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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[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 ____________ .
COLUMBIA SPORTSWEAR COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OREGON 0-23939 93-0498284
(STATE OR OTHER JURISDICTION (COMMISSION FILE (IRS EMPLOYER
OF NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
6600 NORTH BALTIMORE PORTLAND, OREGON 97203
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(503) 286-3676
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting common stock held by
non-affiliates of the registrant as of February 29, 2000, was $134,297,000 based
upon the last reported sale price of the Company's Common Stock as reported by
the Nasdaq National Market System.
The number of shares of Common Stock outstanding on February 29, 2000, was
25,366,520.
Part III is incorporated by reference from the Registrant's Proxy Statement
for its 2000 Annual Meeting of Shareholders to be filed with the Commission
within 120 days of December 31, 1999.
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COLUMBIA SPORTSWEAR COMPANY
DECEMBER 31, 1999
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
Item 1. Business........................................ 3
Item 2. Properties...................................... 10
Item 3. Legal Proceedings............................... 10
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 10
Item 4(a). Executive Officers and Key Employees of the
Registrant................................................ 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................... 13
Item 6. Selected Financial Data......................... 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 15
Item 7(a). Quantitative and Qualitative Disclosures about
Market Risk............................................... 21
Item 8. Financial Statements and Supplementary Data..... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 41
PART III
Item 10. Directors and Executive Officers and Key
Employees of the Company.................................. 41
Item 11. Executive Compensation.......................... 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 41
Item 13. Certain Relationships and Related
Transactions.............................................. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................................... 42
2
PART I
ITEM 1. BUSINESS
GENERAL
Columbia Sportswear Company(R) was established in 1938 and incorporated
under Oregon law in 1961. We design, manufacture, market and distribute active
outdoor apparel, including outerwear, sportswear, rugged footwear and related
accessories. As one of the largest outerwear manufacturers in the world and the
leading seller of skiwear in the United States, we have developed an
international reputation across an expanding product line for quality,
performance, functionality and value. We believe our award-winning advertising
campaign effectively positions the Columbia(R) brand as active, outdoor,
authentic and distinctly American.
Since 1938 we have grown from a small family-owned, regional hat
distributor to a global leader in the active outdoor apparel industry. Known for
durability and dependability at a reasonable price, we leveraged Columbia's
brand awareness in the 1990s by expanding into related merchandise categories
and developing our "head-to-toe" outfitting concept. During 1999, we distributed
our products to approximately 10,300 retailers in 38 countries.
We completed an Initial Public Offering (IPO) of 6,440,000 shares of Common
Stock on April 1, 1998. Gross proceeds from the IPO totaled $115.9 million and
proceeds net of underwriting discounts, commissions, and expenses, totaled
approximately $106.9 million. Dividends were declared and paid in the amount of
$102.3 million. The dividends represented our subchapter "S" accumulated
adjustments account as of the termination date of our subchapter "S" corporation
status, and were paid to shareholders of record on March 23, 1998. The remaining
proceeds were used for working capital needs.
Our business is subject to many risks and uncertainties that could
materially adversely affect our financial condition and results of operations.
For a description of some of these risks and uncertainties, we encourage you to
read "Factors That May Affect Our Business" in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
PRODUCTS
We group our merchandise into four principal categories -- (1) outerwear,
(2) sportswear, (3) rugged footwear and (4) related accessories. The durability,
functionality and affordability of our products make them ideal for use in a
wide range of outdoor activities, including skiing, snowboarding, hunting,
fishing, hiking and golf, as well as for casual wear. Across all of our product
lines, we bring a commitment to innovative, functional product design and a
reputation for durable, high quality materials and construction. We believe our
broad range of competitively priced merchandise offers consumers one of the best
price-value equations in the outdoor apparel and footwear industry.
We believe the Columbia brand represents a differentiated active, outdoor,
authentic, value-oriented and distinctly American image. We design our products
to reinforce this image. In both the design and production phases, we focus our
efforts on the development of popular, higher volume products at moderate price
points. Our attention to technical details such as pockets that double as vents,
double storm flaps over zippers and "gutters" that facilitate water run-off, as
well as the use of special technical materials, contribute to the authenticity
and functionality of our entire selection of merchandise.
3
The following table shows the approximate percentage of sales attributable
to each of our principal product categories during the last three fiscal years.
1999 1998 1997
----- ----- -----
Outerwear................................................... 54.9% 60.2% 62.3%
Sportswear.................................................. 31.7 27.9 25.8
Footwear.................................................... 9.4 7.5 6.9
Accessories................................................. 4.0 4.4 5.0
----- ----- -----
Total............................................. 100.0% 100.0% 100.0%
===== ===== =====
Outerwear
Outerwear is our most established product category. It is designed to
protect the wearer from inclement weather in everyday use and in a variety of
outdoor activities, including skiing, snowboarding, hiking, hunting and fishing.
Many of our jackets incorporate our revolutionary Columbia Interchange
System(R), which was introduced in 1983 and features a 3- or 4-jackets-in-1
design. Jackets incorporating the Interchange System typically combine a
durable, nylon outershell with a removable, zip-out liner. The outershell and
the liner may be worn separately or together. This layering approach provides
the wearer with a jacket for all seasons and weather conditions at a reasonable
price.
Our skiwear line is the best selling brand of skiwear in the United States
and includes products such as parkas, vests, ski pants, ski suits and pullovers.
Our line of snowboard apparel, which carries the "Convert(R)" label, is
another important component of the outerwear category. We were one of the first
companies to identify and react to the rapid emergence of snowboarding as a
popular sport, and as a result, our Convert line is now one of the top selling
brands of snowboard apparel in the United States.
Hunting and fishing products constitute one of our longest running product
lines in the outerwear category. Our hunting and fishing merchandise offerings
include apparel for the serious sportsman engaged in a variety of hunting and
fishing activities. All of these products, including parkas, shells, vests,
liners, bib pants and rain suits incorporate a variety of specific-purpose,
tailored features that enhance our reputation as a leader in this category of
outerwear.
We also produce a separate line of youth outerwear products. The market for
youth outerwear is significant and we are able to leverage our expertise in
outerwear design and sourcing to meet the needs of the youth market.
Sportswear
In 1993 we targeted sportswear as a growth opportunity. Building on a
foundation of authentic fishing and hunting shirts, we rapidly expanded our
sportswear product offering, which resulted in sportswear sales increasing to
31.7% of our net sales for 1999.
Our sportswear line is made up of outdoor sportswear, golf apparel, and
GRT(R) (Gear for Rugged Trekking, Travel and Training).
The outdoor sportswear product line, consisting primarily of hiking shorts,
water sport trunks, fleece and pile products, sweaters, chinos, knit shirts,
woven shirts, sweats, and jeans, appeals both to the serious outdoorsman and the
more casual wearer who wants to project an outdoor image.
Our golf line includes a variety of products designed specifically for the
needs of golfers. It focuses on golf as an outdoor activity that requires
specific fabrics and features to enhance performance.
For the consumer interested in training, trekking and adventure travel, our
GRT line of active outdoor performance apparel offers a line of lightweight
products, many of which incorporate our Omni-Dry(R) system of moisture
management.
4
Sportswear products are designed to be sold alongside our outerwear and
rugged footwear products as part of our unified "head-to-toe" outfitting
concept. Although the majority of our sportswear sales are to sporting goods and
specialty outdoor stores, department stores are becoming an increasingly
important part of the distribution chain.
Rugged Footwear
We introduced rugged footwear in 1993. This category consists primarily of
active all-weather and performance outdoor footwear, featuring innovative
technical designs that incorporate waterproof/breathable constructions, thermal
insulation, advanced cushioning systems and high abrasion, slip-resistant
outsoles. Rugged footwear as a percentage of our consolidated net sales has
increased from 2.9% in 1994 to 9.4% in 1999. We believe the market for rugged
footwear represents a substantial growth opportunity.
Accessories
We also produce a line of accessories that includes hats, caps, scarves,
gloves, mittens and headbands to complement our outerwear and sportswear lines.
LICENSING
In June of 1999 we engaged a licensing agency to develop a strategy to
license our trademarks across a range of categories that complement our current
offerings. Since that time we have signed three separate licensing agreements
that will bring Columbia brand casual and outdoor socks, packs and adventure
travel bags and small personal leather goods to North American markets. We
expect socks to be available in the marketplace in fall 2000, and for other
products to be available no later than the first half of 2001. We believe that
these licensed categories are a natural progression of our current product
offering and strengthen our strategic product line expansion.
ADVERTISING, MARKETING, AND PROMOTION
Our creative and award-winning print and broadcast advertising campaigns
have built brand awareness and have helped to highlight the strengths of our
product line among consumers. The humorous advertisements feature Chairman
Gertrude Boyle as an overbearing taskmaster --"one tough mother"-- who demands
high quality standards for our products. The advertisements, which often include
witty dialogue between "Mother Boyle" and her son Tim, Columbia's President and
Chief Executive Officer, remind consumers of our long history of providing
authentic outdoor apparel with exceptional value and help to create the image of
a distinctly American brand.
One of our growth strategies is to improve the productivity of our existing
customers by expanding the number of concept shops and brand enhancement systems
at customer retail locations. Concept shops, which promote a consistent brand
image, are located within the stores of our customers and are dedicated
exclusively to selling our merchandise on a year-round basis. On a smaller
scale, brand enhancement systems which include signage and fixtures that
prominently display consolidated groupings of Columbia merchandise offer similar
benefits. As of December 31, 1999, we had installed 674 concept shops in retail
locations worldwide.
INVENTORY MANAGEMENT
From the time of initial order through production, distribution and
delivery, we manage our inventory to reduce risk. Our recently expanded U.S.
distribution center and inventory management system coupled with our
enterprise-wide information system have enhanced our ability to manage our
inventories by providing detailed inventory status from the time of initial
factory order through shipment to our retail customers.
Additionally, through the use of incentive discounts we encourage early
purchases by our customers to promote effective inventory management. We provide
our customers with staggered delivery times through the spring and fall seasons,
which also permits us and our customers to manage inventories effectively and
thereby diminish the likelihood of closeout sales. Through our efforts to match
purchases of inventory to the receipt of
5
customer orders, we believe we are able to reduce the risk of overcommitting to
inventory purchases. This helps us avoid significant inventory build-ups and
minimizes working capital requirements. This strategy, however, does not
eliminate inventory risk entirely because customer orders can generally be
canceled up to 45 days prior to shipment.
PRODUCT DESIGN
Our experienced in-house merchandising and design teams, working closely
with internal sales and production teams as well as with retailers and
consumers, produce products designed primarily for functionality and durability.
In fact, we base many new products on existing designs such as the Bugaboo(R)
Parka, a consistent best seller for more than a decade. By pursuing this
strategy we believe we can attract a wider, value-oriented consumer audience
than our more technical or fashion-oriented competitors.
In addition, our use of special materials, such as Omni-Tech(TM)
(waterproof, breathable) and Bergundtal Cloth (water-resistant, wind protection)
substantially enhance the value of our products without adding significant cost.
SOURCING AND MANUFACTURING
Our apparel and footwear products are produced internationally by
independent manufacturers selected, monitored and coordinated by regional
Columbia employees to assure conformity to strict quality standards. In some
instances, manufacturers produce products with materials provided by us, and in
other instances manufacturers obtain materials directly from a supplier. We
believe the use of these independent manufacturers increases production capacity
and flexibility and reduces our costs.
Unlike many apparel companies, we use few independent agents in our
sourcing activities. We maintain 11 sourcing and quality control offices in the
Far East, each staffed by Columbia employees and managed by personnel native to
the region. Personnel in these offices direct sourcing activities, help to
ensure quality control and assist with the monitoring and coordination of
overseas shipments. Final pricing for all orders, however, is approved by
personnel from our U.S. headquarters. We believe Columbia personnel in the Far
East, who are focused narrowly on our interests, are more responsive to our
needs than independent agents would be and are more likely to build long-term
relationships with key vendors. We believe these relationships enhance our
access to raw materials and factory capacity at more favorable prices.
For 1999 we produced approximately 90% (by dollar volume) of our products
outside the United States, principally in the Far East. We attempt to monitor
the selection of independent factories to ensure that no single manufacturer or
country is responsible for manufacturing a disproportionate amount of our
merchandise.
On September 30, 1999 we announced the closure of our only manufacturing
facility in Chaffee, Missouri, a strategic move designed to reduce costs and
enhance operating efficiencies. The closure will be completed during the first
quarter of 2000.
We believe the use of independent manufacturers, in conjunction with the
use of Columbia sourcing personnel rather than agents, increases our production
flexibility and capacity and allows us to maintain control over critical aspects
of the sourcing process. Our approach also enables us to substantially limit our
capital expenditures and avoid costs associated with managing a large production
work force. We do not have formal arrangements with most of our contractors or
suppliers other than purchase orders. However, we believe our relationships with
our contractors and suppliers are excellent and that the long-term, reliable and
cooperative relationships that we have with many of our vendors provide us a
competitive advantage over other apparel distributors.
By having Columbia employees in regions where we source our products, we
enhance our ability to monitor factories to ensure their compliance with
Columbia's Standards of Manufacturing Practices. Our policies require every
factory to comply with a code of conduct relating to factory working conditions
and the treatment of workers involved in the production of Columbia brand
products.
6
Our quality control program is designed to ensure our products meet the
highest quality standards. Our employees monitor the quality of fabrics and
other components and inspect prototypes of each product before starting
production runs. In addition, our employees also perform quality control checks
throughout the production process up to and including final shipment to our
customers. We believe our attention to the quality control program is an
important and effective means of maintaining the quality and reputation of our
products. Independent manufacturers generally produce our apparel using one of
two principal methods. In the first method, the manufacturer purchases the raw
materials needed to produce the garment from suppliers we approve, at prices and
on terms negotiated by either that manufacturer or ourselves. A substantial
portion of our merchandise is manufactured under this arrangement. In the
second, sometimes referred to as "cut, make, pack, and quota" and used
principally for production in China, we directly purchase the raw materials from
suppliers, assure the availability of necessary U.S. import quotas, and ship the
materials in a "kit," together with patterns, samples, and most other necessary
items, to the independent manufacturer to produce the finished garment. While
this second arrangement advances the timing for inventory purchases and exposes
us to additional risks before a garment is manufactured, we believe it further
increases our manufacturing flexibility and frequently provides us with a cost
advantage over other production methods.
We transact business on an order-by-order basis without exclusive
commitments or arrangements to purchase from any single vendor. We believe,
however, that the long term relationships with our vendors will help to assure
adequate sources to produce a sufficient supply of goods in a timely manner and
on satisfactory economic terms in the future.
By sourcing the bulk of our products outside the United States, we are
subject to risks of doing business abroad. These risks include, but are not
limited to, foreign exchange rate fluctuations, governmental restrictions and
political or labor disturbances. In particular, we must continually monitor
import requirements and transfer production as necessary to lessen the potential
impact from increased tariffs or quota restrictions which may be periodically
imposed.
We have from time to time experienced difficulty satisfying our raw
material and finished goods requirements, and any such future difficulties could
adversely affect our business operations. Three major factory groups accounted
for approximately 15% of our total global production for 1999. Another company
produces all of the zippers used in Columbia products. However, in both
instances these factory groups have multiple factory locations, many of which
are in different countries.
SALES AND DISTRIBUTION
Our products are sold to approximately 10,300 specialty and department
store retailers throughout the world. Our strategy for continued growth is to
focus on:
- Enhancing the productivity of existing retailers
- Expanding distribution in international markets
- Further developing the existing merchandise categories
- Increasing our penetration into the department store and specialty
footwear channels.
During the last three fiscal years, we recorded the following geographic
net sales percentages of Columbia product.
1999 1998 1997
----- ----- -----
Net sales to unrelated entities:
United States..................................... 72.6% 78.6% 81.2%
Canada............................................ 10.7 9.1 8.8
Other international............................... 16.7 12.3 10.0
----- ----- -----
100.0% 100.0% 100.0%
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7
See Note 14 of Notes to Consolidated Financial Statements for net sales,
income before income tax, identifiable assets, interest expense, and
depreciation and amortization by geographic segment.
North America
Approximately 40% of the worldwide retailers that offer Columbia brand
products are located in the United States and Canada. The sales in these two
countries amounted to 83.3% of our total revenues for 1999. We work with 25
independent sales agencies that work with retail accounts that vary in size from
single specialty store operations to the large chains made up of many stores in
several locations.
Our flagship store in Portland, Oregon is designed to create a distinctive
"Columbia" environment, reinforcing the active and outdoor image of the Columbia
brand. In addition, this store provides us with the ability to test new
marketing and merchandising techniques. We also operate nine outlet stores in
various locations throughout North America. These outlet stores are designed to
sell excess inventory without adversely affecting our retail accounts.
We distribute substantially all of our products to U.S. retailers from our
newly expanded 649,000 square foot Rivergate Distribution Center located in
Portland, Oregon. We inspect, sort, pack and ship products from this
distribution facility. We handle Canadian distribution at a 66,000 square foot
warehouse in Strathroy, Ontario. In some instances, independent manufacturers
may ship Columbia products directly to a customer-designated facility.
Other International
We have a European sales and marketing office in Strasbourg, France. We
currently sell our products directly to approximately 4,200 Western European
retailers. We distribute products in Europe from an independent logistics
company based in The Netherlands. Successful marketing and sales efforts,
particularly in France, Spain, The Netherlands and Germany, resulted in net
direct sales of our products in Europe of $41.4 million in 1999.
We have distributed our products through independent distributors in Japan
since the mid-1970s. In the fall of 1998, we began distributing our products
directly in Japan, and during 1999 we sold our products to approximately 120
Japanese retailers. We believe that our direct sales approach in Japan creates
an opportunity for accelerated sales growth in this region. In 1997 we also
began selling our products in South Korea. Our offices in Tokyo and Seoul direct
sales and marketing efforts in Asia.
In several other countries throughout the world, we sell our products to
independent exclusive distributors. These distributors service retail customers
in locations such as Australia, New Zealand, South America, Eastern Europe and
Russia. Distributors also offer Columbia products in Mexico, Norway and Turkey.
In addition, in Switzerland, Greece and the United Kingdom we sell through
independent distributors. In late 1999, we established a subsidiary in the
United Kingdom for direct sales in that market beginning with Spring 2001.
INTELLECTUAL PROPERTY
We own many trademarks including "Columbia(R)," "Columbia Sportswear
Company(R)," "Convert(R)," "Bugaboo(R)," "Bugabootoo(TM)," "Silent Rain(R),"
"Columbia Interchange System(R)" and "Tough Mother(R)". Our trademarks, many of
which are registered or subject to pending applications in the United States and
other nations, are used on a variety of items of apparel, footwear, and other
related products. We believe that our trademarks are of great value, providing
the consumer with an assurance that the product being purchased is high quality
and provides a good value. We also place significant value on trade dress (the
overall appearance and image of our products) which, as much as trademarks,
distinguishes our products in the marketplace. We are very protective of these
proprietary rights and frequently take action to prevent counterfeit
reproductions or infringing activity. In the past we have successfully resolved
conflicts over proprietary rights through legal action and negotiated
settlements. As we expand both in market share and
8
geographic scope, trademark or trade dress disputes are anticipated to increase
as well, making it more difficult to protect our proprietary rights.
MANAGEMENT INFORMATION SYSTEM
In order to achieve operating efficiencies, we implemented a new enterprise
wide management information system. This system, coupled with a new warehouse
inventory management system, became fully operational in the second quarter of
1999. The system provides a stronger and more timely link between us and our
customers. The system also enhances our ability to monitor our performance
against historical and budgetary benchmarks, to manage inventory and labor costs
and to make more informed purchasing decisions.
BACKLOG
We typically receive the bulk of our orders for each of the fall and spring
seasons a minimum of three months prior to the date the products are shipped to
customers. Generally, the orders are cancelable by the customer up to 45 days
prior to the date of shipment. At December 31, 1999, our backlog was $272.8
million, compared to $206.8 million at December 31, 1998. For a variety of
reasons, including the timing of shipments, product mix of customer orders and
the amount of in-season orders, backlog may not be a reliable measure of future
sales for any succeeding period.
SEASONALITY
Our business is affected by seasonal trends that are common to the outdoor
apparel industry, in which sales and profits are highest in the third calendar
quarter. Our products are marketed on a seasonal basis, with a product mix
weighted substantially toward the fall season. Additionally, the sale of our
products is subject to substantial cyclical fluctuation or impact from
unseasonable weather conditions. Sales tend to decline in periods of recession
or economic uncertainty. This cyclicality and any related fluctuation in
consumer demand could have a material adverse effect on our results of
operations and financial condition.
COMPETITION
The active outerwear, sportswear and rugged footwear segments of the
apparel industry are highly competitive. We encounter substantial competition in
the active outerwear and sportswear business from, among others, The North Face,
Inc., Marmot Mountain Ltd., Woolrich Woolen Mills, Inc., The Timberland Company
("Timberland"), Patagonia Corporation and Helly-Hansen A/S. In addition, we
compete with major sport companies, such as Nike, Inc., Adidas AG and Reebok
International Ltd., and with fashion-oriented competitors, such as Polo Ralph
Lauren Corporation, Nautica Enterprises, Inc. and Tommy Hilfiger Corporation.
Our rugged footwear line competes with, among others, Timberland, Kaufman
Footwear, Nike ACG, and Salomon S.A. Many of these companies have global
operations and compete with us in Europe and Asia. In Europe we also face
competition from such brands as Berghaus, Jack Wolfskin and Craft of Sweden and
many other lesser-known regional brands. In Asia our competition is from brands
such as Mont-Bell and Patagonia among others. Additional competition comes from
our own retail customers that manufacture and market clothing and footwear under
their own labels. Some of our competitors are substantially larger and have
substantially greater financial, distribution, marketing and other resources
than we do. We believe the primary competitive factors in the market for
activewear are functionality, durability, style, price and brand name, and that
our product offerings are well positioned within the market.
CREDIT AND COLLECTION
We extend credit to our customers based on an assessment of a customer's
financial circumstances, generally without requiring collateral. To assist in
the scheduling of production and the shipping of seasonal products, we offer
customers discounts for placing pre-season orders and extended payment terms for
taking delivery before the peak shipping season. These extended payment terms
increase our exposure to the risk of uncollectible receivables. Some of our
significant customers have experienced financial difficulties in the past, and
future financial difficulties of customers could have a material adverse effect
on our business.
9
GOVERNMENT REGULATION
Many of our imports are subject to existing or potential governmental
duties, tariffs or quotas that may limit the quantity of certain types of goods
which may be imported into the United States and other countries. In addition,
these duties often comprise a material portion of the cost of the merchandise.
Although we are diligent in the monitoring of these trade restrictions, the
United States or other countries could impose new or adjusted quotas, duties,
tariffs or other restrictions, any of which could have a material adverse effect
on our business.
EMPLOYEES
At December 31, 1999 we had 1,379 full-time employees. Of these employees,
825 were based in the United States, 66 in Canada, 52 in Europe and 436 in Asia.
ITEM 2. PROPERTIES
Following is a summary of principal properties owned or leased by us. Our
leases expire at various dates through 2003.
U.S. ADMINISTRATIVE OFFICES: U.S. DISTRIBUTION FACILITY:
Portland, Oregon (2 Portland, Oregon (1 location) -- owned
locations) -- leased
CANADIAN OPERATION:
Strathroy, Ontario (1
location) -- leased
ITEM 3. LEGAL PROCEEDINGS
We and our subsidiaries are from time to time involved in routine legal
matters incidental to our business. In the opinion of management, the resolution
of these matters will not have a material effect on our financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
ITEM 4(a). EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
The following table sets forth our executive officers and certain key
employees of the Company.
NAME AGE POSITION
---- --- --------
Gertrude Boyle............................ 76 Chairman of the Board(1)
Timothy P. Boyle.......................... 50 President, Chief Executive Officer,
Treasurer, Secretary and Director(1)
Don Richard Santorufo..................... 53 Executive Vice President and Chief
Operating Officer(1)
Patrick D. Anderson....................... 42 Chief Financial Officer(1)
Carl K. Davis............................. 51 Vice President and General Counsel(1)
Terry J. Brown............................ 57 Vice President of Planning/Chief
Information Officer(1)
Robert G. Masin........................... 51 General Merchandise Manager(1)
Grant D. Prentice......................... 45 General Manager -- Outerwear Merchandising
Michael R. Egeck.......................... 41 General Manager -- Sportswear
Merchandising
Rodney R. Gumringer....................... 38 General Manager -- Footwear Merchandising
- ---------------
(1) These individuals are considered Executive Officers of Columbia.
GERTRUDE BOYLE has served as Chairman of the Board of Directors since 1983.
Columbia was founded by her parents in 1938 and managed by her husband, Neal
Boyle, from 1964 until his death in 1970. Mrs. Boyle also served as our
President from 1970 to 1988. Mrs. Boyle is Timothy P. Boyle's mother.
TIMOTHY P. BOYLE joined Columbia in 1971 as General Manager and has served
as President and Chief Executive Officer since 1988. He has been a member of the
Board of Directors since 1978. Mr. Boyle is also a member of the board of
directors of Triad Machinery, a heavy equipment retailer, and Widmer Brothers
Brewing Company. Mr. Boyle is Gertrude Boyle's son.
DON RICHARD SANTORUFO joined Columbia in 1979 as Purchasing and Production
Manager, and in 1984 he was promoted to Vice President, Manufacturing and
oversaw the development of our Asian manufacturing operations. He has served as
Executive Vice President and Chief Operating Officer since January 1995. From
1975 to 1977 Mr. Santorufo was Production and Purchasing Manager for Alpine
Designs, a skiwear manufacturer, and from 1977 to 1979 he was Production Manager
for Jen-Cel-Lite Corporation, a sleeping bag and insulation manufacturer.
PATRICK D. ANDERSON joined Columbia in June 1992 as Manager of Financial
Reporting, became Corporate Controller in August 1993 and was appointed Chief
Financial Officer in December 1996. From 1985 to 1992, Mr. Anderson was an
accountant with Deloitte & Touche LLP.
CARL K. DAVIS joined Columbia in October 1997 as Vice President and General
Counsel. He was employed by Nike from 1981 to October 1997 where he served in a
variety of capacities, most recently as Director of International Trade.
TERRY J. BROWN joined Columbia in January 1983 as Planner, served as
Executive Planner starting in November 1995 and in January 2000 was named Vice
President of Planning/Chief Information Officer. Prior to joining Columbia, Mr.
Brown was Vice President and Chief Financial Officer of Agoil, Inc., an oil and
gas exploration and development company, from 1978 to 1981, and Planner for
Jantzen Incorporated, an apparel company, from 1968 to 1978.
ROBERT G. MASIN joined Columbia in May 1989 as National Sales Manager and
became General Merchandise Manager in July 1998. From 1976 to 1989 he worked for
W.L. Gore and Associates, a polymer technology and manufacturing and service
company. From 1982 to 1989 he was National Sales Manager of Gore's Fabric
Division.
11
GRANT D. PRENTICE joined Columbia in May 1984 as General
Manager -- Outerwear Merchandising. From 1977 to 1984, Mr. Prentice worked as a
sales representative for Gerry Outdoor Products, a skiwear company based in
Colorado.
MICHAEL R. EGECK has been General Manager -- Sportswear Merchandising for
Columbia since August 1992. From 1983 to 1992, Mr. Egeck was with Seattle
Pacific Industries, a sportswear apparel company, where his most recent position
was Director of Merchandising, Design and Sales Operations.
RODNEY R. GUMRINGER joined Columbia in December 1993 as General
Manager -- Footwear Merchandising. From 1988 to 1993, Mr. Gumringer was Product
Development Manager for the casual shoe division of Nike.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
Our Common Stock is listed on the Nasdaq National Market and trades under
the symbol "COLM." At February 29, 2000, there were approximately 188 holders of
record and approximately 7,700 beneficial shareholders.
Following are the high and low closing prices for our Common Stock for the
fiscal years ended December 31, 1999 and 1998:
HIGH LOW
------ ------
1999
First Quarter.............................................. $19.63 $11.75
Second Quarter............................................. $16.88 $13.38
Third Quarter.............................................. $19.13 $14.25
Fourth Quarter............................................. $21.50 $15.13
1998
First Quarter (from March 26, 1998)........................ $21.94 $21.13
Second Quarter............................................. $24.75 $18.63
Third Quarter.............................................. $20.88 $ 9.88
Fourth Quarter............................................. $22.25 $14.38
Since our public offering in March of 1998, we have not declared any
dividends for shareholders. We anticipate that all of our earnings in the
foreseeable future will be retained for the development and expansion of our
business and, therefore, we have no current plans to pay cash dividends. Future
dividend policy will depend on our earnings, capital requirements, financial
condition, restrictions imposed by our credit agreement, and other factors
considered relevant by our Board of Directors. For certain restrictions on our
ability to pay dividends, see Note 5 of Notes to Consolidated Financial
Statements.
13
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below for, and as of the end of, each
of the years in the five-year period ended December 31, 1999 have been derived
from our audited financial statements. The financial data should be read in
conjunction with Consolidated Financial Statements and related Notes that appear
elsewhere in this Annual Report and Management's Discussion and Analysis of
Financial Condition and Results of Operations set forth in Item 7.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales................................... $470,503 $427,278 $353,452 $298,988 $303,797
Cost of sales............................... 259,609 240,457 198,946 176,859 182,971
-------- -------- -------- -------- --------
Gross profit................................ 210,894 186,821 154,506 122,129 120,826
Selling, general and administrative
expense................................... 150,829 131,023 110,204 95,431 84,583
-------- -------- -------- -------- --------
Income from operations...................... 60,065 55,798 44,302 26,698 36,243
Interest expense, net....................... 4,822 4,075 3,593 4,220 5,767
Provision for income taxes.................. 22,235 18,979 1,413 1,468 1,750
-------- -------- -------- -------- --------
Net income.................................. $ 33,008 $ 32,744 $ 39,296 $ 21,010 $ 28,726
======== ======== ======== ======== ========
Earnings per share:
Basic..................................... $ 1.30 $ 1.38 $ 2.09 $ 1.24 $ 1.69
Diluted................................... $ 1.29 $ 1.36 $ 2.06 $ 1.24 $ 1.69
Weighted average shares outstanding:
Basic..................................... 25,331 23,731 18,792 16,997 16,986
Diluted................................... 25,608 24,058 19,103 16,997 16,986
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital............................. $144,105 $109,505 $ 69,706 $ 59,797 $ 47,726
Inventories................................. 86,465 74,059 48,300 34,638 48,404
Total assets................................ 304,990 269,478 174,477 135,967 162,301
Long-term debt.............................. 26,665 27,275 2,831 2,963 --
Shareholders' equity........................ 184,375 149,414 110,535 91,936 70,458
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All references to years relate to the fiscal year ended December 31 of such
year.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in our consolidated statements of
operations:
1999 1998 1997
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 55.2 56.3 56.3
----- ----- -----
Gross profit................................................ 44.8 43.7 43.7
Selling, general and administrative expense................. 32.1 30.7 31.2
----- ----- -----
Income from operations...................................... 12.7 13.0 12.5
Interest expense, net....................................... 1.0 0.9 1.0
----- ----- -----
Income before income tax.................................... 11.7 12.1 11.5
Provision for income taxes.................................. 4.7 4.4 0.4
----- ----- -----
Net income.................................................. 7.0% 7.7% 11.1%
===== ===== =====
YEAR ENDED DECEMBER 31,1999 COMPARED TO YEAR ENDED DECEMBER 31,1998
Net sales: Net sales increased 10.1% to $470.5 million in 1999 from $427.3
million in 1998. The increase in net sales was due primarily to growth in our
international business. Domestic sales increased 1.7% to $341.6 million in 1999
from $335.9 million in 1998. Net international sales, excluding Canada,
increased 49.2% to $78.5 million in 1999 from $52.6 million in 1998. The
increase in net international sales was due primarily to increases in European
and Japanese direct sales which increased $14.2 million or 52.1% and $10.4
million or 133.8%, respectively. Unit sales generated these increases for both
Europe and Japan across all product lines. Canadian sales increased 30.0% to
$50.4 million in 1999 from $38.8 million in 1998. This Canadian sales growth was
due to increased sales unit volume across outerwear, sportswear and footwear
product categories.
Gross Profit: Gross profit as a percentage of net sales was 44.8% and 43.7%
for 1999 and 1998 respectively. This increase of 110 basis points in gross
margin was due to a combination of factors that may not be replicated. These
include an increase in higher margin international sales, which increased to
16.7% of net sales in 1999 from 12.3% in 1998 as a percent of net sales, minimal
off-price sales for the year with strong margins on those products which were
discounted, and favorable pricing on fall 1999 production. The increase in the
gross margin was also attributable to the continued emphasis on inventory
management which resulted in fewer markdowns and closeouts as well as
manufacturing efficiencies.
Selling, General and Administrative Expense: Selling, general, and
administrative expense increased 15.1% to $150.1 million in 1999 from $131.0
million for 1998. As a percentage of sales, selling, general, and administrative
expenses increased to 32.1% in 1999 from 30.7% in 1998. The increase was
primarily due to an additional $5.0 million in depreciation expense as capital
projects including the new distribution center and enterprise wide information
system were capitalized in 1998 and an entire year of depreciation was recorded
in 1999. Additionally, we incurred $1.5 million in expenses relating to the
announced closure of our only manufacturing facility in the third quarter of
1999. Additional drivers of selling, general, and administrative expenses
included variable expenses relating to the higher sales for the year and the
continued expansion of our other international operations. We believe in the
longer term we will be able to leverage selling, general and administrative
expenses as a percentage of sales as our international operations become more
established and our sportswear and footwear product categories continue to
expand.
Interest Expense: Interest expense increased by 18.3% in 1999 from the
comparable period in 1998. The increase was attributable to financing for
capital projects and working capital needed to fund the growth in sales activity
for year ended December 31, 1999.
15
Provision For Income Taxes: The provision for income taxes increased due to
growth in income before income tax and the increase of our effective tax rate
from 36.8% in 1998 to 40.2% in 1999. The increase in our effective tax rate was
due to the recognition of a non-recurring, non-cash benefit of approximately $2
million in the first quarter of 1998. This benefit was a result of the
termination of our "S" corporation status and was recognized in order to record
deferred income taxes for the tax effect of cumulative temporary differences
between financial and tax reporting. See Notes 1 and 9 to the Consolidated
Financial Statements.
YEAR ENDED DECEMBER 31,1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales: Net sales increased 20.9% to $427.3 million in 1998 from $353.5
million in 1997. Domestic sales increased 17.1% to $335.9 million in 1998 from
$287 million in 1997. The domestic sales increase was due to strong wholesale
sales volume growth for spring sportswear and fall outerwear and footwear. Net
international sales, excluding Canada, increased 48.5% to $52.6 million in 1998
from $35.4 million in 1997. This increase was due primarily to a $11.2 million
or 69.8% increase in European direct sales. Canadian sales increased 24.6% to
$38.8 million in 1998 from $31.1 million in 1997. This increase was due to sales
volume growth of fall outerwear to existing customers and increased sales volume
of rugged footwear through both existing and new customers.
Gross Profit: Gross profit as a percentage of net sales was 43.7% for both
1998 and 1997. For 1998, there was downward pressure on gross margins due to the
growth in footwear and sportswear as a percentage of total sales. Footwear and
sportswear generally have lower gross margins than outerwear products. This
downward pressure was offset by an increase in relatively higher margin
international sales which increased to 12.3% of total sales in 1998 versus 10.0%
in 1997. The stability in the gross margin was also attributable to the
continued emphasis on inventory management which corresponds to fewer markdowns
and closeouts as well as manufacturing efficiencies.
Selling, General and Administrative Expense: Selling, general, and
administrative expense increased 18.9% to $131.0 million in 1998 from $110.2
million for the comparable period in 1997, primarily as a result of an increase
in selling and operating expenses to support both the higher level of sales and
continued investment in operational infrastructure. As a percentage of sales,
selling, general, and administrative expenses decreased to 30.7% in 1998 from
31.2% for the comparable period in 1997. The improved selling, general and
administration expenses as a percentage of sales was due primarily to expense
leverage achieved in the European and Canadian operations where the brand
continued to show strong growth.
Interest Expense: Interest expense increased by 13.4% in 1998 from 1997.
The increase was attributable to additional borrowing requirements for working
capital needed to fund the growth in sales activity for year ended December 31,
1998.
Provision For Income Taxes: Prior to the initial public offering, we
operated as an "S" corporation and, as a result were not subject to federal or
most state income taxes. In connection with the initial public offering we
terminated our "S" corporation status. As a result, from that point forward we
were subject to federal and state income taxes. We recognized a non-recurring,
non-cash benefit of approximately $2 million to our earnings in the first
quarter of 1998 to record deferred income taxes for the tax effect of cumulative
temporary differences between financial and tax reporting. See Notes 1 and 9 to
the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
We financed our operations in the year ended December 31, 1999 primarily
through cash provided by operating activities. At December 31, 1999, we had
total cash equivalents of $14.6 million compared to $6.8 million at December 31,
1998. Cash provided by operating activities was $23.3 million for year ended
December 31, 1999 as compared to $0.4 million in 1998.
Our primary capital requirements are for working capital, investing
activities associated with the expansion of our distribution center, systems
development and general corporate needs. Net cash used in investing activities
was $12.6 million for the year ended December 31, 1999 and $40.2 million for the
comparable period in 1998.
16
Cash used in financing activities was $2.8 million for the year ended
December 31, 1999 compared to cash provided of $42.6 million in 1998. In 1999,
net cash used in financing activities was primarily due to repayment of our
short-term notes payable. In 1998, net cash provided by financing activities was
primarily due to proceeds from the issuance of senior promissory notes in the
aggregate principal amount of $25 million and borrowings of short-term notes
payable. Repayment of short-term notes payable was $3.1 million in 1999 compared
to borrowings of $13.3 million in 1998.
To fund our domestic working capital requirements, we have available
unsecured revolving lines of credit with aggregate seasonal limits ranging from
$75 million to $95 million. As of December 31, 1999, $9.1 million was
outstanding under these lines of credit bearing interest at a rate of 6.5% per
annum. Additionally, we maintain unsecured lines of credit with a combined limit
of $105 million available for issuing letters of credit. Internationally, our
subsidiaries have local currency operating lines in place guaranteed by our
domestic operations.
Traditionally, our operations are impacted by seasonal trends typical in
the outdoor apparel industry and result in higher sales and profits in the third
calendar quarter. This pattern has resulted primarily from the timing of
shipments to wholesale customers for the fall outerwear season. As our
sportswear and footwear product lines mature, they will have future impact on
seasonal shipments and corresponding working capital requirements. We believe
that our liquidity requirements for at least the next 12 months will be
adequately covered by cash provided by operations and short term borrowing
arrangements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from fluctuations of foreign currency
exchange rates and interest rates due to our international sales, production and
funding requirements. It is our policy to utilize financial instruments to
reduce market risk where internal netting and other strategies cannot be
effectively employed. Foreign currency and interest rate transactions are used
only to the extent considered necessary to meet our objectives. We do not enter
into foreign currency or interest rate transactions for speculative purposes.
Our foreign currency risk management objective is to protect cash flows
resulting from sales, purchases and other costs from the impact of exchange rate
movements. This risk is managed by using forward exchange contracts and
purchased options to hedge certain firm as well as anticipated commitments and
the related receivables and payables, including third party or intercompany
transactions. Anticipated, but not yet firmly committed, transactions that we
hedge with purchased options carry a high level of certainty and are expected to
be recognized within one year. Cross-currency swaps are used to hedge foreign
currency denominated payments related to intercompany loan agreements. Hedged
transactions are denominated primarily in European currencies, Japanese yen and
Canadian dollars. The market risk related to these contracts was not material to
our consolidated financial statements at both December 31, 1999 and 1998.
EURO CURRENCY CONVERSION
European Union finance members approved 11 of the 15 member states for
participation in economic and monetary union. On January 1, 1999, the Euro was
adopted as the national currency of the participating countries -- Austria,
Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands,
Portugal and Spain. Initially, the Euro will be used for non-cash transactions.
Legacy currencies of the participating member states will remain legal tender
until January 1, 2002. On this date, Euro-denominated bills and coins will be
issued for use in cash transactions.
The introduction of the Euro is a significant event with potential
implications for our existing operations within the participating countries. As
such, we have committed resources to conduct risk assessments and to take
corrective actions, where required, to ensure that we are prepared for the
introduction of the Euro. We are undertaking a review of the Euro implementation
both in participating and non-participating countries where we have operations.
Progress regarding Euro implementation is reported periodically to management.
We have not experienced any significant operational disruptions to date and
do not expect the continued implementation of the Euro to cause any significant
operational disruptions. In addition, we have not incurred
17
and do not expect to incur any significant costs from the continued
implementation of the Euro, including any additional currency risk, which could
materially affect our liquidity or capital resources.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective April 1, 1999, we adopted SFAS No. 133 -- "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 requires that all
derivative financial instruments, such as foreign exchange contracts, be
recognized in the financial statements and measured at fair value regardless of
the purpose or intent for holding them. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or
shareholders' equity (as a component of comprehensive income). The adoption of
SFAS No. 133 did not have a material effect on our Consolidated Financial
Statements.
FORWARD LOOKING STATEMENTS
Information in Item 1 of Part 1 and Items 7 and 7(a) of Part II of this
Annual Report regarding future performance or conditions, including but not
limited to potential growth in domestic and international markets, growth in
merchandise categories, increased sales to department stores and footwear
specialty shops, implementation and performance of new management information
systems, access to raw materials and factory capacity, Euro currency conversion,
financing and working capital requirements and resources, and expected expenses
as a percentage of net sales constitute forward-looking statements that are
subject to risks and uncertainties. Many factors could have an adverse impact on
our business and may cause actual results to differ materially from information
included in such forward-looking statements. Some of the factors that could
cause actual results to differ from those projected in forward-looking
statements are described below, under the heading "Factors That May Affect Our
Business". Risks we face include, but are not limited to, competitive factors
(including increased competition, new product offerings by competitors and price
pressure); seasonality, fluctuations in operating results and economic
cyclicality; effects of weather on consumer purchases; changes in consumer
preferences; ability to implement our growth strategy, including the
effectiveness of sales and marketing efforts and the management of growth;
dependence on and performance by key personnel, independent manufacturers and
key suppliers; advance purchases of products and associated inventory risks; the
financial condition and prospects of our customers; risks associated with
international operations, such as currency exchange rate fluctuations or
political unrest; dependence on and the ability to establish and protect
proprietary rights; government regulations, including tariffs and import
restrictions; disruptions in the supply of labor or raw materials or increases
in labor and material costs; computer disruptions or unexpected expenses
required to make modifications to computer systems; the ability to obtain
financing on favorable terms; and general economic conditions. Any
forward-looking statements should be considered in light of these and other
factors.
FACTORS THAT MAY AFFECT OUR BUSINESS
WE OPERATE IN VERY COMPETITIVE MARKETS
The markets for outerwear, sportswear and rugged footwear are highly
competitive. In each of our geographic markets, we face significant competition
from global and regional branded apparel and footwear companies, as well as
retailers that market apparel and footwear under their own labels. We also
compete with other apparel and footwear companies for the production capacity of
independent manufacturers that produce our apparel and for import quota
capacity. Many of our competitors are significantly larger and have
substantially greater financial, distribution, marketing and other resources and
have achieved greater recognition for their products than we have. Increased
competition could result in reductions in display areas in retail locations,
reductions in sales or reductions in prices of our products, any of which could
have a material adverse affect on our business.
OUR BUSINESS IS AFFECTED BY SEASONALITY, FLUCTUATIONS IN OPERATING RESULTS AND
ECONOMIC CYCLES
Our results of operations have fluctuated and are likely to fluctuate
significantly from period to period. Our products are marketed on a seasonal
basis, with a product mix now weighted substantially toward the fall season. Our
results of operations for the quarter ending September 30 in the past have been
much stronger
18
than the results for the other quarters. This seasonality, along with other
factors that are beyond our control, including general economic conditions,
changes in consumer behavior, weather conditions, availability of import quotas
and currency exchange rate fluctuations, could adversely affect our business and
cause our results of operations to fluctuate. Results of operations in any
period should not be considered indicative of the results to be expected for any
future period. The sale of our products, particularly skiwear, is subject to
substantial cyclical fluctuation. Sales tend to decline in periods of recession
or economic uncertainty. This cyclicality and any related fluctuation in
consumer demand could have a material adverse affect on our results of
operations and financial condition.
OUR BUSINESS IS AFFECTED BY WEATHER CONDITIONS
Sales of our outerwear are dependent in part on the weather and may decline
in years in which weather conditions do not favor the use of our outerwear. For
example, we believe unseasonably warm weather in the United States in 1998 and
1999 caused customers to delay, and in some cases reduce or cancel, orders for
our outerwear, which had an adverse effect on the our net sales and
profitability. Sustained periods of unseasonably warm weather could have a
material adverse effect on our business.
WE FACE RISKS ASSOCIATED WITH CONSUMER PREFERENCES AND FASHION TRENDS
We believe we have benefited from changing consumer preferences, including
increased consumer interest in outdoor activities and lifestyle changes that
emphasize apparel designed for these activities. Changes in consumer preferences
or consumer interest in outdoor activities could have a material adverse affect
on our business. In addition, although we believe our products have not been
significantly affected by past fashion trends, changes in fashion trends could
have a greater impact as we expand our offerings to include more product
categories. Also, we face risks because our business requires us to anticipate
consumer preferences. Our decisions about product designs often are made in
advance of consumer acceptance. Although we try to manage our inventory risk
through early order commitments by retailers, we must generally place production
orders with manufacturers before we have received all of a season's orders. If
we fail to anticipate accurately and respond to consumer preferences, this could
lead to, among other things, lower sales, excess inventories and lower margins.
WE MAY NOT BE ABLE TO IMPLEMENT OUR GROWTH STRATEGY OR MANAGE GROWTH
SUCCESSFULLY
We face many challenges in implementing our growth strategies. For example,
our expansion into international markets involves countries where we have little
sales or distribution experience and where our brand is not yet widely known.
Expanding our product categories involves, among other things, gaining
experience with new products and winning consumer acceptance. Increasing sales
to department stores, and the number of concept shops opened and their success,
will each depend on various factors, including strength of our brand name,
competitive conditions, our ability to manage increased sales and concept shop
expansion, the availability of desirable locations and the negotiation of terms
with retailers. Future terms with customers may be less favorable to us than
those we now operate under. To implement our business strategy, we need to
manage growth effectively. We need to continue to change certain aspects of our
business, to maintain and enhance our information systems and operations to
respond to increased demand and to attract, retain and manage qualified
personnel. Growth could place an increasing strain on management, financial,
product design, marketing, distribution and other resources, and we could
experience operating difficulties. For example, increasing distribution
capabilities in a timely manner is critical to meeting customer expectations and
managing inventory effectively. It involves many challenges, including finding
favorable locations on reasonable terms, implementing technology and making
expenditures that may not result in financial benefits in the near term or at
all.
WE DEPEND ON INDEPENDENT MANUFACTURERS TO MAKE OUR PRODUCTS AND MEET CUSTOMER
EXPECTATIONS
Our products are produced by independent manufacturers worldwide. Although
we enter into a number of purchase order commitments each season, we do not have
long-term contracts with any manufacturer. We do not operate any production
facilities. We therefore face risks that manufacturing operations will fail to
perform as expected, or that our competitors will gain production or quota
capacities that we need for our
19
business. If a manufacturer fails to ship orders in a timely manner or to meet
our standards, it could cause us to miss delivery requirements, which could
result in cancellation of orders, refusal to accept deliveries or a reduction in
purchase prices, any of which could have a material adverse affect on our
business. If a manufacturer violates labor or other laws, or engages in
practices that are not generally accepted as ethical in our key markets, this
could result in adverse publicity for us and have a material adverse affect on
our business. In an effort to ensure that our independent manufacturers operate
with safe, ethical and humane working conditions, we monitor factories and we
require that each agree to comply with our Standards of Manufacturing Practices
and applicable laws and regulations, but we do not control these vendors or
their labor practices.
WE DEPEND ON KEY SUPPLIERS FOR SOME SPECIALTY FABRICS
Some of the materials that we use may be available, in the short-term, from
only one or a very limited number of sources. For example, some specialty
fabrics are manufactured to our specification by one or a few sources, and three
major factory groups accounted for approximately 15% of our 1999 global
production. From time to time, we have experienced difficulty satisfying our raw
material and finished goods requirements. Although we believe we could identify
and qualify additional factories to produce these materials, the unavailability
of some existing manufacturers for supply of these materials could have a
material adverse affect on our business.
OUR ADVANCE PURCHASES OF PRODUCTS MAY RESULT IN EXCESS INVENTORIES
To minimize our purchasing costs, the time necessary to fill customer
orders and the risk of non-delivery, we place orders for our products with
manufacturers prior to receiving all of our customers' orders and maintain an
inventory of certain products that we anticipate will be in greater demand. We
may not be able to sell the products we have ordered from manufacturers or that
we have in our inventory. Customer orders, moreover, are generally cancelable by
the customer up to 45 days prior to the date of the shipment. Inventory levels
in excess of customer demand may result in inventory write-downs and the sale of
excess inventory at discounted prices, which could have a material adverse
effect on our business.
WE ARE AFFECTED BY THE FINANCIAL HEALTH OF RETAILERS
We extend credit to our customers based on an assessment of a customer's
financial circumstances, generally without requiring collateral. To assist in
the scheduling of production and the shipping of seasonal products, we offer
customers discounts for placing pre-season orders and extended payment terms for
taking delivery before the peak shipping season. These extended payment terms
increase our exposure to the risk of uncollectible receivables. In addition, we
face increased risk of order reduction or cancellation when dealing with
financially ailing retailers. Some of our significant customers have experienced
financial difficulties in the past, which in turn have had an adverse affect on
our business.
WE FACE RISKS OF PRODUCT LIABILITY AND WARRANTY CLAIMS
Our products are used in outdoor activities, sometimes in severe
conditions. Although we have not experienced any significant expense as the
result of product recalls or product liability claims, this could occur in the
future and have a material adverse affect on our business. Substantially all of
our products are backed by a lifetime limited warranty for defects in quality
and workmanship. We maintain a warranty reserve for future warranty claims, but
the actual costs of servicing future warranty claims could exceed the reserve
and have a material adverse affect on us.
OUR INTERNATIONAL OPERATIONS INVOLVE MANY RISKS
Our business is subject to the risks generally associated with doing
business abroad, such as foreign governmental regulations, foreign consumer
preferences, political unrest, disruptions or delays in shipments and changes in
economic conditions in countries in which we manufacture or sell products. These
factors, among others, could influence our ability to sell products in
international markets, as well as our ability to manufacture products or procure
materials. If any of these or other factors make the conduct of business in a
20
particular country undesirable or impractical, there could be a material adverse
affect on our business. In addition, many of our imports are subject to duties,
tariffs or quotas that affect the cost and quantity of certain types of goods
imported into the United States or into our other sales markets. The countries
in which our products are produced or sold may adjust or impose new quotas,
duties, tariffs or other restrictions, any of which could have a material
adverse effect on us. We produce a significant portion of our products in China,
and therefore our business could be materially adversely affected by adverse
changes in China's trading status with the U.S. or with other sales markets. In
1999, President Clinton and Congress extended "normal trade relations" (formerly
"most favored nation") trading status for China for an additional one-year
period. We face a continuing risk that "normal trade relations" with China will
be discontinued in the future, resulting in increased tariffs on goods we import
from China.
CURRENCY EXCHANGE RATE FLUCTUATIONS MAY AFFECT OUR BUSINESS
We generally purchase products in U.S. dollars. However, the cost of these
products sourced overseas may be affected by changes in the value of the
relevant currencies. Price increases caused by currency exchange rate
fluctuations could make our products less competitive or have an adverse affect
on our margins. Our international revenue and expense generally is derived from
sales and operations in foreign currencies, and this revenue and expense could
be materially affected by currency fluctuations, including amounts recorded in
foreign currencies and translated into U.S. dollars for consolidated financial
reporting. Currency exchange rate fluctuations could also disrupt the business
of the independent manufacturers that produce our products by making their
purchases of raw materials more expensive and more difficult to finance. We
conduct a program to hedge against our exposure to currency exchange rate
fluctuations. We may not, however, be successful and foreign currency
fluctuations could have a material adverse affect on us.
OUR SUCCESS DEPENDS ON OUR PROPRIETARY RIGHTS
We believe our registered and common law trademarks have significant value
and are important to our ability to create and sustain demand for our products.
We also place significant value on our trade dress, the overall appearance and
image of our products. In markets outside the United States, it may be more
difficult for us to establish our proprietary rights and to challenge
successfully use of those rights by other parties. Although we have not been
materially inhibited from selling products in connection with trademark or trade
dress disputes, we could encounter more obstacles as we expand our product line
and the geographic scope of our marketing. From time to time, we discover
products that are counterfeit reproductions of our products or trade dress
"knock offs." If we are unsuccessful in challenging a party's products on the
basis of trademark or trade dress infringement, continued sales of these
products could adversely impact our sales and our brand and result in the shift
of consumer preference away from our products. The actions we take to establish
and protect trademarks and other proprietary rights may not be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as violations of proprietary rights. In addition, we
could incur substantial costs in legal actions relating to our use of
intellectual property or the use of our intellectual property rights by others.
OUR COMMON STOCK PRICE MAY BE VOLATILE
The price of our common stock has fluctuated substantially since our
initial public offering. Our common stock is traded on the Nasdaq National
Market, which has experienced and is likely to experience significant price and
volume fluctuations that could adversely affect the market price of our common
stock without regard to our operating performance. We also believe factors such
as fluctuations in financial results, variances from financial market
expectations, changes in earnings estimates by analysts, or announcements by us
or competitors may cause the market price of the common stock to fluctuate,
perhaps substantially.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations and is
incorporated herein by this reference.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Our management is responsible for the information and representations
contained in this report. The financial statements have been prepared in
conformity with the generally accepted accounting principles we considered
appropriate in the circumstances and include some amounts based on our best
estimates and judgements. Other financial information in this report is
consistent with these financial statements.
Our accounting systems include controls designed to reasonably assure that
assets are safeguarded from unauthorized use or disposition and which provide
for the preparation of financial statements in conformity with generally
accepted accounting principles. These systems are supplemented by the selection
and training of qualified financial personnel and an organizational structure
providing for appropriate segregation of duties.
The Audit Committee is responsible for recommending to the Board of
Directors the appointment of the independent accountants and reviews with the
independent accountants and management the scope and the results of the annual
examination, the effectiveness of the accounting control system and other
matters relating to our financial affairs as they deem appropriate.
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Columbia Sportswear Company:
We have audited the accompanying consolidated balance sheets of Columbia
Sportswear Company as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Columbia
Sportswear Company and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 1, 2000
23
COLUMBIA SPORTSWEAR COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31,
--------------------
1999 1998
-------- --------
Current Assets:
Cash and cash equivalents................................. $ 14,622 $ 6,777
Accounts receivable, net of allowance of $4,535 and
$3,395, respectively................................... 118,709 105,967
Inventories (Note 3)...................................... 86,465 74,059
Deferred tax asset (Note 9)............................... 11,822 8,895
Prepaid expenses and other current assets................. 2,425 2,485
-------- --------
Total current assets.............................. 234,043 198,183
Property, plant, and equipment, net (Note 4)................ 68,960 68,692
Intangibles and other assets................................ 1,987 2,603
-------- --------
Total assets...................................... $304,990 $269,478
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable (Note 5).................................... $ 31,676 $ 34,727
Accounts payable.......................................... 36,779 37,514
Accrued liabilities (Note 6).............................. 19,156 15,469
Income taxes payable...................................... 2,075 767
Current portion of long-term debt......................... 252 201
-------- --------
Total current liabilities......................... 89,938 88,678
Long-term debt (Note 7)..................................... 26,665 27,275
Deferred tax liability (Note 9)............................. 4,012 4,111
-------- --------
Total liabilities................................. 120,615 120,064
Commitments and contingencies (Note 12)..................... -- --
Shareholders' Equity:
Preferred stock; 10,000 shares authorized; none issued and
outstanding............................................ -- --
Common stock; 50,000 shares authorized; 25,350 and 25,267
issued and outstanding (Note 8)........................ 126,265 124,990
Retained earnings......................................... 65,290 32,282
Accumulated other comprehensive income.................... (3,770) (3,478)
Unearned portion of restricted stock issued for future
services............................................... (3,410) (4,380)
-------- --------
Total shareholders' equity........................ 184,375 149,414
-------- --------
Total liabilities and shareholders' equity........ $304,990 $269,478
======== ========
See accompanying notes to consolidated financial statements.
24
COLUMBIA SPORTSWEAR COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Net sales.................................................. $470,503 $427,278 $353,452
Cost of sales.............................................. 259,609 240,457 198,946
-------- -------- --------
Gross profit............................................... 210,894 186,821 154,506
Selling, general, and administrative....................... 150,829 131,023 110,204
-------- -------- --------
Income from operations..................................... 60,065 55,798 44,302
Interest expense, net...................................... 4,822 4,075 3,593
-------- -------- --------
Income before income tax................................... 55,243 51,723 40,709
Income tax expense (Note 9)................................ 22,235 18,979 1,413
-------- -------- --------
Net income................................................. $ 33,008 $ 32,744 $ 39,296
======== ======== ========
Net income per share:
Basic.................................................... $ 1.30 $ 1.38 $ 2.09
Diluted.................................................. $ 1.29 $ 1.36 $ 2.06
Weighted average shares outstanding (Note 15):
Basic.................................................... 25,331 23,731 18,792
Diluted.................................................. 25,608 24,058 19,103
Pro forma net income data (unaudited):
Income before income taxes, as reported.................. $ 40,709
Pro forma provision for income taxes (Note 1)......... 16,284
--------
Pro forma net income.................................. $ 24,425
========
Proforma net income per share (Note 1):
Basic............................................... $ 1.30
Diluted............................................. $ 1.28
See accompanying notes to consolidated financial statements.
25
COLUMBIA SPORTSWEAR COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 33,008 $ 32,744 $ 39,296
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 12,604 7,641 7,518
Non-cash compensation................................... 970 970 970
Loss on disposal of property, plant, and equipment...... 132 102 4
Deferred income tax provision........................... (3,026) (4,784) --
Changes in operating assets and liabilities:
Accounts receivable................................... (12,767) (27,426) (17,674)
Inventories........................................... (11,788) (24,373) (14,745)
Prepaid expenses and other current assets............. 61 (272) (963)
Intangibles and other assets.......................... 300 (152) (2,577)
Accounts payable...................................... (1,441) 12,884 5,199
Accrued liabilities................................... 3,772 2,221 1,875
Income taxes payable.................................. 1,628 870 --
-------- --------- --------
Net cash provided by operating activities.......... 23,453 425 18,903
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment............... (12,591) (40,408) (14,816)
Proceeds from sale of property, plant, and equipment...... 15 161 49
Maturity of short-term investments........................ -- -- 813
-------- --------- --------
Net cash used in investing activities.............. (12,576) (40,247) (13,954)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (repayment) on notes payable................ (3,139) 13,289 9,284
Issuance (repayment) on long-term debt.................... (558) 24,490 (137)
Proceeds from issuance of common stock.................... 876 366 --
Proceeds from initial public offering..................... -- 106,850 --
Distributions paid to shareholders........................ -- (102,395) (12,791)
-------- --------- --------
Net cash provided by (used in) financing
activities....................................... (2,821) 42,600 (3,644)
-------- --------- --------
Net Effect of Exchange Rate Changes on Cash................. (211) (2) (587)
-------- --------- --------
Net Increase in Cash and Cash Equivalents................... 7,845 2,776 718
Cash and Cash Equivalents, Beginning of Year................ 6,777 4,001 3,283
-------- --------- --------
Cash and Cash Equivalents, End of Year...................... $ 14,622 $ 6,777 $ 4,001
======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest, net of capitalized
interest................................................ $ 5,067 $ 3,874 $ 4,055
Cash paid during the year for income taxes................ 22,795 23,217 1,247
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Note receivable from sale of fixed assets................. -- -- 152
Application of deposit in land purchase................... -- 331 --
Repayment of related party note receivable................ -- 5,813 --
See accompanying notes to consolidated financial statements.
26
COLUMBIA SPORTSWEAR COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
UNEARNED
PORTION OF
COMMON STOCK ACCUMULATED RESTRICTED
---------------------- OTHER STOCK
SHARES RETAINED COMPREHENSIVE ISSUED FOR COMPREHENSIVE
OUTSTANDING AMOUNT EARNINGS INCOME FUTURE SERVICES INCOME TOTAL
----------- -------- --------- ------------- --------------- ------------- ---------
BALANCE, JANUARY 1, 1997...... 18,792 $ 17,886 $ 81,034 $ (664) $(6,320) $ 91,936
Comprehensive income
Net income.................. 39,296 $39,296 39,296
-------
Other comprehensive income,
net of tax
Foreign currency translation
adjustment................ (3,142) (3,142) (3,142)
-------
Comprehensive income.......... $36,154
=======
Distribution to
shareholders................ -- -- (18,525) -- -- (18,525)
Amortization of unearned
compensation................ -- -- -- -- 970 970
------ -------- --------- ------- ------- ------- ---------
BALANCE, DECEMBER 31, 1997.... 18,792 17,886 101,805 (3,806) (5,350) 110,535
Comprehensive income
Net income.................. 32,744 $32,744 32,744
-------
Other comprehensive income,
net of tax
Foreign currency translation
adjustment................ 328 328 328
-------
Comprehensive income.......... $33,072
=======
Initial public offering, net
of expenses................. 6,440 106,850 106,850
Exercise of employee stock
options..................... 35 366 366
Tax benefit from exercise of
stock options............... (112) (112)
Distribution to
shareholders................ (102,267) (102,267)
Amortization of unearned
compensation................ 970 970
------ -------- --------- ------- ------- ------- ---------
BALANCE, DECEMBER 31, 1998.... 25,267 124,990 32,282 (3,478) (4,380) 149,414
Comprehensive income
Net income.................. 33,008 $33,008 33,008
-------
Other comprehensive income,
net of tax
Foreign currency translation
adjustment................ (365) (365) (365)
Unrealized gain on
derivative transactions... 73 73 73
-------
Comprehensive income.......... $32,716
=======
Exercise of employee stock
options..................... 61 596 596
Tax benefit from exercise of
stock options............... 399 399
Employee stock purchase
program..................... 22 280 280
Amortization of unearned
compensation................ 970 970
------ -------- --------- ------- ------- ---------
BALANCE, DECEMBER 31, 1999.... 25,350 $126,265 $ 65,290 $(3,770) $(3,410) $ 184,375
====== ======== ========= ======= ======= =========
See accompanying notes to consolidated financial statements
27
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION AND ORGANIZATION
NATURE OF THE BUSINESS:
Columbia Sportswear Company (the "Company") is a global leader in the
design, manufacture, marketing and distribution of active outdoor apparel,
including outerwear, sportswear, footwear, and related accessories.
PRO FORMA ADJUSTMENTS:
With completion of the initial public offering of common stock in the first
quarter of 1998, the Company is subject to federal and state income taxes from
the date of termination of the Company's "S" corporation status (the
"Termination Date"). The pro forma consolidated statement of operations for the
period ended December 31, 1997 reflect adjustments for income taxes based upon
income before provision for income taxes as if the Company had been subject to
additional federal and state income taxes based upon a pro forma effective tax
rate of 40%.
PRO FORMA NET INCOME PER SHARE:
Pro forma net income per share is based on the weighted average number of
shares of common stock outstanding and dilutive common equivalent shares from
stock options (using the treasury stock method). In addition, the average shares
outstanding reflect the conversion of voting and nonvoting shares into shares of
voting common stock and the subsequent conversion of each share of voting common
stock into 0.59 shares of common stock pursuant to a reverse stock split which
occurred at consummation of the offering of common stock by the Company.
Common equivalent shares issued during 1997 have been included in the
calculation of diluted net income per share using the treasury stock method as
if they were outstanding in 1997 with a price equivalent to $18 per share.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Columbia
Sportswear Co. ("CSC") and all wholly-owned subsidiaries, including GTS Inc.
("GTS"), Columbia Sportswear Canada Ltd. ("CSCL"), Columbia Sportswear Holdings,
Ltd. ("CSHL"), Columbia Sportswear Japan Ltd. ("CSC Japan"), Columbia Sportswear
Germany GmbH ("CSC Germany"), Columbia Sportswear France SNC. ("CSC France") and
Columbia Sportswear Korea ("CSC Korea") (collectively, the "Company").
BASIS OF CONSOLIDATION:
All significant intercompany balances and transactions have been
eliminated. Pursuant to a plan of share exchange on December 18, 1997, CSC
acquired all of the outstanding stock of GTS. As a result of this acquisition,
CSCL, CSHL, CSC Germany, CSC France, and CSC Korea became wholly owned
subsidiaries of CSC. The plan of share exchange has been accounted for in a
manner similar to a pooling-of-interest and, accordingly, the combined financial
statements contained herein are presented as if GTS had always been a wholly
owned subsidiary of CSC.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates and assumptions.
28
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain reclassifications of amounts reported in the prior period financial
statements have been made to conform to classifications used in the current
period financial statements.
REVENUE RECOGNITION:
Revenue for wholesale operations is recognized at the time the merchandise
is shipped to customers. Retail store revenue is recognized at the time of sale.
Allowances for estimated returns are provided when sales are recorded.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents represent cash and short-term, highly liquid
investments with maturities of three months or less at date of acquisition.
ACCOUNTS RECEIVABLE:
Accounts receivable have been reduced by an allowance for doubtful
accounts, which were $4,535,000 and $3,395,000 in 1999 and 1998, respectively.
The net charges to this reserve were $3,177,000, $2,643,000 and $2,636,000 in
1999, 1998 and 1997, respectively.
INVENTORY VALUATION:
Inventories are carried at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment are stated at cost. Depreciation of
equipment and amortization of leasehold improvements is provided using the
straight-line method over the estimated useful lives of the assets, ranging from
3 to 10 years. Buildings are depreciated using the straight-line method over 30
years. Long-lived assets held and used by the Company are reviewed for
impairment when events and circumstances indicate costs may not be recoverable.
INTANGIBLES AND OTHER ASSETS:
Goodwill is being amortized on a straight-line basis over eight years.
Goodwill of $979,000 and $1,361,000, net of amortization of $1,917,000 and
$1,428,000, is included in intangibles and other assets for 1999 and 1998,
respectively.
INCOME TAXES:
Deferred income taxes are provided to recognize the effect of temporary
differences between tax and financial statement reporting.
Prior to its initial public offering of common stock on April 1, 1998, the
Company elected to be treated as an "S" corporation under provisions of the
Internal Revenue Code of 1986. Accordingly, payment of federal and most state
taxes on income earned in the United States was the responsibility of the
shareholders rather than the Company.
Just prior to the initial public offering, the Company terminated its "S"
corporation status. The Company retained the tax basis of the assets and
liabilities of the "S" corporation as of the termination date and recorded
deferred income taxes of approximately $2,000,000 for the income tax effect of
cumulative temporary differences.
29
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the offerings and the termination of the Company's "S"
corporation status, the Company entered into a tax indemnification agreement
with each of its shareholders, including Gertrude Boyle, Timothy P. Boyle, Sarah
Bany, Don Santorufo and certain trusts. The agreements provide that the Company
will indemnify and hold harmless each of these shareholders for federal, state,
local or foreign income tax liabilities and costs relating thereto, resulting
from any adjustment to the Company's income that is the result of an increase or
change in character of the Company's income during the period it was treated as
an "S" corporation. The agreements also provide that if there is a determination
that the Company was not an "S" corporation prior to the Offerings, the
shareholders will pay to the Company certain refunds actually received by them
as a result of the determination.
FOREIGN CURRENCY TRANSLATION:
The assets and liabilities of the Company's foreign subsidiaries have been
translated into U.S. dollars using the exchange rates in effect at period end,
and the net sales and expenses have been translated into U.S. dollars using the
average exchange rates in effect during the period. Translation adjustments are
included as a separate component of shareholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Based on borrowing rates currently available to the Company for bank loans
with similar terms and maturities, the fair value of the Company's long-term
debt approximates the carrying value. Furthermore, the carrying value of all
other financial instruments potentially subject to valuation risk (principally
consisting of cash and cash equivalents, accounts receivable and accounts
payable) also approximate fair value.
ADVERTISING COSTS:
Advertising costs are expensed as incurred. Advertising expense was
$20,725,000, $18,666,000 and $16,649,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
PRODUCT WARRANTY:
Substantially all of the Company's products carry lifetime warranty
provisions for defects in quality and workmanship. The Company's estimated
liability for future warranty claims related to past sales at December 31, 1999
and 1998 is approximately $4,200,000 and $3,700,000, respectively, and is
recorded in accrued expenses. Warranty expense was approximately $3,127,000,
$2,852,000 and $2,848,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS:
Effective April 1, 1999, the Company adopted SFAS No. 133 -- "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 133 requires that
all derivative financial instruments, such as foreign exchange contracts, be
recognized in the financial statements and measured at fair value regardless of
the purpose or intent for holding them. Changes in the fair value of derivative
financial instruments are either recognized periodically in income or
shareholders' equity (as a component of comprehensive income). The adoption of
SFAS No. 133 did not have a material effect on our Consolidated Financial
Statements.
30
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31,
------------------
1999 1998
------- -------
Raw materials............................................ $ 3,459 $ 4,071
Work in process.......................................... 9,197 5,576
Finished goods........................................... 73,809 64,412
------- -------
$86,465 $74,059
======= =======
NOTE 4 -- PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment consist of the following (in thousands):
DECEMBER 31,
-------------------
1999 1998
-------- -------
Land.................................................... $ 4,740 $ 4,740
Buildings............................................... 25,432 25,249
Machinery and equipment................................. 59,078 37,617
Furniture and fixtures.................................. 6,751 6,469
Leasehold improvements.................................. 10,720 6,420
Construction in progress................................ 444 15,836
-------- -------
107,165 96,331
-------- -------
Less accumulated depreciation........................... 38,205 27,639
-------- -------
$ 68,960 $68,692
======== =======
NOTE 5 -- SHORT TERM BORROWINGS AND CREDIT LINES
The Company has available an unsecured operating line of credit providing
for borrowings to a maximum of $70,000,000 during the period from August 1 to
December 15, 1999 and $50,000,000 at all other times. The maturity date of this
agreement is June 30, 2000. Interest, payable monthly, is computed at the bank's
prime rate minus up to 2.1% per annum, representing an effective interest rate
of 6.50% at both December 31, 1999 and 1998, respectively. The agreement also
includes a fixed rate option based on the LIBOR rate plus up to 75 basis points.
The balance outstanding was $9,145,000 and $16,370,000 at December 31, 1999 and
1998, respectively. The unsecured operating line of credit requires the Company
to comply with certain covenants including a Capital Ratio which limits
indebtedness to Tangible Net Worth. If the Company defaults on its payments, it
is prohibited, subject to certain exceptions, from making dividend payments or
other distributions.
The Company also has available an unsecured revolving line of credit of
$25,000,000 with a $45,000,000 import line of credit to issue documentary
letters of credit on a sight basis. The combined limit under this agreement is
$70,000,000. The revolving line accrues interest at the bank's prime rate minus
2% per annum. The revolving line also has a fixed rate option based on the
bank's cost of funds plus 35 basis points. There was no balance outstanding on
this line as of December 31, 1999 and 1998.
The Company is party to certain Buying Agency Agreements pursuant to which
the Company is provided unsecured lines of credit. These lines of credit are
used to finance the purchase of goods outside the U.S. which are produced by the
Company's independent manufacturers. The available funds are limited to
$127,300,000 with a sublimit of $60,000,000 on the import line of credit.
Borrowings bear interest at a range of .35% to .75% above the LIBOR rate (LIBOR
rate: 6.0% and 5.1% as of December 31, 1999 and 1998,
31
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively). These agreements expire in 2000 and 2001 will automatically renew
for either one-year or three-year terms unless either party elects otherwise.
The balance outstanding on the import line of credit was $15,383,000 and
$18,494,000 at December 31, 1999 and 1998, respectively, and is included in
accounts payable. At December 31, 1999, the Company had $43,524,000 of firm
purchase orders placed under these financing arrangements.
CSCL has available a line of credit providing for borrowing to a maximum of
C$18,000,000 (US$12,464,000 at December 31, 1999). As of December 31, 1999 and
1998, there was no balance outstanding on this line.
At December 31, 1999 and 1998, the Company's European branch had bank
borrowings outstanding of $8,039,000 and $9,175,000, at an interest rate of 3.3%
and 3.7%, respectively.
At December 31, 1999 and 1998, the Company's Japanese subsidiary had bank
borrowings outstanding of $14,492,000 and $9,182,000 at an interest rate of 1.9%
and 1.6%, respectively.
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
DECEMBER 31,
------------------
1999 1998
------- -------
Accrued salaries, bonus, vacation and other benefits..... $ 9,960 $ 8,395
Accrued warranty reserve................................. 4,200 3,700
Other.................................................... 4,996 3,374
------- -------
$19,156 $15,469
======= =======
NOTE 7 -- LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
------------------
1999 1998
------- -------
Mortgage note payable.................................... $ 1,917 $ 2,476
Senior promissory notes payable.......................... 25,000 25,000
Less current portion..................................... (252) (201)
------- -------
$26,665 $27,275
======= =======
The Company assumed a mortgage in connection with the acquisition of a
domestic distribution center. The loan matures in June 2009 and bears interest
at 8.76%.
In connection with capital projects, the Company entered into a note
purchase agreement. Pursuant to the note purchase agreement, the Company issued
senior promissory notes in the aggregate principal amount of $25 million,
bearing an interest rate of 6.68% and maturing August 11, 2008. Proceeds from
the notes were used to finance the expansion of the Company's distribution
center in Portland, Oregon. Up to an additional $15 million in shelf notes may
be issued under the note purchase agreement. The Senior Promissory Notes require
the Company to comply with certain ratios related to indebtedness to earnings
before interest, taxes, depreciation and amortization ("EBITDA") and Tangible
Net Worth.
32
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Principal payments due on these notes as of December 31, 1999 were as
follows (in thousands):
SENIOR
MORTGAGE NOTE PROMISSORY NOTE
------------- ---------------
2000............................................ $ 252 $ --
2001............................................ 275 --
2002............................................ 300 3,571
2003............................................ 328 3,571
2004............................................ 357 3,571
Thereafter...................................... 405 14,287
------ -------
$1,917 $25,000
====== =======
NOTE 8 -- SHAREHOLDERS' EQUITY
The Company is authorized to issue 50,000,000 shares of common stock. At
December 31, 1999 and 1998, 25,350,307 and 25,267,214 shares of common stock
were issued and outstanding. All shares and per share amounts for all periods
are restated to reflect the conversion of voting and nonvoting shares into
voting shares of common stock and the subsequent conversion of each share of
voting common stock into 0.59 shares of common stock pursuant to a reverse stock
split which occurred at consummation of the offering of common stock by the
Company.
On June 9, 1999, the shareholders of the Company approved the 1999 Employee
Stock Purchase Plan ("ESPP"). 500,000 shares of common stock are authorized for
issuance under the ESPP. The ESPP allows qualified employees of the Company to
purchase shares on a quarterly basis up to fifteen percent of their respective
compensation. The purchase price of the shares is equal to eighty five percent
of the lesser of the closing price of the Company's common stock on the first or
last trading day of the respective quarter. As of December 31, 1999, 21,582
shares of common stock had been issued under the ESPP.
NOTE 9 -- INCOME TAXES
The Company applies an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactment of changes
in the tax laws or rates. Deferred taxes are provided for temporary differences
between assets and liabilities for financial reporting purposes and for income
tax purposes and valuation allowances are recorded against net deferred tax
assets when appropriate.
Deferred income taxes arise from temporary differences between the carrying
amounts of asset and liabilities for financial reporting purposes and the
amounts used for income tax purposes. In 1999 the Company recorded a net
increase in temporary differences of $3,026,000, resulting in a net deferred tax
asset of $7,810,000 at December 31, 1999. The net deferred tax asset consists of
a current asset of $11,822,000 and a non-current liability of $4,012,000 at
December 31, 1999.
Undistributed earnings of the Company's Canadian subsidiary amounted to
approximately $15,500,000 on December 31, 1999. Upon distribution of those
earnings in the form of dividends or otherwise, a portion would be subject to
both U.S. income taxes and foreign withholding taxes. It is anticipated that the
U.S. income taxes and foreign withholding taxes would be substantially offset by
the corresponding foreign tax credits resulting from such a distribution.
Certain foreign tax benefits have been offset by valuation allowances
related to net operating losses.
33
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the provision for income taxes consists of the following
(in thousands):
YEAR ENDED DECEMBER 31
----------------------
1999 1998
-------- --------
(IN THOUSANDS)
Current:
Federal.............................................. $17,764 $17,594
State and local...................................... 3,308 3,066
Non-U.S.............................................. 4,189 3,103
------- -------
25,261 23,763
Deferred:
Federal.............................................. (1,745) (4,262)
State and local...................................... (599) (522)
Non-U.S.............................................. (682) --
------- -------
(3,026) (4,784)
------- -------
Provision for income taxes............................. $22,235 $18,979
======= =======
The following is a reconciliation of the normal expected statutory federal
income tax rate to the effective rate reported in the financial statements:
YEAR ENDED
DECEMBER 31
--------------
1999 1998
---- ----
(PERCENT OF
INCOME)
Provision for federal income taxes at the statutory rate.... 35.0% 35.0%
State and local income taxes, net of federal benefit........ 3.4 3.7
Non-U.S. income taxed at different rates.................... 1.4 1.5
Initial recording of deferred tax asset..................... -- (4.1)
Other....................................................... .4 .6
---- ----
Actual provision for income taxes........................... 40.2% 36.7%
==== ====
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate to income before income taxes for
1997 because the Company's income was not subject to federal and certain state
income taxes.
Significant components of the Company's deferred taxes are as follows:
YEAR ENDED DECEMBER 31
----------------------
1999 1998
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Nondeductible accruals and allowances................ $ 8,624 $ 5,981
Capitalized inventory costs.......................... 3,198 2,914
------- -------
11,822 8,895
Deferred tax liabilities:
Depreciation and amortization........................ (2,682) (2,531)
Deferred compensation................................ (1,330) (1,721)
Other, net........................................... -- 141
------- -------
(4,012) (4,111)
------- -------
Total........................................ $ 7,810 $ 4,784
======= =======
34
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- PROFIT SHARING PLAN
The Company has a 401(k) profit-sharing plan, which covers substantially
all employees with more than ninety days of service. The Company may elect to
make discretionary matching and/or non-matching contributions. All contributions
to the plan are determined by the Board of Directors and totaled $1,860,000,
$1,666,000 and $1,681,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE 11 -- PARTICIPATION SHARE AGREEMENT
Effective December 1990, the Company adopted a Participation Share
Agreement (the "Participation Plan") with a key employee. The Participation Plan
provided for the grant of participation shares equivalent to 10% of the Company,
which were to be awarded at various dates through January 2000. Shares awarded
were subjected to vesting at a rate of 20% per year. The original Participation
Plan granted the employee deferred compensation in the appreciation of a defined
per-share book value of the Company since January 1987 and contained an
anti-dilutive provision.
Effective December 31, 1996, the original Participation Plan was terminated
and a Deferred Compensation Conversion Agreement (the "Agreement") was entered
into. Under the Agreement, the participation shares, whether or not vested or
awarded under the Participation Plan, were converted to 1,800,435 shares of
common stock. As of December 31, 1999, of the converted shares, 391,388 shares
of common stock awarded were subject to vesting through December 2004.
The total value of the share conversion is $15,693,000 ($8.72 per share of
common stock), of which $6,320,000 was unvested as of December 31, 1996. The
unvested portion is recorded as a reduction in shareholders' equity and will be
amortized to compensation expense through December 2004 as shares are earned.
Compensation expense related to the Participation Plan and the 1996 conversion
totaled $970,000, $970,000 and $970,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Additionally, the agreement provided for bonuses to
be paid in amounts equal to the accrued interest due and owing on notes
receivable from the shareholder. These bonuses were $90,000 and $330,000 in 1998
and 1997, respectively.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
The Company leases certain operating facilities from related parties of the
Company. Total rent expense, including month-to-month rentals, for these leases
amounted to $339,000, $327,000 and $198,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Rent expense was $2,303,000, $2,123,000 and $2,941,000 for non-related
party leases during the years ended December 31, 1999, 1998 and 1997,
respectively.
Future minimum payments on all lease obligations greater than one year are
as follows (amounts in thousands):
NON-RELATED RELATED
YEAR ENDING DECEMBER 31, PARTIES PARTIES TOTAL
------------------------ ----------- ------- -------
1999.................................................. $2,718 $299 $ 3,017
2000.................................................. 2,211 308 2,519
2001.................................................. 1,808 254 2,062
2002.................................................. 729 58 787
2003.................................................. 415 -- 415
Thereafter............................................ 1,324 -- 1,324
------ ---- -------
$9,205 $919 $10,124
====== ==== =======
35
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is a party to various legal claims, actions and complaints.
Although the ultimate resolution of legal proceedings cannot be predicted with
certainty, management believes that disposition of these matters will not have a
material adverse effect on the Company's consolidated financial statements.
NOTE 13 -- STOCK INCENTIVE PLAN
On March 12, 1997, the Board of Directors of the Company approved the 1997
Stock Incentive Plan (the "Plan"). In January 1998, the Board of Directors
increased the number of shares authorized for issuance under the Plan from
2,000,000 to 2,500,000 shares. The options generally become exercisable ratably
over a five-year period beginning from the date of grant and expire ten years
from the date of grant.
The following table summarizes the stock option activity under the
Company's option plan:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Options outstanding at January 1, 1997...................... --
Granted..................................................... 736,774 $10.40
---------
Options outstanding at December 31, 1997.................... 736,774 10.40
Granted..................................................... 465,500 19.63
Canceled.................................................... (17,283) 9.68
Exercised................................................... (35,038) 10.45
---------
Options outstanding at December 31, 1998.................... 1,149,953 14.15
Granted..................................................... 302,933 12.44
Cancelled................................................... (69,866) 13.46
Exercised................................................... (61,511) 9.70
---------
Options outstanding at December 31, 1999.................... 1,321,509 $14.00
=========
The Company continues to measure compensation cost for those plans using
the method of accounting prescribed by Accounting Principles Board Opinion No.
25 ("APB 25"). Entities electing to remain with the accounting in APB 25 must
make pro forma disclosures of net income and, if presented, earnings per share,
as if the fair value based method of accounting defined in the Statement of
Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-based
Compensation", had been adopted.
The Company has elected to account for the Plan under APB 25; however, the
Company has computed, for pro forma disclosure purposes, the value of all stock
options granted during 1999, 1998 and 1997 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123 using the following weighted average
assumptions:
1999 1998 1997
------------ ------------ -------------
Risk-free interest rate............... 5.04 - 6.20% 5.77 - 5.71% 6.69 - 5.77%
Expected dividend yield............... 0% 0% 0%
Expected lives........................ 4 to 8 years 4 to 8 years 4 to 8 years
Expected volatility................... 66.80% 51.36% Minimum value
Using the Black-Scholes methodology, the total value of stock options
granted during 1999, 1998 and 1997 was $2,417,000, $5,040,000 and $2,431,000,
respectively, which would be amortized on a pro forma basis over the vesting
period of the options. The weighted average fair value of options granted during
1999, 1998 and 1997 was $7.98, $10.83 and $3.30 per share, respectively.
36
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
If the Company had accounted for the Plan in accordance with SFAS No. 123,
the Company's net income and earnings per share would approximate the pro forma
disclosures below (in thousands, except per share amounts):
1999 1998 1997
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Net income...................... $33,008 $31,116 $32,744 $31,616 $39,296 $38,970
Net income per share -- basic... $ 1.30 $ 1.23 $ 1.38 $ 1.33 $ 2.09 $ 2.07
Net income per
share -- diluted.............. $ 1.29 $ 1.22 $ 1.36 $ 1.31 $ 2.06 $ 2.05
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- -----------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
- --------------- ----------- ----------------- -------- ----------- --------
$ 9.68 - 15.20 584,182 7.31 $10.55 275,128 $10.39
$19.63 - 19.63 440,399 8.36 19.63 142,280 19.63
$12.13 - 18.38 296,928 9.17 12.44 43,989 12.39
--------- ---- ------ ------- ------
$ 9.68 - 19.63 1,321,509 8.08 $14.00 461,397 $13.43
NOTE 14 -- SEGMENT INFORMATION
The Company operates predominantly in one industry segment: the design,
production, marketing and selling of active outdoor apparel, including
outerwear, sportswear, rugged footwear, and related accessories.
The geographic distribution of the Company's net sales, income before
income tax, identifiable assets, interest expense, and depreciation and
amortization expense are summarized in the following table (in thousands) for
the years ended December 31, 1999, 1998 and 1997. Inter-geographic net sales,
which are recorded at a negotiated mark-up and eliminated in consolidation, are
not material.
1999 1998 1997
-------- -------- --------
Net sales to unrelated entities:
United States............................................ $341,583 $335,897 $286,896
Canada................................................... 50,428 38,782 31,135
Other International...................................... 78,492 52,599 35,421
-------- -------- --------
$470,503 $427,278 $353,452
======== ======== ========
Income (loss) before income tax:
United States............................................ $ 50,014 $ 50,132 $ 42,970
Canada................................................... 8,074 7,370 2,325
Other International...................................... 3,887 (189) (993)
Less interest and other income (expense) and
eliminations.......................................... (6,732) (5,590) (3,593)
-------- -------- --------
$ 55,243 $ 51,723 $ 40,709
======== ======== ========
37
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999 1998 1997
-------- -------- --------
Assets:
United States............................................ $274,222 $247,125 $171,545
Canada................................................... 24,905 16,696 15,416
Other international...................................... 45,254 33,571 15,041
-------- -------- --------
Total identifiable assets................................ 344,381 297,392 202,002
Eliminations............................................. (39,391) (27,914) (27,525)
-------- -------- --------
Total assets.......................................... $304,990 $269,478 $174,477
======== ======== ========
Interest expense (income), net:
United States............................................ $ 4,098 $ 3,340 $ 3,048
Canada................................................... 305 753 665
Other International...................................... 419 (18) (120)
-------- -------- --------
$ 4,822 $ 4,075 $ 3,593
======== ======== ========
Depreciation and amortization expense:
United States............................................ $ 11,709 $ 6,934 $ 6,775
Canada................................................... 400 392 443
Other International...................................... 495 315 300
-------- -------- --------
$ 12,604 $ 7,641 $ 7,518
======== ======== ========
NOTE 15 -- NET INCOME PER SHARE
SFAS No. 128, "Earnings Per Share" requires dual presentation of basic and
diluted earnings per share ("EPS"). Basic EPS is based on the weighted average
number of common shares outstanding. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
There were no adjustments to net income in computing diluted earnings per
share for the year ended December 31, 1999, 1998 and 1997. A reconciliation of
the common shares used in the denominator for computing basic and diluted net
income per share is as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Weighted average common shares outstanding, used in
computing basic net income per share................ 25,331 23,731 18,792
Effect of dilutive stock options...................... 277 327 311
------- ------- -------
Weighted-average common shares outstanding, used in
computing diluted net income per share.............. 25,608 24,058 19,103
======= ======= =======
Net income per share of common stock:
Basic............................................... $ 1.30 $ 1.38 $ 2.09
Diluted............................................. $ 1.29 $ 1.36 $ 2.06
NOTE 16 -- FINANCIAL RISK MANAGEMENT AND DERIVATIVES
The Company enters into foreign currency contracts in order to reduce the
impact of certain foreign currency fluctuations. Firmly committed and
anticipated transactions and the related receivables and payables may be hedged
with forward exchange contracts or purchased options. Premiums paid on purchased
options are included in prepaid expenses and are recognized in earnings ratably
over the life of the option. Gains and losses arising from foreign currency
forward and purchased option contracts, and cross-currency swap transactions are
recognized in income or expense as offsets of gains and losses resulting from
the underlying
38
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
hedged transactions. Hedge effectiveness is determined by evaluating whether
gains and losses on hedges will offset gains and losses on the underlying
exposures. This evaluation is performed at inception of the hedge and
periodically over the life of the hedge. Cash flows from risk management
activities are classified in the same category as the cash flows from the
related investment, borrowing or foreign exchange activity. The Company is
exposed to certain losses in the event of nonperformance by the other parties to
these agreements, but the Company does not anticipate nonperformance by the
other parties.
The counterparties to derivative transactions are major financial
institutions with high investment grade credit ratings. However, this does not
eliminate the Company's exposure to credit risk with these institutions. This
credit risk is generally limited to the unrealized gains in such contracts
should any of these counterparties fail to perform as contracted and is
immaterial to any one institution at December 31, 1999 and 1998. To manage this
risk, the Company has established strict counterparty credit guidelines which
are continually monitored and reported to Senior Management according to
prescribed guidelines. As a result, the Company considers the risk of
counterparty default to be minimal.
The Company manages a portion of its exposure to fluctuations in currencies
related to foreign sales and accounts receivable with short-term strategies
after giving consideration to market conditions, contractual agreements,
anticipated sale and purchase transactions, and other factors. At December 31,
1999 and 1998, the Company had approximately $29,500,000 and $9,700,000
(notional) in forward exchange contracts. The carrying value and unrealized
gains and losses related to these contracts were not material at December 31,
1999 and 1998.
39
SUPPLEMENTAL INFORMATION -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company's quarterly financial data for
the past two years ending December 31, 1999 (in thousands, except per share
amounts):
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
1999
Net sales........................... $89,214 $71,416 $187,568 $122,305
Gross profit........................ 56,600 40,116 98,097 64,796
Net income.......................... 240 (238) 23,891 9,115
Net income per share
Basic............................ 0.01 (0.01) 0.94 0.36
Diluted(1)....................... 0.01 (0.01) 0.93 0.35
1998
Net sales........................... $74,938 $67,177 $173,956 $111,207
Gross profit........................ 28,937 28,383 79,645 49,856
Net income.......................... 2,101 564 22,872 7,207
Net income per share
Basic(2)......................... 0.11 0.02 0.91 0.29
Diluted(2)....................... 0.11 0.02 0.90 0.28
- ---------------
(1) In 1999, the sum of the four quarters net income (loss) per share does not
equal the annual amount due to the dilutive effect of stock options as
accounted for under SFAS No. 128, "Earnings Per Share".
(2) In 1998, the sum of the four quarters net income per share does not equal
the annual amount due to the timing of issuance of shares in the first
quarter and the dilutive effect of stock options as accounted for under SFAS
No. 128, "Earnings Per Share."
40
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
Information with respect to our directors is hereby incorporated by
reference from our proxy statement, under the caption "Election of Directors,"
for our 2000 annual meeting of shareholders (the "2000 Proxy Statement") to be
filed pursuant to Regulation 14A promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, which proxy statement is
anticipated to be filed no later than 120 days after the end of our fiscal year
ended December 31, 1999. Information with respect to executive officers is
included under Item 4(a) of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated herein by reference the information required by this
Item included in the 2000 Proxy Statement under the caption "Executive
Compensation" which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal year ended December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated herein by reference the information required by this
Item included in the 2000 Proxy Statement under the caption "Voting Securities
and Principal Shareholders" which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the fiscal year ended
December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated herein by reference the information required by this
Item included in the 2000 Proxy Statement under the caption "Certain
Relationships and Related Transactions" which will be filed with the Securities
and Exchange Commission no later than 120 days after the close of the fiscal
year ended December 31, 1999.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2)Financial Statements. The Financial Statements of the
Company filed as part of this Annual Report on Form 10-K are on pages 22 to 39
of this Annual Report.
(a)(3) Exhibits
*3.1 Second Amended and Restated Articles of Incorporation.
*3.2 1998 Restated Bylaws.
*4.1 See Article II of Exhibit 3.1 and Article I of Exhibit 3.2.
+10.1 1997 Stock Incentive Plan, as amended (incorporated by
reference to exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1998).
*10.2 Form of Incentive Stock Option Agreement.
*10.3 Form of Nonstatutory Stock Option Agreement.
*10.4 Credit Agreement between the Hong Kong and Shanghai Banking
Corporation Limited and the Company dated September 17,
1991, as amended.
*10.5 Buying Agency Agreement between Nissho Iwai American
Corporation and the Company dated January 1, 1992, as
amended.
*10.5(a) Amendment No. 2 to the Buying Agency Agreement Between
Nissho Iwai American Corporation and the Company dated
February 19, 1998.
*10.5(b) Buying Agency Agreement between the Company and Nissho Iwai
American Corporation dated October 1, 1998 (incorporated by
reference in exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30,
1998).
*10.6 Credit Agreement between the Company and Wells Fargo Bank,
N.A. dated July 31, 1997.
*10.6(a) Form of First Amendment to Credit Agreement between the
Company and Wells Fargo Bank, N.A. dated March 23, 1998.
10.6(b) Credit Agreement Extension between the Company and Wells
Fargo Bank National Association dated June 30, 1998
(incorporated by reference to exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998).
10.6(c) Second Amendment to Credit Agreement between the Company and
Wells Fargo Bank National Association dated July 31, 1998
(incorporated by reference to exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998).
10.6(d) Third Amendment to Credit Agreement between the Company and
Wells Fargo Bank National Association dated June 30, 1999
(incorporated by reference to exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1999).
*10.7 Assumption Agreement by and between the Company, Timothy P.
Boyle and Don Santorufo and First Interstate Bank of Oregon,
N.A., dated March 8, 1996; and form of First Amendment
thereto dated March 23, 1998.
*10.8 Lease between Penzel & Company and the Company dated
February 23, 1988, as amended.
*10.9 Form of lease between Timothy P. Boyle and Gertrude Boyle
and the Registrant.
42
*10.10 Form of Lease between Gertrude Boyle and the Company.
*10.11 Lease between BB&S Development Company and the Company,
dated February 12, 1996.
*10.12 Lease between B.A.R.K. Holdings, Inc. and Columbia
Sportswear Canada Limited, dated January 3, 1994.
*10.13 Form of Stock Purchase Agreement between Columbia Sportswear
Holdings Limited, Columbia Sportswear Canada Limited and
Douglas Hamilton and Doug Hamilton in trust for Elizabeth K.
Hamilton, dated August 24, 1992.
+*10.14 Deferred Compensation Conversion Agreement between the
Company and Don Santorufo, dated December 31, 1996.
*10.15 Form of Tax Indemnification Agreement for existing
shareholders.
+*10.16 Employment Agreement between Carl K. Davis and the Company
dated as of September 5, 1997.
*10.17 Form of Indemnity Agreement for Directors.
*10.18 Form of Agreement Regarding Plan of Recapitalization Among
the Company and Shareholders.
+*10.19 Amendment and Waiver, Deferred Compensation Conversion
Agreement, between the Company and Don Santorufo.
*10.20 Asset Purchase Agreement between the Company and Columbia
Outfitters, Inc., dated March 4, 1998.
10.21 Note Purchase and Private Shelf Agreement between the
Company and The Prudential Insurance Company of America and
Pruco Life Insurance Company dated August 11, 1998
(incorporated by reference to exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998).
10.22 1999 Employee Stock Purchase Plan (incorporated by reference
to exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999).
10.23 Executive Incentive Compensation Plan (incorporated by
reference to exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999).
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
- ---------------
+ Management Contract or Compensatory Plan.
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Reg. No. 333-43199).
(b) No reports on Form 8-K were held during the last quarter of the period
covered by this report.
43
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, as of March 30, 2000.
COLUMBIA SPORTSWEAR COMPANY
By: PATRICK D. ANDERSON
------------------------------------
Patrick D. Anderson
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated as of March 30, 2000.
SIGNATURES TITLE
---------- -----
*TIMOTHY P. BOYLE President and Chief Executive
- ----------------------------------------------------- Officer and Director
Timothy P. Boyle (Principal Executive Officer)
PATRICK D. ANDERSON Chief Financial Officer
- ----------------------------------------------------- (Principal Financial and
Patrick D. Anderson Accounting Officer)
*GERTRUDE BOYLE Chairman of the Board of
- ----------------------------------------------------- Directors
Gertrude Boyle
*SARAH BANY Director
- -----------------------------------------------------
Sarah Bany
*EDWARD S. GEORGE Director
- -----------------------------------------------------
Edward S. George
*MURREY R. ALBERS Director
- -----------------------------------------------------
Murrey R. Albers
*JOHN STANTON Director
- -----------------------------------------------------
John Stanton
*By: PATRICK D. ANDERSON
-------------------------------------------------
Patrick D. Anderson
as Attorney-in-Fact
44