, as an exhibit to Registration Statement on Form S-8, numbered 33-60459, and incorporated herein by reference. (7) Filed on August 18, 1992, as an exhibit to Registration Statement on Form S-8, numbered 33-50998, and incorporated herein by reference. (8) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference. (9) Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended June 26, 1998, and incorporated herein by reference. (10) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference. (11) Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended June 30, 1995, and incorporated herein by reference. (12) Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended June 27, 1996, and incorporated herein by reference. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TIMBERLAND COMPANY March 24, 2000 By: /s/ Jeffrey B. Swartz --------------------- Jeffrey B. Swartz, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Sidney W. Swartz Chairman of the Board - -------------------- and Director March 24, 2000 Sidney W. Swartz /s/ Jeffrey B. Swartz President, Chief Executive - --------------------- Officer and Director (Principal Jeffrey B. Swartz Executive Officer) March 24, 2000 /s/ Geoffrey J. Hibner Senior Vice President-Finance - ---------------------- and Administration and Chief Geoffrey J. Hibner Financial Officer March 10, 2000 /s/ Dennis W. Hagele Vice President-Finance - -------------------- and Corporate Controller Dennis W. Hagele (Chief Accounting Officer) March 24, 2000 /s/ Robert M. Agate Director March 24, 2000 - ------------------- Robert M. Agate /s/ John F. Brennan Director March 24, 2000 - ------------------- John F. Brennan /s/ Ian W. Diery Director March 24, 2000 - ---------------- Ian W. Diery /s/ John A. Fitzsimmons Director March 24, 2000 - ----------------------- John A. Fitzsimmons /s/ Virginia H. Kent Director March 24, 2000 - -------------------- Virginia H. Kent /s/ Indra K. Nooyi Director March 24, 2000 - ------------------ Indra K. Nooyi /s/ Abraham Zaleznik Director March 24, 2000 - -------------------- Abraham Zaleznik
18 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The Timberland Company: We have audited the consolidated financial statements of The Timberland Company and subsidiaries as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated February 2, 2000 (February 18, 2000 as to Note 15); such consolidated financial statements and report are included in your 1999 Annual Report to security holders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of The Timberland Company listed in Item 14(a)(2). This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts February 2, 2000 (February 18, 2000 as to Note 15) F-1 19 SCHEDULE II THE TIMBERLAND COMPANY VALUATION AND QUALIFYING ACCOUNTS (Dollars In Thousands)
- --------------------------------------------------------------------------------------------------------------------- Additions Deductions - --------------------------------------------------------------------------------------------------------------------- Balance at Charged to Write-Offs, Beginning of Costs and Charged to Other Net of Balance at End Period Expenses Accounts Recoveries Of Period - --------------------------------------------------------------------------------------------------------------------- Description - --------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts: - --------------------------------------------------------------------------------------------------------------------- Year ended - --------------------------------------------------------------------------------------------------------------------- December 31, 1999 $4,769 $3,618 -- $3,477 $4,910 - --------------------------------------------------------------------------------------------------------------------- December 31, 1998 3,742 2,383 -- 1,356 4,769 - --------------------------------------------------------------------------------------------------------------------- December 31, 1997 3,540 3,605 -- 3,403 3,742 - --------------------------------------------------------------------------------------------------------------------- Group insurance reserve: - --------------------------------------------------------------------------------------------------------------------- Year ended - --------------------------------------------------------------------------------------------------------------------- December 31, 1999 $1,077 $5,793 -- $5,746 $1,124 - --------------------------------------------------------------------------------------------------------------------- December 31, 1998 1,100 4,377 -- 4,400 1,077 - --------------------------------------------------------------------------------------------------------------------- December 31, 1997 1,035 6,803 -- 6,738 1,100 - ---------------------------------------------------------------------------------------------------------------------
F-2 20 TIMBERLAND, the TREE DESIGN LOGO, 24-7 Comfort Suspension, ACT, Active Comfort Technology, Aero Balm, Balm Shelter, Bootness, B.S.F.P., Cream Buff, Endoskeleton, Euro Rec, Euro TecRec, Fastpacker, Gear For Outdoor Athletes, Grime Squad, Guaranteed Waterproof Construction, Hydro Balm, ISN, Independent Suspension Network, Jackson Mountain, Lockseam, More Quality Than You May Ever Need, Mountain Athletics, Path of Service, Pull On Your Boots, Pull On Your Boots and Make a Difference, TBL, The Boot Company, This is a trip, This is not baggage, This is your new best friend, Timberland Pro, Trail Grip, Treeline, Waximum, Weathergear, Wind, Water, Earth and Sky, Workboots For The Professional, the 24-7 Comfort Suspension logo, the PRO and PRO Series logos, the Mountain Athletics logos, the Endoskeleton logo and the Independent Suspension Network logo are trademarks or registered trademarks of The Timberland Company. (C)The Timberland Company 2000 All Rights Reserved. EX-13 2 ANNUAL REPORT 1 EXHIBIT 13 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, 1999 1998 1997 1996 1995(1) - -------------------------------------------------------------------------------------------------------------------- Revenue $917,216 $862,168 $796,458 $689,973 $655,138 Net income (loss) 75,247 59,156 47,321 20,419 (11,635) Basic earnings (loss) per share(2) 3.51 2.59 2.10 .92 (.53) Diluted earnings (loss) per share(2) 3.39 2.52 2.02 .91 (.53) - -------------------------------------------------------------------------------------------------------------------- SELECTED BALANCE SHEET DATA (Dollars in Thousands) - -------------------------------------------------------------------------------------------------------------------- December 31, 1999 1998 1997 1996 1995(1) - -------------------------------------------------------------------------------------------------------------------- Cash and equivalents $196,085 $151,889 $ 98,771 $ 93,336 $ 38,389 Working capital 302,286 291,835 242,911 269,603 268,115 Total assets 493,311 469,467 420,003 449,586 421,408 Total long-term debt 100,000 100,000 100,000 189,454 207,187 Stockholders' equity 272,368 266,193 214,895 165,360 142,221 - --------------------------------------------------------------------------------------------------------------------
(1) Includes a $16.0 million pre-tax restructuring charge which reduced earnings and earnings per share by $9.9 million and $.44 diluted ($.45 basic), respectively, and a $12.1 million non-recurring pre-tax gain which increased earnings and earnings per share by $7.5 million and $.34 diluted ($.34 basic), respectively. (2) Prior years' earnings (loss) per share have been restated to reflect the 2-for-1 stock split in September 1999. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discusses the Company's results of operations and liquidity and capital resources. The discussion should be read in conjunction with "The Year in Review" and the consolidated financial statements and related notes.
RESULTS OF OPERATIONS (Amounts in Thousands, Except Per Share Data) - -------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Revenue $917,216 100.0% $862,168 100.0% $796,458 100.0% Gross profit 393,102 42.9 342,839 39.8 311,921 39.2 Operating expense 276,551 30.2 248,249 28.8 228,068 28.6 Operating income 116,551 12.7 94,590 11.0 83,853 10.5 Interest expense 9,342 1.0 9,538 1.1 14,833 1.9 Net income 75,247 8.2 59,156 6.9 47,321 5.9 Basic earnings per share $ 3.51 $ 2.59 $ 2.10 Weighted-average shares outstanding 21,448 22,849 22,561 Diluted earnings per share $ 3.39 $ 2.52 $ 2.02 Weighted-average shares outstanding 22,178 23,517 23,475 - --------------------------------------------------------------------------------------------------------------------
Prior years' earnings per share and weighted-average shares have been restated to reflect the 2-for-1 stock split in September 1999. Revenue increased to $917.2 million in 1999 from $862.2 million in 1998 and $796.5 million in 1997. This represents an increase of 6.4% in 1999 and 8.3% in 1998, each compared with the prior year. Footwear revenue was $713.4 million in 1999, $651.8 million in 1998 and $593.0 million in 1997. This represents an increase of 9.5% in 1999 and 9.9% in 1998, each compared with the prior year. The revenue increase in 1999, compared with 1998, was primarily due to increases in domestic and, to a lesser degree, European unit sales, partially offset by the impact of foreign exchange. By product, the increase was primarily attributable to growth in Boots and, to a lesser degree, Kids', European Men's Casual and the introduction of the new Mountain Athletics(TM) by Timberland and Timberland PROtrademark series sub-brands. These increases in revenue were partially offset by unit volume decreases in the 2 Performance and, to lesser degree, the domestic Casual categories. The increase in 1998, compared with 1997, was primarily due to growth in domestic wholesale, domestic retail and European wholesale unit sales, partially offset by a decline in average selling price. By product, the increases were primarily in the Performance, Boots and Kids' categories. Worldwide footwear revenue represented 77.8%, 75.6% and 74.5% of total revenue in 1999, 1998 and 1997, respectively. Revenue attributable to apparel and accessories was $189.0 million in 1999, $195.8 million in 1998 and $193.8 million in 1997. The revenue decrease of 3.5% in 1999, compared with 1998, was primarily due to a reduction in domestic wholesale revenue, partially offset by increases in European average selling price and unit sales, and domestic retail unit sales. The decrease in domestic wholesale revenue was primarily due to a $6.9 million reduction in wholesale off-price apparel sales. The decline in off-price sales resulted from the Company's focus on rationalizing its domestic distribution strategy and better managing inventory levels. The 1.0% revenue increase in 1998, compared with 1997, was primarily due to increases in domestic retail unit sales and European wholesale average selling price and unit sales. These increases were partially offset by a decline in domestic wholesale average selling price. Worldwide apparel and accessories revenue represented 20.6%, 22.7% and 24.3% of total revenue in 1999, 1998 and 1997, respectively. Worldwide revenue from Company-owned retail and factory stores was $210.5 million in 1999, $191.7 million in 1998 and $181.1 million in 1997. This represents an increase of 9.8% in 1999 and 5.8% in 1998, each compared with the prior year. These increases in revenue were primarily due to increases in footwear and apparel and accessories unit sales, resulting from, in part, new retail locations worldwide. Worldwide retail revenue represented 22.9%, 22.2% and 22.7% of total revenue in 1999, 1998 and 1997, respectively. The Company has three reportable business segments: U.S. Wholesale, U.S. Retail and International (for a more detailed description and additional financial information regarding segments, see the "Business Segments and Geographic Information" note (Note 10) to the Company's consolidated financial statements). Domestic revenue, comprised of the U.S. Wholesale and U.S. Retail segments, amounted to $662.5 million in 1999, $610.3 million in 1998 and $578.4 million in 1997, or 72.2%, 70.8% and 72.6% of total revenue for each of the three years, respectively. The U.S. Wholesale segment revenue increased by 8.4% in 1999, compared with 1998, and by 5.3% in 1998, compared with 1997, both primarily due to increases in footwear unit sales. The U.S. Retail segment revenue increased by 8.9% in 1999, compared with 1998, and by 6.1% in 1998, compared with 1997, both primarily due to increases in footwear unit sales and, to a lesser degree, apparel and accessories unit sales. Comparable store sales increased by 5.4% in 1999, compared with 1998, and by 4.3% in 1998, compared with 1997. International segment revenue increased by 1.1% in 1999, compared with 1998, and by 15.5% in 1998, compared with 1997. The increase in 1999, compared with 1998 was primarily due to higher European unit sales and apparel and accessories average selling prices. This increase was substantially offset by the impact of foreign exchange and, to a lesser extent, lower revenue in Asia where the Company operated through an independent distributor. The increase in 1998, compared with 1997, was primarily due to European footwear unit sales. The gross profit margin was 42.9% in 1999, 39.8% in 1998 and 39.2% in 1997. The increase in margin percentage in 1999, compared with 1998, was primarily due to improvements in manufacturing efficiencies, fewer off-price apparel sales and the introduction of higher margin products, such as the Mountain Athletics(TM) by Timberland sub-brand. The improvement in gross profit margin from 1997 to 1998 was primarily due to a mix of higher margin products, in addition to lower unit costs in footwear manufacturing and sourcing. Operating expense was $276.6 million, or 30.2% of revenue, in 1999, $248.2 million, or 28.8% of revenue, in 1998 and $228.1 million, or 28.6% of revenue, in 1997. The increase in operating expense in 1999, compared with 1998, was principally due to expenditures to support business growth, predominately selling and marketing related. The increase in 1998, compared with 1997, was primarily due to marketing expenditures and sales volume related expenditures. Operating income, which is pre-tax earnings before interest and other expense, was $116.6 million in 1999, $94.6 million in 1998 and $83.9 million in 1997. As a percentage of revenue, operating income was 12.7% in 1999, 11.0% in 1998 and 10.5% in 1997. Segment operating income improved in all segments in 1999 and 1998, both in dollars and as a percentage of revenue, compared with the respective prior years. That improvement was due to a combination of increased revenue and higher gross margin rates in each segment 3 year over year, partially offset by the expense increase discussed previously and, additionally, the impact of foreign exchange within the International segment. The increase in Unallocated Corporate expense in 1999, compared with 1998, was primarily due to finance, information systems, legal and administrative expenses incurred in the support of company-wide activities, and United States distribution expenses. The increase in 1998, compared with 1997, was primarily due to expanded marketing efforts. Interest expense was $9.3 million in 1999, compared with $9.5 million in 1998 and $14.8 million in 1997. The decrease from 1998 to 1999 was due to lower levels of short-term borrowings, while the decrease from 1997 to 1998 was due to lower levels of long-term borrowings. The effective income tax rate was 32.0% in 1999, 32.0% in 1998 and 30.0% in 1997. For an analysis of the effective tax rate, see the "Income Taxes" note (Note 6) to the Company's consolidated financial statements. The Company believes that inflation has not had a significant impact on the Company's operations over the past three years. LIQUIDITY AND CAPITAL RESOURCES Cash generated by operations amounted to $135.2 million in 1999, $84.2 million in 1998 and $113.8 million in 1997. The Company's earnings and continued improvements in working capital management were the principal sources of cash generation. The reduction in inventory levels experienced in 1999 and 1998, compared with the respective prior years, was achieved by improved forecasting accuracy and the reduction of excess and obsolete product in the business system. Inventory turns were 3.7 times in 1999, compared with 3.2 times in 1998 and 2.9 times in 1997. Days sales outstanding at December 31, 1999 were 26 days, compared with 27 days at December 31, 1998 and 29 days at December 31, 1997. Domestic wholesale days sales outstanding were 29 days, 34 days and 36 days at the end of 1999, 1998 and 1997, respectively. Net cash used by investing activities amounted to $23.7 million in 1999, $21.8 million in 1998 and $25.2 million in 1997. Of the net cash used by investing activities, capital expenditures were $20.1 million in 1999, $20.7 million in 1998 and $25.7 million in 1997. A majority of capital expenditures during the three years ended December 31, 1999 were for manufacturing machinery and equipment, distribution and transportation equipment, retail store additions and improvements, and for information system enhancements. During 1999, 1998 and 1997, net cash used in financing activities amounted to $64.3 million, $10.1 million and $82.7 million, respectively. In 1999 and 1998, $71.7 million and $16.2 million was used to repurchase outstanding shares of the Company's Class A Common Stock, respectively. In 1997, $89.5 million was used to repay long-term debt, including prepayments totaling $82.0 million. The Company uses funds from operations and unsecured revolving and committed lines of credit as the primary sources of financing for its seasonal and other working capital requirements. On April 30, 1998, the Company entered into a revolving credit agreement to provide up to $80.0 million in letters of credit under an overall $100.0 million committed facility. This agreement expires on June 19, 2001. The Company's debt to capital ratio was 26.9% at December 31, 1999, 27.3% at December 31, 1998 and 31.8% at December 31, 1997. Management believes that the Company's capital requirements for 2000 will be met through the use of its current cash balances, through its existing credit facilities and through cash flow from operations, without the need for additional permanent financing. However, if the need arises, the Company's ability to obtain any additional credit facilities will depend upon prevailing market conditions, the Company's financial condition and the terms and conditions of such additional facilities. NEW ACCOUNTING PRONOUNCEMENTS A discussion of new accounting pronouncements is included in the "Summary of Significant Accounting Policies" note (Note 1) to the Company's consolidated financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the financial position and results of operations of the Company are routinely subject to a variety of risks, including market risk associated with 4 interest rate movements on borrowings and investments and currency rate movements on non-U.S. dollar denominated assets and liabilities. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effect of these and other potential exposures. The Company utilizes cash from operations and U.S. dollar denominated borrowings to fund its working capital and investment needs. Short-term debt, if required, is used to meet working capital requirements and long-term debt generally is used to finance long-term investments. In addition, derivative instruments are used by the Company in its hedging of foreign currency transactions. These debt instruments and derivative instruments are viewed as risk management tools and are not used for trading or speculative purposes. Cash balances are normally invested in high-grade securities with terms under three months. The Company has available unsecured committed and uncommitted lines of credit as sources of financing for its working capital requirements. Borrowings under these credit agreements bear interest at variable rates based on the London Interbank Offering Rate. At December 31, 1999 and 1998, the Company had no short-term financing outstanding and one long-term debt instrument outstanding at a fixed interest rate of 8.94% with a maturity in December 2001. The Company's foreign currency exposure is generated primarily from its European operating subsidiaries. The Company seeks to minimize the impact of these foreign currency fluctuations by hedging the related transactions with foreign currency forward contracts. These contracts are short-term and expire in twelve months or less. As of December 31, 1999, there were no material foreign currency transactions that were not hedged. Based upon sensitivity analysis as of December 31, 1999, a 10% change in foreign exchange rates would cause the fair value of the Company's financial instruments to increase/decrease by approximately $5.0 million. YEAR 2000 * STATE OF READINESS. The Company's Year 2000 compliance strategy included several overlapping phases: inventory, analysis, conversion, testing and implementation. In 1999, the Company completed all phases for all of its enterprise business systems and technical systems worldwide and for all departmental applications, facilities and non-informational technology systems identified by the Company as critical or high risk. The Company took steps to assess the Year 2000 compliance of its external business partners and to reduce the risks to, and the resulting impact on, the Company of their non-compliance. Those steps included requiring such external business partners to provide compliance certification, periodic status reports and contingency plans to the Company. The Company monitored the rollover of 1999 into 2000 and has not experienced any material business disruptions as a result of Year 2000 issues and believes that the risk for major system failure has passed. As a result, the Company has removed its restriction on new installations and upgrades of all operational systems. * RISKS. The Company does not now anticipate that any future material business disruption will occur as a result of Year 2000 issues. The Company will continue to monitor its business systems and processes and the Year 2000 compliance of its external business partners throughout the first quarter of 2000. However, the Company will not be able to independently verify that all of its external business partners are, in fact, Year 2000 compliant. Therefore, there is a risk that the Company's business, financial position and results of operations could be materially adversely affected by any Year 2000 issues which did not become apparent in the rollover from 1999 to 2000, or during the subsequent weeks. * CONTINGENCY PLAN. The Company completed and documented its Year 2000 contingency plans to address the risk and exposure to the Company. The Company used the information and data received from its external business partners to assist in its assessment of risk of non-compliance and in the development of its contingency plans. Because the Company did not experience any material business interruptions as a result of Year 2000 issues, it did not put any of its contingency plans into place. The Company will continue to update its assessments and revise its contingency plans as appropriate, based on additional information received, and will maintain its contingency plans during 2000 in the event that it should need to address the risks described above. 5 * COSTS. Total expenditures related to the Company's Year 2000 compliance efforts are currently estimated not to exceed $3.0 million, of which $2.5 million has been incurred through December 31, 1999. This estimate does not include the compensation of Company employees and other similar internal costs, the time and costs that may be incurred by the Company as a result of the failure of any third parties to become Year 2000 compliant, or internal costs related to contingency plans. The estimate of total expenditures is based on the Company's current assessment of additional Year 2000 compliance needs and is subject to change as the Company proceeds with its Year 2000 efforts. The Company's statements of its expectations regarding the current status, date of completion and costs of its Year 2000 compliance programs are forward-looking statements. These statements are management's best estimates based on the information currently available. EURO Effective January 1, 1999, the European Monetary Union ("EMU") created a single currency, the euro, for its member countries. A transition period, from January 1, 1999 through December 31, 2001, will allow the member countries to methodically eliminate their local currencies and to convert to the euro. During this transition period, either the euro or a member country's present currency will be accepted as legal tender. In 1998, the Company formed a task force to study the requirements of conversion to the euro and the related impact to the Company (four of the five European subsidiaries of the Company operate in countries that are members of the EMU). The task force reviewed technology requirements, pricing and competitive implications, banking, the impact on hedging programs and the timing and costs related to each of these. From this review, a conversion program was developed and implemented in 1998. As of December 31, 1999, the accounting and ledger systems of the Company's European subsidiaries were euro compliant. Additionally, the Company can invoice and manage all wholesale orders in local currency and euros. At the subsidiaries' retail locations, all credit card readers are euro compliant and all price tags and displays are in both local currency and euros. The retail store registers and merchandising/inventory management systems are currently scheduled to be euro compliant by the end of 2000. Throughout 2000, the Company will continue to review and potentially adjust its European subsidiaries' wholesale and retail pricing for consistency among markets. The Company will also be working on the euro compliance of its financial reporting and consolidation system to support all euro process and system changes. The Company believes that the adoption of the euro will not have a material impact on the Company's consolidated financial statements. FORWARD-LOOKING INFORMATION Management is unaware of any current trends or conditions that could have a material adverse effect on the Company's consolidated financial position, future results of operations or capital or liquidity needs. However, as discussed in an exhibit to the Company's Form 10-K for the year ended December 31, 1999, entitled "Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995," investors should be aware of factors that could affect the Company's actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of the Company. These factors include political, economic or other factors such as currency exchange rates, conversion to the euro, Year 2000 conversions, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the business in each of the Company's markets; competitive product, advertising, promotional and pricing activity; dependence on the rate of development and degree of acceptance of new product introductions in the marketplace; and the difficulty of forecasting sales at certain times in certain markets. SUBSEQUENT EVENT A discussion of the Company's re-acquisition of distribution rights in the Asia Pacific region and acquisition of the stock of four of the subsidiary countries is included in the "Subsequent Event" note (Note 15) to the Company's consolidated financial statements. 6 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. - ----------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------- High Low High Low First Quarter $32 9\32 $21 9\32 $37 23\32 $26 5\8 Second Quarter 37 29 1\16 43 7\16 34 1\2 Third Quarter 42 5\16 31 7\16 36 1\32 18 5\8 Fourth Quarter 52 7\8 35 3\4 24 7\8 14 15\32 - ----------------------------------------------------------------------------- Quarterly stock prices have been restated to reflect the 2-for-1 stock split in September 1999. As of February 25, 2000, the number of record holders of the Company's Class A Common Stock was approximately 718 and the number of record holders of the Company's Class B Common Stock was 8. The closing sales price of the Company's Class A Common Stock on February 25, 2000 was $383/4 per share. The Company has never declared a dividend on either the Company's Class A or Class B Common Stock and does not contemplate doing so in the foreseeable future. In addition, the Company's ability to pay cash dividends is limited pursuant to various loan agreements (see notes to the Company's consolidated financial statements). 7 CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 1998 - ------------------------------------------------------------------------------------------------------------- (Amounts in Thousands, Except Share and Per Share Data) 1999 1998 - ------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and equivalents $ 196,085 $ 151,889 Accounts receivable, net of allowance for doubtful accounts of $4,910 in 1999 and $4,769 in 1998 78,696 79,024 Inventory 114,673 131,218 Prepaid expense 9,890 11,897 Deferred income taxes 15,297 13,538 - ------------------------------------------------------------------------------------------------------------- Total current assets 414,641 387,566 - ------------------------------------------------------------------------------------------------------------- Property, plant and equipment 130,425 131,237 Less accumulated depreciation and amortization (75,019) (74,316) - ------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 55,406 56,921 - ------------------------------------------------------------------------------------------------------------- Excess of cost over fair value of net assets acquired, net 17,533 19,217 Other assets, net 5,731 5,763 - ------------------------------------------------------------------------------------------------------------- Total assets $ 493,311 $ 469,467 - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 33,247 $ 25,890 Accrued expense Payroll and related 30,570 22,090 Interest and other 35,038 29,528 Income taxes payable 13,500 18,223 - ------------------------------------------------------------------------------------------------------------- Total current liabilities 112,355 95,731 - ------------------------------------------------------------------------------------------------------------- Long-term debt 100,000 100,000 Deferred income taxes 8,588 7,543 Stockholders' equity Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued -- -- Class A Common Stock, $.01 par value (1 vote per share); 30,000,000 shares authorized; 18,638,355 shares issued at December 31, 1999 and 9,177,383 shares issued at December 31, 1998 187 92 Class B Common Stock, $.01 par value (10 votes per share); convertible into Class A shares on a one-for-one basis; 15,000,000 shares authorized; 4,675,698 shares issued at December 31, 1999 and 2,338,162 shares issued at December 31, 1998 47 23 Additional paid-in capital 82,755 74,711 Deferred compensation (3,658) -- Retained earnings 282,209 207,077 Accumulated other comprehensive income (loss) (4,151) 626 Less treasury stock at cost; 2,671,349 shares at December 31, 1999 and 417,368 shares at December 31, 1998 (85,021) (16,336) - ------------------------------------------------------------------------------------------------------------- Total stockholders' equity 272,368 266,193 - ------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 493,311 $ 469,467 - -------------------------------------------------------------------------------------------------------------
Prior years' have been restated to reflect the 2-for-1 stock split in September 1999. The accompanying notes are an integral part of these consolidated financial statements. 8 CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------------------------------------- (Amounts in Thousands, Except Per Share Data) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Revenue $917,216 $862,168 $796,458 Cost of goods sold 524,114 519,329 484,537 - ------------------------------------------------------------------------------------------------------------- Gross profit 393,102 342,839 311,921 - ------------------------------------------------------------------------------------------------------------- Operating expense Selling 219,545 195,688 174,729 General and administrative 55,321 50,876 51,654 Amortization of goodwill 1,685 1,685 1,685 - ------------------------------------------------------------------------------------------------------------- Total operating expense 276,551 248,249 228,068 - ------------------------------------------------------------------------------------------------------------- Operating income 116,551 94,590 83,853 - ------------------------------------------------------------------------------------------------------------- Other expense (income) Interest expense 9,342 9,538 14,833 Other, net (3,449) (1,942) 1,419 - ------------------------------------------------------------------------------------------------------------- Total other expense 5,893 7,596 16,252 - ------------------------------------------------------------------------------------------------------------- Income before income taxes 110,658 86,994 67,601 Provision for income taxes 35,411 27,838 20,280 - ------------------------------------------------------------------------------------------------------------- Net income $ 75,247 $ 59,156 $ 47,321 - ------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 3.51 $ 2.59 $ 2.10 Weighted-average shares outstanding 21,448 22,849 22,561 - ------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 3.39 $ 2.52 $ 2.02 Weighted-average shares outstanding 22,178 23,517 23,475 - -------------------------------------------------------------------------------------------------------------
Prior years' earnings per share and weighted-average shares have been restated to reflect the 2-for-1 stock split in September 1999. The accompanying notes are an integral part of these consolidated financial statements. 9 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Class A Class B Additional Deferred Other Compre- Consolidated Common Common Paid-in Compens- Retained Comprehensive Treasury hensive Stockholders' (Dollars in Thousands) Stock Stock Capital ation Earnings Income (Loss) Stock Income Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 1997 $ 84 $27 $61,806 $ -- $100,600 $2,963 $ (120) $165,360 Issuance of shares under employee stock plans 4 (1) 4,362 -- -- -- 7 4,372 Tax benefit from stock option plans -- -- 2,400 -- -- -- -- 2,400 Comprehensive income: Net income -- -- -- -- 47,321 -- -- $47,321 47,321 Translation adjustment -- -- -- -- -- (4,558) -- (4,558) (4,558) ------- Comprehensive income -- -- -- -- -- -- -- $42,763 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 88 26 68,568 -- 147,921 (1,595) (113) 214,895 Issuance of shares under employee stock plans 4 (3) 3,843 -- -- -- -- 3,844 Repurchase of common stock -- -- -- -- -- -- (16,223) (16,223) Tax benefit from stock option plans -- -- 2,300 -- -- -- -- 2,300 Comprehensive income: Net income -- -- -- -- 59,156 -- -- $59,156 59,156 Translation adjustment -- -- -- -- -- 2,221 -- 2,221 2,221 ------- Comprehensive income -- -- -- -- -- -- $61,377 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 92 23 74,711 -- 207,077 (626) (16,336) 266,193 Issuance of shares under employee stock plans 3 1 5,544 (3,705) -- -- 2,985 4,828 Amortization of deferred compensation -- -- -- 47 -- -- -- 47 Repurchase of common stock -- -- -- -- -- -- 71,670 (71,670) Tax benefit from stock option plans -- -- 2,500 -- -- -- -- 2,500 2-for-1 stock split 92 23 -- -- (115) -- -- -- Comprehensive income: Net income -- -- -- -- 75,247 -- -- $75,247 75,247 Translation adjustment -- -- -- -- -- (4,777) -- (4,777) (4,777) ------- Comprehensive income -- -- -- -- -- -- -- $70,470 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 $187 $47 $82,755 $(3,658) $282,209 $(4,151) $(85,021) $272,368 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 10 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997 - ---------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 75,247 $ 59,156 $ 47,321 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (714) (35) (7,478) Depreciation and amortization 24,363 18,199 20,292 Loss on disposal of property, plant and equipment 396 1,303 1,564 Increase (decrease) in cash from changes in working capital: Accounts receivable (2,687) (2,781) 24,799 Inventory 15,817 11,637 14,270 Prepaid expense 1,679 1,112 (3,707) Accounts payable 10,144 5,083 (454) Accrued expense 15,290 (9,975) 11,165 Income taxes (4,301) 459 6,001 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 135,234 84,158 113,773 - ---------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment 81 97 3,772 Additions to property, plant and equipment (20,094) (20,683) (25,704) Other, net (3,701) (1,245) (3,250) - ---------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (23,714) (21,831) (25,182) - ---------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Common stock repurchases (71,670) (16,223) -- Payments on long-term debt -- -- 89,454) Issuance of common stock 4,875 3,844 4,372 Tax benefit from stock option plans 2,500 2,300 2,400 - ---------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (64,295) (10,079) (82,682) - ---------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (3,029) 870 (474) - ---------------------------------------------------------------------------------------------------------------- Net increase in cash and equivalents 44,196 53,118 5,435 Cash and equivalents at beginning of year 151,889 98,771 93,336 - ---------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of year $ 196,085 $ 151,889 $ 98,771 - ---------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Interest paid $ 9,165 $ 9,378 $ 15,650 Income taxes paid 40,848 27,336 21,885 - ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Share and Per Share Data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of The Timberland Company and its subsidiaries (the "Company"). All material intercompany transactions have been eliminated in consolidation. RECOGNITION OF REVENUE Revenue consists of sales to customers, license fees and royalties. Sales are recognized upon shipment of product to customers. License fees and royalties are recognized when earned. TRANSLATION OF FOREIGN CURRENCIES The Company translates financial statements denominated in foreign currencies by translating balance sheet accounts at the end of period exchange rate and statement of income accounts at the average exchange rate for the period. Translation gains and losses are recorded in stockholders' equity and reflected in other comprehensive income, and transaction gains and losses are reflected in net income. DERIVATIVES The Company is exposed to foreign exchange risk when it sells goods in local currencies through its foreign subsidiaries. It is the Company's policy to hedge a portion of this risk through forward sales of foreign currencies, thereby locking in the future exchange rates. Gains and losses on the underlying contracts are accounted for using hedge accounting. Accordingly, the change in the fair value of the contracts that hedge firm commitments is deferred and recognized as part of the related foreign currency transaction upon occurrence. CASH AND EQUIVALENTS Cash and equivalents consist of short-term, highly liquid investments that normally have original maturities to the Company of three months or less. INVENTORY Inventory is stated at the lower of cost (first-in, first-out) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets or over the terms of the related leases, if such periods are shorter. The principal estimated useful lives are: building and improvements, 4 to 30 years; machinery and equipment, 3 to 12 years; lasts, patterns and dies, 3 years. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED The excess of cost over the fair value of net assets acquired is being amortized on a straight-line basis over periods of 10, 15 and 40 years. Accumulated amortization amounted to $14,242 and $12,557 at December 31, 1999 and 1998, respectively. ACCRUED INSURANCE COSTS The Company is self-insured for workers' compensation, healthcare, dental and short-term disability up to certain specified limits. Expenses associated with such self-insurance programs are accrued based upon estimates of the amounts required to cover incurred incidents. INCOME TAXES Income taxes are determined based on the income reported in the Company's financial statements, regardless of when such taxes are payable. In addition, tax assets and liabilities are adjusted to reflect the changes in U.S. and applicable foreign income tax laws when enacted. Future tax benefits, such as net operating loss carry-forwards, are recognized to the extent that realization of such benefits is more likely to occur than not. 12 ACCOUNTING FOR ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make assumptions that affect the estimates reported in these consolidated financial statements. Actual results may differ from these estimates. STOCK SPLIT In 1999, the Company's Board of Directors approved a 2-for-1 stock split of its Class A and Class B Common Stock, effective September 15, 1999. Excluding the consolidated balance sheets, all share and per share amounts in the accompanying consolidated financial statements and related notes have been restated for all periods to reflect the stock split. EARNINGS PER SHARE Basic Earnings Per Share ("EPS") excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the periods presented. Diluted EPS reflects the potential dilution that would occur if securities such as stock options were exercised. Dilutive securities (Note 12) included in the calculation of diluted weighted-average shares were 725,395 in 1999 and 334,323 in 1998. LONG-LIVED ASSETS The Company continually evaluates the carrying values and estimated useful lives of its long-lived assets, primarily property, plant and equipment and intangible assets. When factors indicate that such assets should be evaluated for possible impairment, the Company uses estimates of future operating results and cash flows to determine whether the assets are economically recoverable. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the method prescribed by Accounting Principles Board Opinion No. 25 and related interpretations. COMPREHENSIVE INCOME Comprehensive income, in the case of the Company, is the combination of reported net income and other comprehensive income, which is comprised of foreign currency translation adjustments. Comprehensive income has no impact on the Company's reported net income. Comprehensive income is included in the consolidated statements of changes in stockholders' equity. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was not required to be implemented by the Company until fiscal 2000. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133 an Amendment of FASB Statement No. 133." SFAS No. 137 delayed the original implementation date of SFAS No. 133 by one year. Since the requirements of SFAS 133 are complex and its scope far reaching, the Company has not completed its evaluation of the impact of this standard on its consolidated financial statements. 13 2. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The following table illustrates the U.S. dollar equivalent of foreign exchange contracts at December 31, 1999 and 1998 along with maturity dates, net unrealized gain (loss) and net unrealized gain (loss) deferred. Unrealized gains or losses are determined based on the difference between the settlement and year-end foreign exchange rates. The contract amount represents the net amount of all purchase and sale contracts of a foreign currency. A negative amount represents a net purchase position of a foreign currency.
- ---------------------------------------------------------------------------------------------------------------------------- Contract Net Unrealized Amount Maturity Unrealized Unrealized Net Unrealized Gain (Loss) (U.S. $ Equivalent) Date Gross Gain Gross (Loss) Gain (Loss) Deferred - ---------------------------------------------------------------------------------------------------------------------------- December 31, 1999 - ---------------------------------------------------------------------------------------------------------------------------- Pounds Sterling $16,509 2000 $ 33 $ -- $ 33 $ 31 Euros 35,004 2000 2,585 -- 2,585 2,585 - ---------------------------------------------------------------------------------------------------------------------------- Total $51,513 $2,618 $ -- $ 2,618 $ 2,616 - ---------------------------------------------------------------------------------------------------------------------------- December 31, 1998 - ---------------------------------------------------------------------------------------------------------------------------- Pounds Sterling $12,957 1999 $ -- $ (394) $ (394) $ (360) Deutsche Marks 7,821 1999 -- (509) (509) (509) French Francs (1,121) 1999 -- (398) (398) (373) Italian Lire 8,461 1999 -- (452) (452) (452) Spanish Pesetas 6,431 1999 4 (229) (225) (219) Swedish Krone 6,121 1999 141 -- 141 141 - ---------------------------------------------------------------------------------------------------------------------------- Total $40,670 $ 145 $(1,982) $(1,837) $(1,772) - ----------------------------------------------------------------------------------------------------------------------------
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions, thereby minimizing exposure to concentrations of credit risk. Credit risk with respect to trade receivables is limited, due to the large number of customers included in the Company's customer base. The Company had an allowance for doubtful accounts receivable of $4,910 and $4,769 at December 31, 1999 and 1998, respectively. 3. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
- ---------------------------------------------------------------------------------------- December 31, 1999 1998 - ---------------------------------------------------------------------------------------- Carrying Carrying or Contract Fair or Contract Fair Amount Value Amount Value - ---------------------------------------------------------------------------------------- Cash and equivalents(1) $196,085 $196,085 $151,889 $151,889 Long-term debt(2) 100,000 103,549 100,000 108,553 Foreign currency contracts(3) 51,513 48,895 40,670 42,507 - ----------------------------------------------------------------------------------------
1 The carrying amounts of cash and equivalents approximate their fair values. 2 The fair value of the Company's long-term debt is estimated based on current rates available to the Company as of December 31, 1999 and 1998 for debt of the same remaining maturities. 3 The fair value of foreign currency contracts is estimated by obtaining the appropriate year-end rates as of December 31, 1999 and 1998, respectively. 14 4. INVENTORY Inventory consists of the following: - ------------------------------------------------------- December 31, 1999 1998 - ------------------------------------------------------- Raw materials $ 4,493 $ 6,253 Work-in-process 2,832 3,913 Finished goods 107,348 121,052 - ------------------------------------------------------- Total $114,673 $131,218 - ------------------------------------------------------- 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: - ------------------------------------------------------- December 31, 1999 1998 - ------------------------------------------------------- Land and improvements $ 501 $ 501 Building and improvements 30,389 30,605 Machinery and equipment 89,327 87,991 Lasts, patterns and dies 10,228 12,140 - ------------------------------------------------------- Total $130,425 $131,237 - ------------------------------------------------------- 6. INCOME TAXES The components of the provision for income taxes are as follows:
- -------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1999 1998 1997 Current Deferred Current Deferred Current Deferred - -------------------------------------------------------------------------------------------------------------- Federal $24,354 $(454) $18,588 $ 26 $21,368 $(5,956) State 6,092 (260) 5,003 (78) 3,958 (2,078) Puerto Rico 421 -- 317 17 828 556 Foreign 5,258 -- 3,965 -- 1,604 -- - -------------------------------------------------------------------------------------------------------------- Total $36,125 $(714) $27,873 $(35) $27,758 $(7,478) - --------------------------------------------------------------------------------------------------------------
The provision for income taxes differs from the amount computed using the statutory federal income tax rate of 35% due to the following:
- -------------------------------------------------------------------------------------------------------- Years Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------- Federal income tax at statutory rate $38,730 35.0% $30,448 35.0% $23,660 35.0% Federal tax exempt operations in Puerto Rico (6,550) (5.9) (4,688) (5.4) (5,261) (7.8) State taxes, net of applicable federal benefit 4,274 3.9 3,324 3.8 2,294 3.4 Other, net (1,043) (1.0) (1,246) (1.4) (413) (0.6) - -------------------------------------------------------------------------------------------------------- Total $35,411 32.0% $27,838 32.0% $20,280 30.0% - --------------------------------------------------------------------------------------------------------
15 The tax effects of temporary differences and carry-forwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 1999 and 1998 consist of the following:
- -------------------------------------------------------------------------------------------------------------- 1999 1998 Assets Liabilities Assets Liabilities - -------------------------------------------------------------------------------------------------------------- Current: Inventory $ 5,701 $ -- $ 6,158 $ -- Receivable allowances 7,288 -- 6,441 -- Intercompany profit elimination 369 -- 230 -- Other 1,939 -- 709 -- - -------------------------------------------------------------------------------------------------------------- Total current $15,297 $ -- $13,538 $ -- - -------------------------------------------------------------------------------------------------------------- Non-current: Accelerated depreciation and amortization $ 3,808 $ -- $ 3,784 $ -- Puerto Rico tollgate taxes -- (2,470) -- (2,470) Undistributed foreign earnings -- (9,372) -- (9,189) Other -- (554) 332 -- Net operating loss carry-forwards 30 -- 330 -- Less-valuation allowance (30) -- (330) -- - -------------------------------------------------------------------------------------------------------------- Total non-current $ 3,808 $(12,396) $ 4,116 $(11,659) - --------------------------------------------------------------------------------------------------------------
The Company's consolidated income before taxes included earnings from its subsidiary in Puerto Rico, which are substantially exempt from Puerto Rico income tax under an exemption which expires in 2012 and federal income taxes under an exemption which becomes limited after 2001 and currently expires after 2005. Deferred tollgate taxes have been provided on all of the accumulated earnings of the subsidiary in Puerto Rico which are subject to tollgate tax. Deferred income taxes are also provided on the undistributed earnings of the Company's foreign subsidiaries. 7. NOTES PAYABLE The Company has an unsecured committed revolving credit agreement (the "Agreement") with a group of banks. The Agreement expires on June 19, 2001 and provides for $100,000 of committed borrowings, of which up to $80,000 may be used for letters of credit. Under the terms of the Agreement, the Company may borrow at interest rates (6.4% at December 31, 1999) based upon the lenders' cost of funds, plus an applicable spread. The Agreement provides for a facility fee of 0.20% per annum on the full commitment, places limitations on incurring additional debt, stock repurchases and on the amount of dividends the Company may pay, and also contains certain other financial and operating covenants. Additionally, the Company has uncommitted lines of credit available from certain banks totaling $24,000 at December 31, 1999. Borrowings under these lines are at prevailing money market rates (6.5% at December 31, 1999). These arrangements may be terminated at any time at the option of the banks or the Company. 8. LONG-TERM DEBT As of December 31, 1999 and 1998, the Company's long-term debt consisted of $100,000 of 8.94% notes which mature on December 15, 2001. The 8.94% notes place limitations on the incurrence of additional debt, stock repurchases and on the amount of dividends the Company may pay, and also require maintenance of certain financial and operating covenants. 16 9. LEASE COMMITMENTS The Company leases its corporate headquarters facility, manufacturing facilities, retail stores, showrooms, two distribution facilities and certain equipment under non-cancelable operating leases expiring at various dates through 2014. The approximate minimum rental commitments under all non-cancelable leases as of December 31, 1999 are as follows: - ---------------------------------------------------------- 2000 $ 18,915 2001 18,985 2002 17,303 2003 14,962 2004 11,954 Thereafter 35,822 - ---------------------------------------------------------- Total $117,941 - ---------------------------------------------------------- Most of the leases for retail space provide for renewal options, contain normal escalation clauses and require the Company to pay real estate taxes, maintenance and other expenses. The aggregate base rent obligation for a lease is expensed on a straight-line basis over the term of the lease. Rental expense for all operating leases was $21,509, $18,483 and $18,487 for the years ended December 31, 1999, 1998 and 1997, respectively. 10. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION The Company has five revenue generating business units with separate management teams and financial reporting accountability. These units have been aggregated into three reportable segments, each sharing similar product, distribution, marketing and economic conditions. The reportable segments are U.S. Wholesale, U.S. Retail and International. The U.S. Wholesale segment is comprised of the worldwide product development and manufacturing/sourcing for footwear and apparel and accessories and the sale of such products to wholesale customers in the United States. This segment also includes royalties from licensed products sold in the United States and the management costs and expenses associated with the Company's worldwide licensing efforts. Beginning in 1999, a portion of United States marketing expenses are included in the U.S. Wholesale segment (prior years have been reclassified for comparative purposes). The U.S. Retail segment includes the Company operated specialty and factory outlet stores in the United States. The International segment consists of the marketing, selling and distribution of footwear, apparel and accessories and licensed products outside of the United States. Products are sold outside of the United States through the Company's subsidiaries (which use wholesale and retail channels to sell footwear and apparel and accessories), independent distributors and licensees. The Unallocated Corporate component of segment reporting consists primarily of the corporate finance, legal, information services and administrative expenses incurred in support of company-wide activities, United States distribution expenses and a majority of United States marketing expenses. Unallocated Corporate also includes other expense (income) which is primarily interest expense and interest income. Such expenses are not allocated among the reported business segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performances based on operating contribution, which represents pre-tax income before unallocated corporate expenses, interest and other expenses, net, and on operating cash flow measurements. Total assets are disaggregated to the extent that assets apply specifically to a single segment. Unallocated Corporate assets primarily consist of cash and equivalent s, manufacturing/sourcing assets, computers and related equipment, and United States transportation and distribution equipment. 17
U.S. U.S. Unallocated Wholesale Retail International Corporate Consolidated - ------------------------------------------------------------------------------------------------------------ 1999 - ------------------------------------------------------------------------------------------------------------ Revenue $488,597 $173,937 $254,682 $ -- $ 917,216 Depreciation and amortization 7,587 2,927 4,433 9,416 24,363 Operating income (loss) 150,306 22,167 38,594 (94,515) 116,552 Interest expense -- -- -- 9,342 9,342 Other, net -- -- -- (3,449) (3,449) Income (loss) before income taxes 150,306 22,167 38,594 (100,408) 110,659 - ------------------------------------------------------------------------------------------------------------ Total assets 126,134 32,856 108,096 226,225 493,311 Expenditures for capital additions 7,965 2,457 6,685 2,987 20,094 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ 1998 - ------------------------------------------------------------------------------------------------------------ Revenue $450,543 $159,732 $251,893 $ -- $ 862,168 Depreciation and amortization 4,026 3,243 4,399 6,531 18,199 Operating income (loss) 125,016 17,728 36,363 (84,517) 94,590 Interest expense -- -- -- 9,538 9,538 Other, net -- -- -- (1,942) (1,942) Income (loss) before income taxes 125,016 17,728 36,363 (92,113) 86,994 - ------------------------------------------------------------------------------------------------------------ Total assets 150,282 32,846 92,846 193,493 469,467 Expenditures for capital additions 5,120 1,660 3,578 10,325 20,683 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ 1997 - ------------------------------------------------------------------------------------------------------------ Revenue $427,837 $150,551 $218,070 $ -- $ 796,458 Depreciation and amortization 4,282 3,532 4,800 7,678 20,292 Operating income (loss) 116,284 12,742 25,678 (70,851) 83,853 Interest expense -- -- -- 14,833 14,833 Other, net -- -- -- 1,419 1,419 Income (loss) before income taxes 116,284 12,742 25,678 (84,265) 67,601 - ------------------------------------------------------------------------------------------------------------ Total assets 151,020 34,647 91,615 142,721 420,003 Expenditures for capital additions 4,450 3,028 5,907 12,319 25,704 - ------------------------------------------------------------------------------------------------------------
The following summarizes the Company's operations in different geographic areas for the years ended December 31, 1999, 1998 and 1997, respectively.
United Other States Europe Foreign Consolidated - ------------------------------------------------------------------------------------------------------------ 1999 - ------------------------------------------------------------------------------------------------------------ Revenue $662,534 $227,618 $27,064 $917,216 Long-lived assets 55,501 17,198 5,971 78,670 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ 1998 - ------------------------------------------------------------------------------------------------------------ Revenue $610,275 $216,587 $35,306 $862,168 Long-lived assets 58,414 16,911 6,576 81,901 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ 1997 - ------------------------------------------------------------------------------------------------------------ Revenue $578,388 $184,010 $34,060 $796,458 Long-lived assets 53,885 17,294 6,818 77,997 - ------------------------------------------------------------------------------------------------------------
The U.S. Wholesale and Retail segments and Unallocated Corporate comprise the United States geographic area. The International segment is divided into two geographic areas, Europe and Other Foreign. Other Foreign assets primarily consist of the Company's owned manufacturing facilities in the Caribbean, its Chilean subsidiary and assets related to the Company's sourcing operations. 18 11. STOCKHOLDERS' EQUITY The Company's Class A Common Stock and Class B Common Stock are identical in all respects, except that shares of Class A Common Stock carry one vote per share, while shares of Class B Common Stock carry ten votes per share. In addition, holders of Class A Common Stock have the right, voting separately as a class, to elect 25% of the directors of the Company, and vote together with the holders of Class B Common Stock for the remaining directors. In February 1999 and 1998, 626 and 534,540 shares of Class B Common Stock were converted to Class A Common Stock, respectively. On October 15, 1998, the Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company's Class A Common Stock, from time to time, at the discretion of management, and as market and business conditions may warrant. During 1998 and the first half of 1999, 800,000 and 1,200,000 shares were repurchased, respectively. On July 15, 1999, the Board of Directors authorized the repurchase of up to an additional 2,000,000 shares. As of December 31, 1999, the Company had repurchased 731,300 shares under this authorization. The Company may use repurchased shares to offset shares that may be issued under the Company's stock-based employee incentive plans, or for other purposes. 12. STOCK AND EMPLOYEE BENEFIT PLANS Under the Company's 1997 Incentive Plan (the "1997 Plan"), 2,000,000 shares of Class A Common Stock have been reserved for issuance. In addition to stock options, any of the following incentives may be awarded to participants under the 1997 Plan: stock appreciation rights ("SARs"), restricted stock, unrestricted stock, awards entitling the recipient to delivery in the future of Class A Common Stock or other securities, securities which are convertible into or exchangeable for shares of Class A Common Stock and cash bonuses. The option price per share and vesting periods of stock options are determined by the Compensation Committee of the Board of Directors. All outstanding stock options granted under the 1997 Plan have been granted at fair market value, become exercisable in equal installments over four years beginning one year after the grant date, and expire ten years after the date of grant. In addition to the 1997 Plan, the Company has, on occasion, granted "non-qualified" stock options at fair market value to non-employees to purchase Class A Common Stock. Under its 1991 Stock Option Plan for Non-Employee Directors (the "1991 Plan"), the Company has reserved 200,000 shares of Class A Common Stock for the granting of stock options to eligible non-employee directors of the Company. Under the terms of the 1991 Plan, stock option grants are awarded on a predetermined formula basis and no grant can be made after November 15, 2001. The exercise price of options granted under the 1991 Plan is the fair market value of the stock on the date of the grant. Stock options granted under the 1991 Plan become exercisable in equal installments over four years, beginning one year after the grant date, and expire ten years after the grant date. Options to purchase an aggregate of 711,341, 615,534 and 566,144 shares were exercisable under all option arrangements at December 31, 1999, 1998 and 1997, respectively. Under the existing stock option plans, there were 720,010 and 1,401,928 shares available for future grants at December 31, 1999 and 1998, respectively. 19 The following summarizes transactions under all stock option arrangements for the years ended December 31, 1999, 1998 and 1997:
- ------------------------------------------------------------------------------------------------------------ Number of Range of Weighted-Average Shares Exercise Prices Exercise Price - ------------------------------------------------------------------------------------------------------------ January 1, 1997 1,505,254 $ 3.19-41.63 $10.13 - ------------------------------------------------------------------------------------------------------------ Granted 629,000 20.31-38.81 25.13 Exercised (380,260) 3.19-20.31 9.70 Canceled (136,624) 7.50-25.06 15.46 - ------------------------------------------------------------------------------------------------------------ December 31, 1997 1,617,370 3.19-41.63 15.62 - ------------------------------------------------------------------------------------------------------------ Granted 576,700 17.50-41.47 33.54 Exercised (252,400) 3.19-25.06 11.35 Canceled (250,460) 8.69-41.63 18.03 - ------------------------------------------------------------------------------------------------------------ December 31, 1998 1,691,210 3.19-41.63 22.02 - ------------------------------------------------------------------------------------------------------------ Granted 767,900 30.38-49.25 33.32 Exercised (257,481) 3.19-41.63 14.23 Canceled (104,473) 8.75-41.03 28.33 - ------------------------------------------------------------------------------------------------------------ December 31, 1999 2,097,156 3.19-49.25 26.86 - ------------------------------------------------------------------------------------------------------------
The following summarizes information about all stock options outstanding at December 31, 1999:
- --------------------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ---------------------------------------------------------------------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - --------------------------------------------------------------------------------------------------------------------------------- $ 3.19-10.25 319,186 4.14 Years $ 8.74 290,621 $ 8.73 10.50-18.53 223,952 6.52 14.27 144,827 12.97 18.75-25.06 335,868 7.37 22.68 136,743 23.02 25.19-29.94 16,000 8.19 28.41 3,750 26.73 30.38 536,450 9.15 30.38 1,250 30.38 32.00-35.63 110,150 8.46 35.36 27,250 35.49 36.06 260,750 8.15 36.06 60,500 36.06 36.69-46.63 190,400 8.39 40.49 46,400 40.51 47.50 101,900 9.94 47.50 0 0 49.25 2,500 9.96 49.25 0 0 - --------------------------------------------------------------------------------------------------------------------------------- 3.19-49.25 2,097,156 7.63 26.86 711,341 17.90 - ---------------------------------------------------------------------------------------------------------------------------------
Pursuant to the terms of its 1991 Employee Stock Purchase Plan, as amended (the "ESPP Plan"), the Company is authorized to issue up to an aggregate of 600,000 shares of its Class A Common Stock to eligible employees electing to participate in the ESPP Plan. Eligible employees may contribute, through payroll withholdings, from 2% to 10% of their regular base compensation during six month participation periods beginning January 1 and July 1 of each year. At the end of each participation period, the accumulated deductions are applied toward the purchase of Class A Common Stock at a price equal to 85% of the market price at the beginning or end of the participation period, whichever is lower. Employee purchases amounted to 42,173 shares in 1999, 37,800 shares in 1998 and 30,032 shares in 1997 at prices ranging from $16.05 to $27.26 per share. At December 31, 1999, a total of 213,301 shares were available for future purchases. Compensation cost is recognized for the fair value of the employee's purchase rights. The weighted-average fair values of those purchase rights granted in 1999, 1998 and 1997 were $7.07, $9.32 and $6.44, respectively. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock plans, and provides certain pro-forma disclosures regarding the Company plans as required by SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for stock option grants issued under any of the Company's stock option plans. Had compensation cost for stock option grants issued been determined under the provisions of SFAS No. 123, the Company's net income and diluted earnings per share in 1999, 1998 and 1997 would have been: $69,767 and $3.15, $55,901 and $2.38 and $45,078 and $1.92, respectively. The pro-forma effect on net income and earnings per share for 1999, 1998 and 1997 is not representative of the pro-forma effect on net income in future years because the provisions of SFAS No. 123 do not take into consideration pro-forma compensation expense related to grants made prior to 1995. 20 The fair value of each stock option granted in 1999, 1998 and 1997 under the Company's plans was estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used to value grants issued under the plans in 1999, 1998 and 1997, respectively: expected volatility of 54.4%, 39.9% and 43.9%; risk-free interest rates of 5.4%, 5.5% and 6.2%; expected lives of 5.2, 5.5 and 4.9 years; and no dividend payments. The weighted-average fair values per share of stock options granted during 1999, 1998 and 1997 were $17.31, $14.67 and $11.23, respectively. In December 1999, the Company issued 78,000 restricted shares of Class A Common Stock under the 1997 Plan. Those shares are subject to restrictions on sale and transferability, a risk of forfeiture, and certain other terms and conditions. Those restrictions lapse over a five-year period at 20% per year. Upon issuance of this stock under the 1997 Plan, unearned compensation, equivalent to the market value of the shares at the date of the grant, was charged to stockholder's equity and is being amortized to expense over the five-year vesting period. The Company maintains a contributory 401(k) Retirement Earnings Plan (the "401(k) Plan") for eligible salaried and hourly employees who are at least 18 years of age with six or more months of service. Under the provisions of the 401(k) Plan, employees may contribute between 2% and 16% of their base salary up to certain limits. The 401(k) Plan provides for Company matching contributions not to exceed 3% of the employee's compensation or, if less, 50% of the employee's contribution. Vesting of the Company contribution begins at 25% after one year of service and increases by 25% each year until full vesting occurs. The Company maintains two contributory 165(e) Retirement Earnings Plans (the "165(e) Plans") for eligible salaried and hourly employees of its manufacturing facilities and a non-contributory profit sharing plan for eligible hourly employees not covered by the 401(k) or 165(e) Plans. The Company's contribution expense under all retirement plans was $1,193 in 1999, $1,081 in 1998 and $773 in 1997. 13. LITIGATION The Company is involved in various litigation and legal matters that have arisen in the ordinary course of business. Management believes that the ultimate resolution of any existing matter will not have a material adverse effect on the Company's consolidated financial statements. 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the quarterly results of operations for the years-ended December 31, 1999, 1998 and 1997, respectively:
- --------------------------------------------------------------------------------------------------------------------- 1999 Quarter Ended March 26 June 25 September 24 December 31 - --------------------------------------------------------------------------------------------------------------------- Revenue $176,897 $152,937 $310,939 $276,442 Gross profit 73,129 61,017 134,357 124,599 Net income 7,842 2,402 35,140 29,865 Basic earnings per share .35 .11 1.67 1.44 Diluted earnings per share .35 .11 1.61 1.38 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- 1998 Quarter Ended March 27 June 26 September 25 December 31 - --------------------------------------------------------------------------------------------------------------------- Revenue $163,058 $144,741 $291,857 $262,513 Gross profit 66,945 57,431 116,309 102,153 Net income 7,365 1,901 29,095 20,795 Basic earnings per share .32 .08 1.27 .91 Diluted earnings per share .31 .08 1.24 .90 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- 1997 Quarter Ended March 28 June 27 September 26 December 31 - --------------------------------------------------------------------------------------------------------------------- Revenue $150,684 $132,180 $274,699 $238,895 Gross profit 61,614 51,855 106,641 91,811 Net income 4,296 557 24,957 17,511 Basic earnings per share .19 .02 1.10 .77 Diluted earnings per share .19 .02 1.06 .74 - ---------------------------------------------------------------------------------------------------------------------
Earnings per share data has been restated to reflect the 2-for-1 stock split in September 1999. 21 15. SUBSEQUENT EVENT On February 18, 2000, the Company signed an agreement under which it will re-acquire from Inchcape plc the exclusive distribution rights for the sale of TimberlandRegistration Mark branded products throughout the Asia-Pacific region. In connection with this transaction, the Company acquired the stock of the Inchcape plc distribution subsidiaries in Japan, Hong Kong, Malaysia and Singapore. The Company paid $1.7 million and is releasing Inchcape plc from its obligations under the Distributorship, Supply and Retail Development Agreement dated January 26, 1995. With respect to businesses in other countries, the Company may terminate them, identify new distributors, or directly distribute products in those countries. Also as part of the transaction, the Company will participate with Inchcape plc in any net proceeds received from the disposition of the assets in Australia, New Zealand, Thailand and Taiwan. The transaction will be accounted for under the purchase method of accounting and, accordingly, the results of operations of the acquired Asia-Pacific businesses will be reflected in the Company's consolidated financial statements beginning in the first quarter of 2000. This transaction will result in the reporting of negative goodwill which will be amortized on a straight-line basis over a period not to exceed 10 years. Pro-forma data is not provided since this transaction would not have a material impact on the Company's consolidated financial statements. 22 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The Timberland Company: We have audited the accompanying consolidated balance sheets of The Timberland Company and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the three years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the companies at December 31, 1999 and 1998, and the results of their operations and their cash flows of the three years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts February 2, 2000 (February 18, 2000 as to Note 15) EX-21 3 SUBSIDIARIES 1 EXHIBIT 21 NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION THE OUTDOOR FOOTWEAR COMPANY DELAWARE THE TIMBERLAND FINANCE COMPANY DELAWARE THE TIMBERLAND WORLD TRADING COMPANY DELAWARE TIMBERLAND EUROPE, INC. DELAWARE TIMBERLAND INTERNATIONAL SALES CORPORATION U.S. VIRGIN ISLANDS TIMBERLAND DIRECT SALES, INC. DELAWARE TIMBERLAND RETAIL, INC. DELAWARE TIMBERLAND MANUFACTURING COMPANY DELAWARE TIMBERLAND AVIATION, INC. DELAWARE TIMBERLAND NETHERLANDS, INC. (Formerly Timberland Scandinavia, Inc.) DELAWARE TIMBERLAND INTERNATIONAL, INC. DELAWARE TIMBERLAND SAS FRANCE THE TIMBERLAND WORLD TRADING GMBH GERMANY TIMBERLAND (UK) LIMITED UNITED KINGDOM TIMBERLAND GMBH AUSTRIA TIMBERLAND ESPANA, S.A. SPAIN THE RECREATIONAL FOOTWEAR COMPANY (DOMINICANA), S.A. DOMINICAN REPUBLIC COMPONENT FOOTWEAR DOMINICANA, S.A. DOMINICAN REPUBLIC TIMBERLAND FOOTWEAR & CLOTHING COMPANY INC. LES VETEMENTS & CHAUSSURES TIMBERLAND INC. CANADA THE RECREATIONAL FOOTWEAR COMPANY CAYMAN ISLANDS TIMBERLAND NETHERLANDS HOLDINGS B.V. THE NETHERLANDS THE TIMBERLAND COMPANY Y COMPANIA LIMITADA CHILE TIMBERLAND ASIA LLC DELAWARE EX-23 4 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in this Registration Statement of The Timberland Company on Form S-8 Nos. 333-35223, 33-60459, 33-67128, 33-56913, 33-17552, 33-41660, 33-19183, 33,50998, 33-60457, and 333-84959 and on Form S-3 No. 33-56921 of our report dated February 2, 2000 (February 18, 2000 as to Note 15), appearing in and incorporated by reference in the Annual Report on Form 10-K of The Timberland Company for the year ended December 31, 1999. Boston, Massachusetts March 24, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 DEC-31-1999 196,085 0 83,606 4,910 114,673 414,641 130,425 75,019 493,311 112,355 100,000 0 0 234 272,134 493,311 917,216 917,216 524,114 524,114 1,685 3,618 9,342 110,658 35,411 75,247 0 0 0 75,247 3.51 3.39
EX-99 6 CAUTIONARY STATEMENTS 1 Filed as Exhibit 99 to Form 10-K for the fiscal year ended December 31, 1999 CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Timberland Company (the "Company")wishes to take advantage of The Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information. Prospective information is based on management's then current expectations or forecasts. Such information is subject to the risk that such expectations or forecasts, or the assumptions used in making such expectations or forecasts, may become inaccurate. The following discussion identifies important 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: DEPENDENCE ON SALES FORECASTS. The Company bases, in part, its investments in infrastructure and product on sales forecasts that are necessarily made in advance of actual sales. The Company does business in highly competitive markets, and the Company's business is affected by a variety of factors, including: - - brand awareness - - product innovations - - retail market conditions - - economic and other factors - - changing consumer preferences - - fashion trends - - weather conditions One of management's principal challenges is to improve its ability to predict these factors, in order to enable the Company to better and more rapidly match production of its products with demand. In addition, the Company's growth over the years has created the need to increase these investments in infrastructure and product and to enhance the Company's operational systems. To the extent sales forecasts are not achieved, these investments would represent a higher percentage of revenue, and the Company would experience higher inventory levels and associated carrying costs, all of which would adversely affect the Company's financial performance. CONSUMER ACCEPTANCE OF PRODUCTS. The success of the Company's products and marketing strategy will depend on a favorable reception by the Company's wholesale customers and consumers at retail. This reception is conditioned, in part, on the Company's ability to build its brand, including its new Timberland PRO(TM) and Mountain Athletics(TM) by Timberland sub-brands, into a world class lifestyle brand and on the Company's ability to respond to the demands of the marketplace for greater speed and exceptional customer service. CONSUMER TRENDS AND RETAIL MARKET CONDITIONS. Sales of the Company's products are subject to consumer trends and economic and other factors affecting the retail market. For example, decreased consumer spending, a shift towards discount retailers, softness in the retail market and weakened financial condition of wholesale 2 customers could adversely affect the Company's sales. The Company believes that its more fashion-focused women's footwear product line and men's collection apparel products are more susceptible to changing fashion trends and consumer preferences than are the Company's other products. In addition, warmer than anticipated weather conditions have, in past fall/winter selling seasons, reduced sales as a result of decreased consumer demand at retail for the Company's higher margin boot products. Such conditions could adversely affect the Company's financial performance in the future, especially if a greater proportion of the Company's revenue were to be made up of "at once" orders. RAW MATERIALS. The Company depends on a few key sources for leather, its principal raw material, and other proprietary materials used in its products. In 1999, five suppliers provided, in the aggregate, approximately 70% of the Company's leather purchases. One of these suppliers provided approximately 42% of the Company's leather purchases in 1999. The Company believes that leather will continue to be available from these or alternative sources. However, the Company would be adversely affected by unanticipated price increases or shortage of such materials. DEPENDENCE UPON INDEPENDENT MANUFACTURERS. During 1999, the Company manufactured approximately 18% of its footwear unit volume, compared to approximately 20% during 1998 and 28% during 1997. Independent manufacturers and licensees in Asia, Europe, South America and Mexico produced the remainder of the Company's footwear products and all of its apparel and accessories products. (See the "International" paragraph below for a discussion of the risks of doing business abroad to which the Company may be subject.) Independent manufacturers in China and Taiwan produced approximately 51% of the Company's 1999 footwear unit volume; and three of these manufacturers produced approximately 10% to 18% each of the Company's 1999 footwear volume. The Company believes that the shift towards sourcing product from independent manufacturers will continue to reduce manufacturing overhead and product costs, increase product quality and increase the Company's flexibility to meet changing consumer demand for particular product lines. However, the success of these measures depends on the ability of the Company's independent manufacturers to provide high quality product at lower cost and to do so with rapid turn-around times. There can be no assurance that the Company will be able to maintain current relationships or locate additional manufacturers that can meet the Company's requirements. RETAIL ORGANIZATION. In 1986, the Company opened the first Timberland(R) store dedicated exclusively to Timberland(R) products. At the end of 1999, the Company operated 19 specialty stores and 45 factory outlet stores in the United States and 19 specialty stores and seven factory outlet stores in Europe and Chile. Revenue from retail stores operated by the Company in the U.S. represented 19% of the Company's revenue for 1999. The Company has made significant capital investments in opening these stores and incurs significant expenditures in operating these stores. The higher level of fixed costs related to the Company's retail organization adversely affects profitability, -2- 3 particularly in the first half of the year, as the Company's revenue historically has been more heavily weighted to the second half of the year. The same market conditions affecting the Company's wholesale customers described above also affect the performance of the Company's retail organization. The Company's ability to recover the investment in and expenditures of its retail organization, particularly its specialty stores, would be adversely affected if sales at its retail stores were lower than anticipated, Although the Company believes its factory outlet stores enable the Company to preserve the integrity of the sale of excess, damaged or discontinued products, and maximize the return associated with such sales, the Company's gross margin could be adversely affected if off-price sales increase as a percentage of revenue. COMPETITION. The Company markets its products in highly competitive environments. Many of the Company's competitors are larger and have substantially greater resources than the Company for marketing, research and development, and other purposes. These competitors include athletic footwear companies, branded apparel companies and private labels established by retailers. Furthermore, efforts by the Company's footwear competitors to dispose of their excess inventory could put downward pressure on retail prices and could cause the Company's wholesale customers to redirect some of their purchases away from the Company's products. INTERNATIONAL. The Company manufactures and sources a majority of its products outside the United States. Timberland(R) products are sold in the U.S. and internationally through its stores, operating divisions, wholesale customers, distributors, commission agents, franchisees and licensees. Accordingly, the Company is subject to the risks of doing business abroad, including, among other risks, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. In addition, although the Company pays for the purchase and manufacture of its products primarily in U.S. dollars, it does sell its products in markets where the local currency is not the U.S. dollar. Therefore, the Company is subject to fluctuations in foreign currency exchange rates. The Company recently announced that it signed an agreement under which it will re-acquire the exclusive distribution rights for the Asia-Pacific region from Inchcape plc. The Company will manage the sale of Timberland products in Japan, Singapore, Malaysia and Hong Kong through subsidiaries. The Company plans to pursue arrangements with appropriate distributors in other markets in the Asia-Pacific region. The Company's revenue from its operations in this region would be adversely affected if general economic difficulties in the region do not improve or the Company's efforts to integrate its Asia-Pacific operations require greater investment in infrastructure and/or more time than currently expected. In addition, while the Company believes it has chosen third party manufacturers with sufficient financial strength, a continued economic downturn could cause the Company's suppliers to fail to make and ship orders placed by the Company. The -3- 4 Company could utilize its own factories and sourced manufacturers in other countries in such an event to cover any resulting shortfall; however, delivery of these products would be delayed from the original production schedule. MANUFACTURING. The Company currently plans to retain its internal manufacturing capability in order to continue benefiting from reduced lead times, favorable duty rates and tax benefits. The Company continues to evaluate its manufacturing facilities and independent manufacturing alternatives in order to determine the appropriate size and scope of its manufacturing facilities. There can be no assurance that the costs of products that continue to be manufactured by the Company can remain competitive with sourced products. LICENSING. Since late 1994, the Company has entered into several licensing agreements which enable the Company to expand the Timberland(R) brand to product categories and geographic territories in which the Company has not had an appreciable presence. The rights granted under these agreements are typically exclusive, and the Company may not terminate these agreements at will, although the Company has reserved its right to terminate these agreements for cause. The success of the Timberland brand in these products or territories will, therefore, largely depend on the efforts and financial condition of its licensees. In addition, although the Company is pursuing additional licensing opportunities, there can be no assurance that the Company will be able to locate licensees and negotiate acceptable terms with licensees for additional products and territories. PRICING OF PRODUCTS. The prices the Company is able to obtain for its new and expanded product offerings, and the Company's ability to increase prices of its other products, will depend upon consumer acceptance of such prices, as well as competitive and other market factors. MANAGEMENT AND CONTROL. Sidney W. Swartz, the Company's Chairman, and various trusts established for the benefit of his family or for charitable purposes, hold approximately 85% of the combined voting power of the Company's capital stock in the aggregate, enabling him to control the Company's affairs and to influence the election of the three directors entitled to be elected by the holders of Class A Common Stock voting separately as a class. Jeffrey B. Swartz, the Company's President and Chief Executive Officer, is the son of Sidney Swartz. The loss or retirement of these or other key executives could adversely affect the Company. LIQUIDITY AND CAPITAL RESOURCES. Management believes that the Company's capital needs for 2000 can be met through its existing credit facilities and cash flow from operations, without the need for additional long-term financing. However, the Company may need to raise additional capital in the future in order to finance its anticipated growth and capital requirements beyond 2000. The terms and availability of any such additional or replacement financing will be subject to prevailing market conditions and other factors at that time. -4- 5 In addition, the Company's revolving credit facility and senior notes place limitations on the payment of cash dividends and contain other financial and operational covenants with which the Company must comply. If the Company does not comply with such covenants, the Company s ability to use such credit facilities or to obtain other financing could be adversely affected. INTELLECTUAL PROPERTY. The Company has spent, and may be required in the future to spend, significant amounts to protect and defend its trade name, trademarks, patents, designs and other proprietary rights. The Company is also susceptible to injury from parallel trade and counterfeiting of its products. LITIGATION. The Company is involved in various litigation and legal matters that have arisen and will arise in the ordinary course of business. The costs of prosecuting or defending these matters or an unfavorable outcome in these matters could adversely affect the Company's operating results. ACCOUNTING STANDARDS. Changes in the accounting standards promulgated by the Financial Accounting Standards Board or other authoritative bodies could have an adverse affect on the Company's future reported operating results. ENVIRONMENTAL AND OTHER REGULATION. The Company is subject to various environmental and other laws and regulations, which may change periodically. Compliance with such laws or changes therein could have a negative impact on the Company's future reported operating results. YEAR 2000. The Company has not experienced, nor does it anticipate that it will experience, any material business disruption as a result of Year 2000 issues. However, as described in greater detail in the "Management's Discussion and Analysis" section of the Company's 1999 Annual Report, there is a risk that the Company's business, financial position and results of operations could be materially adversely affected by any Year 2000 issues which have not become apparent. -5- -----END PRIVACY-ENHANCED MESSAGE-----