-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, La8X5VQmCpyXjj6WsMJ2e9D1qZnaCiPcIdg3HEjinhDL0Sz61RVf+QPMO2TtX7v+ q6g2KMQc8tz6Z5oQu2NIQQ== 0000950135-98-001819.txt : 19980327 0000950135-98-001819.hdr.sgml : 19980327 ACCESSION NUMBER: 0000950135-98-001819 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIMBERLAND CO CENTRAL INDEX KEY: 0000814361 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 020312554 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09548 FILM NUMBER: 98573501 BUSINESS ADDRESS: STREET 1: 200 DOMAIN DR CITY: STRATHAM STATE: NH ZIP: 03885 BUSINESS PHONE: 6037729500 MAIL ADDRESS: STREET 1: 200 DOMAIN DR CITY: STRATHAM STATE: NH ZIP: 03885 10-K405 1 THE TIMBERLAND COMPANY 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-9548 The Timberland Company (Exact Name of Registrant as Specified in Its Charter) Delaware 02-0312554 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 200 Domain Drive, Stratham, New Hampshire 03885 (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: (603) 772-9500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange Class A Common Stock, on which registered par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Class A Common Stock of the registrant held by non-affiliates of the registrant was approximately $659,766,322 on March 3, 1998. For purposes of the foregoing sentence the term "affiliate" includes each director and executive officer of the registrant. See Item 12 of this Form 10-K. 9,047,096 shares of Class A Common Stock and 2,338,162 shares of Class B Common Stock of the registrant were outstanding on March 3, 1998. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Annual Report to security holders for the fiscal year ended December 31, 1997 are incorporated by reference in Part I, Item 1 regarding foreign and domestic sales and Part II, Items 5, 6, 7 and 8 of this Form 10-K. Portions of the registrant's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference in Part III of this Form 10-K. 2 PART I ITEM 1. BUSINESS OVERVIEW The Timberland Company was incorporated in Delaware on December 20, 1978, and is the successor to Abington Shoe Company, which was incorporated in Massachusetts in 1933 (The Timberland Company, together with its subsidiaries, is referred to herein as "Timberland" or the "Company," unless the context indicates otherwise). The Company designs, develops, engineers, markets and distributes, under the Timberland(R) brand, premium-quality footwear, apparel and accessories products for men, women and children. Timberland(R) products provide functional performance, classic styling and lasting protection from the elements. The Company believes that the combination of these features distinguishes the Timberland brand from competing brands and makes Timberland products an outstanding value. Timberland products are sold primarily through independent retailers, better-grade department stores and athletic stores which reinforce the high level of quality, performance and service associated with the Timberland brand. In addition, Timberland(R) specialty stores and Timberland(R) factory outlet stores are dedicated exclusively to selling Timberland products. The Company's operating strategy is targeted to five specific areas: product, distribution, marketing, business systems and community. During 1997, the Company continued to focus its efforts on achieving the goals of profitable revenue growth, growing earnings faster than revenue, controlling operating and capital expenditures and generating positive cash flow. The Company introduced new product lines, including an expanded kids' footwear line, a boys' apparel line and new enthusiast and recreational hiking performance footwear products. The Company also continued to shift production of its footwear products to third party manufacturers. CURRENT PRODUCTS The Company's products fall into two groups - footwear products and apparel and accessories products (including product care and licensed products). Revenue from sales of the Company's footwear products represented 75.4%, 74.8% and 74.9% of total product sales for 1997, 1996 and 1995, respectively. Revenue attributable to sales of apparel and accessories products represented 24.6%, 25.2% and 25.1% of total product sales for 1997, 1996 and 1995, respectively. FOOTWEAR In 1973, the Company produced its first pair of waterproof leather boots under the Timberland brand. The Company currently offers a broad variety of footwear products for men, women and children, featuring premium materials, state-of-the-art functional design and components, and advanced construction methods. The Company's footwear design and development group is organized into the following teams: men's footwear, women's footwear, performance footwear, boots and kids' footwear. Each team is responsible for all aspects of the footwear development process. 1 3 Timberland(R) men's and women's footwear products include the Work Casual, Casual and Rugged Casual collections. Timberland(R) performance footwear products are designed to meet the demanding needs of the outdoor enthusiast or recreationalist who engages in a variety of outdoor activities, and include the Enthusiast Hiking, Recreational Hiking, Multi-Purpose Outdoor, Walking and Amphibious collections. These products feature advanced technologies such as Active Comfort Technology(TM) (ACT(TM)), a system developed by the Company that wicks moisture away from the foot and improves comfort and performance, Timberland's patent pending Advanced Combination Construction, which is designed to deliver forefoot flexibility and rear-foot stability, and B.S.F.P.(TM), a motion efficiency system designed to deliver improved traction, energy-return and length of wear. Timberland(R) boots include the classic work boots for which the Company is widely recognized. Timberland(R) kids' footwear products are scaled-down versions of the same high-quality adult footwear products. APPAREL AND ACCESSORIES Timberland(R) men's apparel products consist primarily of rugged outerwear, sweaters, shirts, pants and shorts. These products feature, in certain models, premium waterproof leathers, waterproof and water resistant fabric, rust-proof hardware, canvas, denim, high-quality specialty cotton, wool and other quality performance materials. In 1997, the Company offered a limited women's apparel line of classic items and performance outerwear, distributed principally through Timberland(R) specialty stores and through several premium retailers outside the United States. Timberland's adult apparel product offerings for the Spring and Fall 1998 seasons will be only for men. The Company is currently evaluating alternatives for the production and distribution of women's apparel, including third party licensing. Timberland(R) accessories for men, women and children include all products sold under the Timberland(R) brand other than footwear and apparel products. Many of these products, including watches, men's belts, day packs and travel gear, socks and legwear, gloves, eyewear and men's small leather goods, are designed, manufactured and distributed pursuant to licensing agreements with third parties. These licensing agreements are intended to expand the Timberland brand to appropriate and well-defined product categories in a manner designed to benefit from the expertise of the licensees and to reduce the risks to the Company associated with pursuing such opportunities. Timberland receives a royalty on sales of these licensed products. Timberland accessories also include caps and hats, leather care products and a limited collection of leather goods, including luggage, briefcases, handbags, wardrobe accessories and small leather goods. Timberland introduced a boys' apparel collection in Timberland specialty stores in the United States for the Holiday 1997 selling season. Timberland(R) boys' apparel products are designed in France and manufactured pursuant to a license agreement with Albert, S.A. In 1998, an expanded collection of Timberland boys' apparel products will be available, with broader distribution in both Timberland specialty stores and key wholesale accounts in Europe and the Middle East. 2 4 PRODUCT SALES WHOLESALE OPERATIONS Timberland(R) products are sold in the United States and internationally primarily through independent retailers, better-grade department stores and athletic stores which reinforce the high level of quality, performance and service associated with the Timberland(R) brand. United States: The Company's wholesale customer accounts within the United States range from better-grade department and retail stores to athletic stores. Many of these wholesale accounts merchandise Timberland products in selling areas dedicated exclusively to Timberland products, or "concept shops." These accounts are serviced through a combination of field and corporate-based sales teams aligned with these channels. The Company also services its wholesale accounts through its principal showroom in New York City and two regional showrooms located in Dallas and Seattle. In 1997, 1996 and 1995, 72.6%, 70.4% and 70.2%, respectively, of the Company's revenue was generated in the United States. International: Timberland products are sold internationally by the Company through its operating divisions in the United Kingdom, France, Germany, Italy, Spain and Austria and by distributors, franchisees and commission agents in Europe, the Middle East and North Africa, Central America, South America and the Asia/Pacific region. The Company's European operating divisions provide support for the sale of Timberland products to wholesale customers in their respective countries and, in certain instances, to distributors, franchisees and commission agents in other countries. In 1997, 1996 and 1995, 27.4%, 29.6% and 29.8%, respectively, of the Company's revenue was generated outside of the United States. RETAIL OPERATIONS In addition to the Company's wholesale customers, Timberland(R) specialty stores and Timberland(R) factory outlet stores are dedicated exclusively to selling Timberland products. These two types of stores are operated by the Company in the United States and in parts of Europe, and by certain of the Company's distributors and franchisees in parts of Europe, the Middle East, Central America, South America and the Asia/Pacific region. In 1997, 1996 and 1995, revenue from Company-operated specialty and factory outlet stores accounted for 22.7%, 23.5% and 19.6%, respectively, of the Company's revenue. In addition to providing an environment to showcase the Timberland(R) brand as an integrated source of footwear, apparel and accessories, Timberland specialty stores provide sales and consumer-trend information which assists the Company in developing its marketing strategies, including point-of-purchase marketing materials. The training and customer service programs established in the Company's specialty stores also serve as models which may be adopted by the Company's other retail accounts. At December 31, 1997, the Company operated 30 specialty stores worldwide. The Company's factory outlet stores serve as the primary channel for the sale of factory-second, discontinued and excess products, and are intended to protect and control the integrity 3 5 of the Timberland brand and to maximize the return associated with the sale of such products. At December 31, 1997, the Company operated 43 factory outlet stores worldwide. DISTRIBUTION The Company distributes its products in North America through Company-managed distribution facilities located in Danville, Kentucky and Grove City, Ohio and a third party-managed facility located in City of Industry, California. The Company distributes its products in Europe through a new facility managed by the Company in Enschede, Holland. During 1997, the Company continued to consolidate and centralize its distribution center operations in North America and Europe. The Company announced that it will consolidate the apparel and accessories distribution functions conducted at the Grove City facility into the Danville facility. The Grove City facility will be closed in 1998 when the lease on that facility expires. In addition, the Company is constructing a build-to-suit, Company-managed facility in Ontario, California to replace the City of Industry facility. The Company also completed in 1997 the consolidation of all of its European distribution facilities into the Enschede centralized facility. When the Company completes these consolidation plans, it will have reduced the number of distribution facilities in the United States from eight to two, and in Europe from five third-party operated facilities to one Company-managed facility. ADVERTISING AND MARKETING The Company's advertising campaigns are designed to increase brand awareness among consumers and to emphasize the features that distinguish the Timberland(R) brand from competing brands and make Timberland(R) products an outstanding value. Timberland's product and territory licensing arrangements also require licensees to fund marketing campaigns, over which Timberland maintains approval rights to ensure consistent and effective brand presentation. The Company's national and regional advertising campaigns appeared mainly in various active-lifestyle, fashion and sports-focused consumer periodicals and trade press outlets during 1997. The Company reinforced these advertising campaigns with a variety of in-store promotions, point-of-purchase marketing materials and cooperative advertising programs with its retailers, as well as retail sales clerk training and other sales incentive programs and promotional campaigns. The Company also promoted its products at various industry trade shows in the United States and internationally. The Company's advertising campaigns were focused on the second half of 1997, particularly on the third quarter, when the Company's revenue historically has been highest. SEASONALITY In 1997, as historically has been the case, the Company's revenue was higher in the last two quarters of the year than in the first two quarters. Accordingly, the amount of fixed costs related to the Company's retail operations typically represented a larger percentage of revenue in the first two quarters of 1997 than in the last two quarters of 1997. The Company expects this seasonality to continue in 1998. 4 6 BACKLOG At December 31, 1997, Timberland's backlog of orders from its customers was approximately $186 million, compared to $129 million at December 31, 1996 and $102 million at December 31, 1995. While all orders in the backlog are subject to cancellation by customers, the Company expects that the majority of such orders will be filled in 1998. The Company does not believe that its order backlog at year-end is representative of the orders which will be filled during 1998, due to the risk that such orders could be canceled, the seasonality of the Company's revenue described above and the portion of the Company's sales historically made up of "at-once" orders, the planning for which is more difficult than "future" orders. MANUFACTURING The Company's two manufacturing facilities are located in Puerto Rico and the Dominican Republic. During 1997, the Company manufactured approximately 28% of its footwear unit volume, compared to approximately 35% during 1996 and 40% during 1995. The remainder of the Company's footwear products and all of its apparel and accessories (excluding licensed products, the manufacture of which is the responsibility of the Company's licensees) were produced by independent manufacturers in Asia, Europe, South America and Mexico. Approximately 27%, 10% and 6% of the Company's 1997 footwear unit volume was produced by three independent manufacturers located in China, Thailand and the Czech Republic, respectively. No other independent manufacturer produced more than 5% of the Company's footwear unit volume in 1997. The Company currently plans to retain its internal manufacturing capability in order to continue benefiting from expertise gained with respect to footwear manufacturing methods conducted at its manufacturing facilities. To the extent the Company manufactures its products outside the United States or is dependent upon foreign operations with unaffiliated parties, the Company is subject to the usual risks of doing business abroad. These risks potentially include, among other risks, foreign exchange rate fluctuations, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. The Company maintains a quality management group, which develops, reviews and updates the Company's quality and production standards. To help ensure such standards are being met, the group also conducts product quality audits at the Company's and independent manufacturers' factories and distribution centers. The Company has offices in Bangkok, Thailand and Taichung, Taiwan, and plans to open an office in Zhu Hai, China, to supervise the Company's sourcing activities conducted in the Asia/Pacific region. RAW MATERIALS In 1997, four suppliers provided more than 60%, in the aggregate, of the Company's leather purchases. One of these suppliers provided approximately 30% of the Company's leather purchases in 1997. The Company has no reason to believe that leather will not continue to be available from these or alternative sources. The Company has established a central network of suppliers through which the Company's manufacturing facilities and independent manufacturers can purchase raw materials. In 1998, the Company expects to increase sourcing of leather from 5 7 premier Asian tanneries that process United States hides, including current suppliers, in an effort to reduce lead times while maintaining the Company's high quality standards. The Company believes that key strategic alliances with leading raw material vendors help reduce the cost and provide greater consistency of raw materials procured to produce Timberland(R) products and improve compliance with the Company's production standards. TRADEMARKS AND TRADE NAMES; PATENTS; RESEARCH & DEVELOPMENT The Company's principal trade name is The Timberland Company and the Company's principal trademarks are TIMBERLAND and the TREE DESIGN LOGO, which have been registered in the United States and several foreign countries. Other Company trademarks or registered trademarks are Active Comfort Technology; ACT; Aero Balm; B.S.F.P.; Balm Shelter; Black Ridge Mountain; Bootness; Cream Buff; Euro Rec; Euro TecRec; Fastpacker; Grime Squad; Guaranteed Waterproof Construction; Hydro Balm; Jackson Mountain; Lockseam; Mill River; More Quality Than You May Ever Need; Mountain to River; TBL; The Boot Company; This is a trip; This is not baggage; This is your new best friend; Trail Grip; Treeline; Waximum; Weathergear; and Wind, Water, Earth, and Sky; as well as the following design logos: [TIMBERLAND LOGO] [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] The Company regards its trade name and trademarks as valuable assets and believes that they are important factors in marketing its products. It is the policy of the Company to protect and defend vigorously its trade name and trademarks against infringement under the laws of the United States and other countries. In addition, the Company seeks to protect and defend vigorously its patents, designs, copyrights and all other proprietary rights under applicable laws. The Company conducts research, design and development efforts for its products, including field testing of a number of its products to evaluate and improve product performance. However, the Company's expenses relating to research, design and development have not represented a material expenditure relative to its other expenses. COMPETITION The Company's footwear, apparel and accessories products are marketed in highly competitive environments which are subject to rapid changes in consumer preference. Although the footwear industry is fragmented to a great degree, many of the Company's competitors are larger and have substantially greater resources than the Company, including athletic shoe companies, many of which compete directly with some of the Company's products. In addition, 6 8 the Company faces competition from retailers that are establishing products under private labels which compete with the Company's products. The Company does not believe that any of its principal competitors offers a complete line of products that provide the same quality and performance as the complete line of Timberland(R) footwear, apparel and accessories products. However, the Company does have a variety of major competitors in each of its separate product categories. The Company has at least nine major competitors in classic work boot sales, at least seven major competitors in rugged casual footwear sales, at least twelve major competitors in performance footwear sales, at least thirteen major competitors in dress casual footwear sales and at least six major competitors in kids' footwear sales. The Company's major competitors for its footwear products are located principally in the United States. The Company also faces competition from many international footwear manufacturers. The Company's line of men's apparel faces competition from at least twelve major apparel companies in the United States and from a variety of major apparel companies internationally. The Company's lines of footwear and apparel face competition from at least two direct mail companies in the United States. Product quality, performance, design, styling and pricing, as well as consumer awareness, are all important elements of competition in the footwear, apparel and accessories markets served by the Company. Although changing fashion trends generally affect demand for particular products, the Company believes that, because of the functional performance, classic styling and high quality of Timberland(R) footwear products, demand for Timberland footwear products (except for the more fashion-focused models in the Timberland(R) women's casual footwear line) is less sensitive to changing trends in fashion than other products that are designed specifically to meet such trends. ENVIRONMENTAL MATTERS Compliance with federal, state and local environmental regulations has not had, nor is it expected to have, any material effect on the capital expenditures, earnings or competitive position of the Company, based on information and circumstances known to the Company at this time. EMPLOYEES At December 31, 1997, the Company had approximately 5,100 employees worldwide. Management considers its employee relations to be good. None of the Company's employees is represented by a labor union, and the Company has never suffered a material interruption of business caused by labor disputes. BUSINESS SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREA The Company operates in a single industry segment which includes the designing, engineering, marketing and distribution of footwear, apparel and accessories products for men, women and children. Information regarding revenue, operating income and identifiable assets 7 9 attributable to each of the geographic areas in which the Company operates, and the amount of export sales to unaffiliated customers in the aggregate, is set forth in Note 12 to the Company's consolidated financial statements, entitled "Industry Segment and Geographical Area Information," appearing in the Company's 1997 Annual Report to security holders, which information is incorporated herein by reference. ITEM 2. PROPERTIES Since April 1994, the Company has leased its worldwide headquarters located in Stratham, New Hampshire, under a lease which expires in July 1999, with an option to extend the term for one year. The Company considers its headquarters facilities adequate and suitable for its current needs. The Company leases its manufacturing facilities, which are located in Isabela, Puerto Rico, and Santiago, Dominican Republic. These manufacturing facilities are occupied under 11 leasing arrangements, which expire on various dates through January 2002. The Company owns its distribution facility in Danville, Kentucky, and leases its facilities in Grove City, Ohio, and Enschede, Holland. The Company leases all of its specialty and factory outlet stores. The Company's subsidiaries also lease office and warehouse space to meet their individual requirements. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various litigation and legal matters which have arisen in the ordinary course of business. Management believes that the ultimate resolution of any existing matter will not have a material adverse effect on the Company's consolidated financial statements. The Company and two of its officers and directors were named as defendants in two actions filed in the United States District Court for the District of New Hampshire, one filed by Jerrold Schaffer on December 12, 1994, and the other filed by Gershon Kreuser on January 4, 1995. On April 24, 1995, the District Court granted plaintiffs' motion, assented to by defendants, to consolidate the two actions. On June 23, 1995, plaintiffs filed a consolidated amended complaint (the "Amended Complaint") with the District Court. The Amended Complaint alleged that defendants violated federal securities laws by making material misstatements and omissions in certain of the Company's public filings and statements in 1994. On July 9, 1997, the parties filed a Stipulation and Agreement of Compromise, Settlement and Release (the "Stipulation") with the District Court for approval. On July 31, 1997, the District Court entered an order preliminarily approving the Stipulation. On December 29, 1997, the District Court entered an order granting final approval of the Stipulation. Under the terms of the Stipulation, the settlement of this litigation was final and effective on January 29, 1998. The settlement of this litigation did not have a material adverse effect on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended December 31, 1997, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. 8 10 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following information is submitted as to the executive officers of the Company:
NAME AGE POSITION ---- --- -------- Sidney W. Swartz 62 Chairman of the Board, President, Chief Executive Officer and Director Jeffrey B. Swartz 38 Executive Vice President, Chief Operating Officer and Director Geoffrey J. Hibner 48 Senior Vice President-Finance and Administration and Chief Financial Officer Kenneth P. Pucker 35 Senior Vice President and General Manager-Footwear Gregory W. VanWormer 42 Senior Vice President-Marketing Dennis W. Hagele 54 Vice President-Finance and Corporate Controller (Chief Accounting Officer) Danette Wineberg 51 Vice President and General Counsel
All executive officers serve at the discretion of the Board of Directors. Sidney W. Swartz has served the Company as Chairman of the Board, Chief Executive Officer and President since June 1986. Jeffrey B. Swartz has served the Company as Chief Operating Officer since May 1991 and as Executive Vice President since March 1990. He is also a Director of Central Tractor Farm & Country, Inc. Jeffrey Swartz is the son of Sidney W. Swartz. Geoffrey J. Hibner joined the Company in May 1997 as Senior Vice President-Finance and Administration and Chief Financial Officer. From August 1995 until joining the Company, Mr. Hibner served as the Chief Financial Officer of Frontier Technologies Corporation. From July 1988 to January 1995, Mr. Hibner was the Vice President, Finance for Universal Foods Corporation. Kenneth P. Pucker became the Company's Senior Vice President and General Manager-Footwear effective December 1997. Mr. Pucker joined the Company in June 1992 as Director-Manufacturing Operations. He was promoted to Vice President-Operations effective February 1993; General Manager-The Outdoor Footwear Company (a subsidiary of the Company) effective October 1993; Vice President-Strategic Initiatives effective January 1995; and Vice President and General Merchandising Manager-Footwear effective April 1996. 9 11 Gregory W. VanWormer became the Company's Senior Vice President-Marketing in September 1997. Mr. VanWormer joined the Company in May 1994 as Senior Vice President-Retail. Mr. VanWormer was promoted to Senior Vice President and General Manager-Apparel/Retail effective January 1995 and Senior Vice President and General Manager-Apparel/Retail/Marketing effective January 1996. From August 1991 to April 1994, Mr. VanWormer was the Vice President-General Merchandise Manager of G.H. Bass & Co. Dennis W. Hagele joined the Company in October 1994 as Vice President-Finance and Corporate Controller. From July 1993 to September 1994, Mr. Hagele was an independent financial consultant; and from August 1981 to June 1993, he was Assistant Controller of Sara Lee Corporation. Danette Wineberg joined the Company in October 1997 as Vice President and General Counsel. From November 1993 until joining the Company, Ms. Wineberg was General Counsel for Little Caesar Enterprises, Inc. From September 1986 to November 1993, Ms. Wineberg served in a number of corporate counsel positions for Highland Superstores, Inc., most recently as Vice President-Administration and Corporate Counsel. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is included in the registrant's 1997 Annual Report to security holders under the caption "Quarterly Market Information and Related Matters" and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included in the registrant's 1997 Annual Report to security holders under the caption "Five Year Summary of Selected Financial Data" and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included in the registrant's 1997 Annual Report to security holders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included in the registrant's 1997 Annual Report to security holders and is incorporated herein by reference. 10 12 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information set forth under the caption "Executive Officers of the Registrant" in Item 4A of Part I of this report and to the information under the caption "Information with Respect to Nominees" in the registrant's definitive proxy statement (the "registrant's 1998 Proxy Statement") relating to its 1998 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission (the "Commission") within 120 days after the close of the registrant's fiscal year ended December 31, 1997, which information is incorporated herein by reference. Reference is also made to the information set forth in the registrant's 1998 Proxy Statement with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the information set forth under the caption "Executive Compensation" in the registrant's 1998 Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the registrant's 1998 Proxy Statement, which information is incorporated herein by reference. For purposes of calculating the aggregate market value of the Class A Common Stock held by non-affiliates of the registrant appearing on the cover page of this report, the shares owned by The Sidney W. Swartz 1982 Family Trust, The Swartz Foundation and The Sidney and Judith Swartz Charitable Remainder Unitrust have not been considered owned by an affiliate. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the information set forth under the caption "Certain Relationships and Related Transactions" in the registrant's 1998 Proxy Statement, which information is incorporated herein by reference. 11 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The following financial statements appearing in the Company's 1997 Annual Report to security holders are incorporated by reference in this report: ANNUAL REPORT
PAGE ---- Consolidated Balance Sheets as of December 31, 1997 and 1996 17 For the years ended December 31, 1997, 1996 and 1995: Consolidated Statements of Operations 18 Consolidated Statements of Changes in Stockholders' Equity 19 Consolidated Statements of Cash Flows 20 Notes to Consolidated Financial Statements 21 Independent Auditors' Report 33 (a)(2) Financial Statement Schedule. The following additional financial data should be read in conjunction with the Consolidated Financial Statements in the registrant's 1997 Annual Report to security holders: FORM 10-K PAGE ---- Independent Auditors' Report on Schedule II F-1 Schedule II - Valuation and Qualifying Accounts F-2
All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable and have, therefore, been omitted. (b) No reports on Form 8-K were filed by the Company during the fourth quarter of 1997. (c) Listed below are all the Exhibits filed as part of this report, some of which are incorporated by reference from documents previously filed by the Company with the Commission in accordance with the provisions of Rule 12b-32 of the Exchange Act. 12 14 EXHIBIT DESCRIPTION (3) Articles of incorporation and by-laws 3.1 Restated Certificate of Incorporation (1) 3.2 By-Laws, as amended May 19, 1993 (5) (4) Instruments defining the rights of security holders, including indentures (See also Exhibits 3.1 and 3.2) 4.1 Specimen stock certificate for shares of the Company's Class A Common Stock (12) (10) Material Contracts 10.1 Agreement dated as of August 29, 1979 between The Timberland Company and Sidney W. Swartz (1) 10.2 (a) The Company's 1987 Stock Option Plan, as amended (8) (b) The Company's 1997 Stock Option Plan for Non-Executive Employees (13) (c) The Company's 1997 Incentive Plan (13) 10.3 The Company's 1991 Employee Stock Purchase Plan, as amended (2) 10.4 The Company's 1991 Stock Option Plan for Non-Employee Directors (3) 10.5 The Timberland Company Long Term Incentive Plan for Senior Management (5) 10.6 The Timberland Company Annual Bonus Plan for Exempt Employees (5) 10.7 The Timberland Company Retirement Earnings 401(k) Plan and Trust Agreements (10) 10.8 The Timberland Company Profit Sharing Plan and Trust Agreements (10) 13 15 EXHIBIT DESCRIPTION - -------------------------------------------------------------------------------- 10.9 (a) Lease dated March 23, 1987 between The Outdoor Footwear Company and Corporacion Sublistatica, S.A. (1) (b) Lease dated November 21, 1988 between 745 Associates and The Timberland Company (4) (c) Lease dated March 31, 1981 between the Puerto Rico Industrial Development Company and The Timberland Company (4) (d) Lease dated September 7, 1992 between Corporacion Zona Franca Industrial De Santiago, Inc. and The Recreational Footwear Company (4) (e) Lease dated December 2, 1992 between Corporacion Zona Franca Industrial De Santiago, Inc. and The Recreational Footwear Company (4) (f) Lease dated as of June 29, 1993 between Timberland Dominicana, S.A. and Santiago Norte, S.A. (Pisano) Industrial Park (5) (g) Lease dated as of November 30, 1993 between Timberland Dominicana, S.A. and Santiago Norte, S.A. (Pisano) Industrial Park (5) (h) Lease dated as of December 16, 1993 between Timberland Dominicana, S.A. and Santiago Norte, S.A. (Pisano) Industrial Park (5) (i) Sublease dated March 31, 1994 between Hewlett-Packard Company and The Timberland Company (6) 10.10 (a) Credit Agreement dated as of June 21, 1996 among The Timberland Company, certain banks listed therein and Morgan Guaranty Trust Company of New York, as Agent (11) (b) Amendment No. 1 dated as of March 21, 1997 to the Credit Agreement dated as of June 21, 1996 among The Timberland Company, certain banks listed therein and Morgan Guaranty Trust Company of New York, as Agent (14) 14 16 EXHIBIT DESCRIPTION - -------------------------------------------------------------------------------- (c) Amendment No. 2 dated as of November 5, 1997 to the Credit Agreement dated as of June 21, 1996 among The Timberland Company, certain banks listed therein and Morgan Guaranty Trust Company of New York, as Agent, filed herewith 10.11 (a) Note Agreements dated as of December 15, 1994 regarding $106,000,000 8.94% Senior Notes due December 15, 2001 (7) (b) Amendment No. 1 dated as of April 1, 1995 to Note Agreements (9) (c) Amendment No. 2 dated as of June 28, 1995 to Note Agreements (9) (d) Amendment No. 3 dated as of June 21, 1996 to Amended and Restated Note Agreements (11) (13) Annual Report to security holders 13. Portions of 1997 Annual Report to security holders as incorporated herein by reference, filed herewith (21) Subsidiaries 21. List of subsidiaries of the registrant, filed herewith (23) Consent of experts and counsel 23. Consent of Deloitte & Touche LLP, filed herewith (27) Financial Data Schedule 27.FY97 Financial Data Schedule for the year ended December 31, 1997, filed herewith 27.Q397 Financial Data Schedule for the quarter ended September 26, 1997, filed herewith 27.Q297 Financial Data Schedule for the quarter ended June 27, 1997, filed herewith 27.Q197 Financial Data Schedule for the quarter ended March 28, 1997, filed herewith 27.FY96 Financial Data Schedule for the year ended December 31, 1996, filed herewith 27.Q396 Financial Data Schedule for the quarter ended September 27, 1996, filed herewith 27.Q296 Financial Data Schedule for the quarter ended June 28, 1996, filed herewith 27.Q196 Financial Data Schedule for the quarter ended March 29, 1996, filed herewith 27.FY95 Financial Data Schedule for the year ended December 31, 1995, filed herewith (99) Additional Exhibit 99. Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, filed herewith 15 17 (1) Filed as an exhibit to Registration Statement on Form S-1, numbered 33-14319, and incorporated herein by reference. (2) Filed on June 21, 1995, as an exhibit to Registration Statement on Form S-8, numbered 33-60459, and incorporated herein by reference. (3) Filed on August 18, 1992, as an exhibit to Registration Statement on Form S-8, numbered 33-50998, and incorporated herein by reference. (4) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference. (5) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference. (6) Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended July 1, 1994, and incorporated herein by reference. (7) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference. (8) Filed on June 21, 1995, as an exhibit to Registration Statement on Form S-8, numbered 33-60457, and incorporated herein by reference. (9) Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended June 30, 1995, and incorporated herein by reference. (10) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference. (11) Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended June 27, 1996, and incorporated herein by reference. (12) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference. (13) Filed on September 9, 1997 as an exhibit to Registration Statement on Form S-8, numbered 333-35223, and incorporated herein by reference. (14) Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended March 28, 1997, and incorporated herein by reference. Pursuant to paragraph 4(iii) of Item 601(b), Regulation S-K, the registrant has filed as Exhibits only the instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries with respect to which the total amount of securities authorized thereunder exceeds 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees to furnish to the Commission upon its request copies of other instruments defining the rights of holders of long-term debt of the registrant and its subsidiaries, with respect to which the total amount does not exceed 10% of such assets. The registrant also agrees to furnish to the Commission upon its request copies of any omitted schedule or exhibit to any Exhibit filed herewith. 16 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TIMBERLAND COMPANY March 23, 1998 By: /s/ Sidney W. Swartz --------------------------- Sidney W. Swartz, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Chairman of the Board, President and Chief Executive Officer /s/ Sidney W. Swartz (Principal Executive Officer) March 23, 1998 - --------------------------- (Sidney W. Swartz) Executive Vice President, Chief /s/ Jeffrey B. Swartz Operating Officer and Director March 23, 1998 - --------------------------- (Jeffrey B. Swartz) Senior Vice President-Finance and Administration and Chief /s/ Geoffrey J. Hibner Financial Officer March 23, 1998 - --------------------------- (Geoffrey J. Hibner) Vice President-Finance and Corporate Controller /s/ Dennis W. Hagele (Chief Accounting Officer) March 23, 1998 - --------------------------- (Dennis W. Hagele) /s/ Robert M. Agate Director March 23, 1998 - --------------------------- (Robert M. Agate) /s/ John F. Brennan Director March 23, 1998 - --------------------------- (John F. Brennan) /s/ Ian W. Diery Director March 23, 1998 - --------------------------- (Ian W. Diery) /s/ John A. Fitzsimmons Director March 23, 1998 - --------------------------- (John A. Fitzsimmons) /s/ Abraham Zaleznik Director March 23, 1998 - -------------------- (Abraham Zaleznik)
19 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The Timberland Company: We have audited the consolidated financial statements of The Timberland Company and subsidiaries as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 4, 1998; such consolidated financial statements and report are included in your 1997 Annual Report to security holders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of The Timberland Company listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts February 4, 1998 F-1 20 SCHEDULE II THE TIMBERLAND COMPANY VALUATION AND QUALIFYING ACCOUNTS (Dollars In Thousands)
Additions Deductions ----------------------------------- ---------- Balance at Write-Offs, Balance at Beginning Charged to Costs Charged to Net of End of Period and Expenses Other Accounts Recoveries of Period --------- ------------ -------------- ---------- --------- Description - ----------- Allowance for doubtful accounts: Year ended December 31, 1997 $ 3,540 $ 3,605 - $ 3,403 $ 3,742 December 31, 1996 2,658 2,046 - 1,164 3,540 December 31, 1995 2,704 3,697 - 3,743 2,658 Group insurance reserve: Year ended December 31, 1997 $ 1,035 $ 6,803 - $ 6,738 $ 1,100 December 31, 1996 2,774 3,402 - 5,141 1,035 December 31, 1995 1,810 5,467 - 4,503 2,774
F-2 21 Timberland; [GRAPHIC]; Active Comfort Technology; ACT; Aero Balm; B.S.F.P.; Balm Shelter; Black Ridge Mountain; Bootness; Cream Buff; Euro Rec; Euro TecRec; Fastpacker; Grime Squad; Guaranteed Waterproof Construction; Hydro Balm; Jackson Mountain; Lockseam; Mill River; More Quality Than You May Ever Need; Mountain to River; TBL; The Boot Company; This is a trip; This is not baggage; This is your new best friend; Trail Grip; Treeline; Waximum; Weathergear; and Wind, Water, Earth, and Sky are trademarks or registered trademarks of The Timberland Company. (C) The Timberland Company 1998 All Rights Reserved. EX-10.10C 2 AMEND NO.2 TO CREDIT AGREEMENT 1 EXHIBIT 10.10(C) AMENDMENT NO. 2 TO CREDIT AGREEMENT AMENDMENT dated as of November 5, 1997 to the Credit Agreement dated as of June 21, 1996 (as amended by Amendment No. 1 thereto dated as of March 21, 1997, the "CREDIT AGREEMENT") among THE TIMBERLAND COMPANY (the "BORROWER"), the BANKS party thereto (the "BANKS") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "AGENT"). The parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to the Credit Agreement as amended hereby. SECTION 2. Relaxation of Restrictions on Prepayments of Certain Debt. Section 5.15 of the Credit Agreement is amended by replacing the reference to "$55,000,000" that appears in the proviso to subsection (a) thereof with "$75,000,000". SECTION 3. Representations of Borrower. The Borrower represents and warrants that (i) the representations and warranties of the Borrower set forth in Article 4 of the Credit Agreement will be true on and as of the Amendment Effective Date (except in the case of representations and warranties expressly relating to an earlier date, which were true as of such earlier date) and (ii) no Default will have occurred and be continuing on such date. SECTION 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 5. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 6. Effectiveness. This Amendment shall become effective on the date (the "Amendment Effective Date") when the Agent shall have received from each of the Borrower and the Required Banks a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Agent) that such party has signed a counterpart hereof. 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. THE TIMBERLAND COMPANY By: /s/ Carden N. Welsh ----------------------------------- Title: Treasurer BANKS MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Robert L. Barrett ----------------------------------- Title: Vice President ABN AMRO BANK N.V., BOSTON BRANCH By: /s/ Carol A. Levine ----------------------------------- Title: Senior Vice President By: /s/ James E. Davis ----------------------------------- Title: Group Vice President BANKBOSTON, N.A. (formerly known as THE FIRST NATIONAL BANK OF BOSTON), as a Bank and as Issuing Bank By: /s/ Linda H. Thomas ----------------------------------- Title: Managing Director THE NORTHERN TRUST COMPANY By: /s/ Dennis F. Baer ----------------------------------- Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Robert Ivosevich ----------------------------------- Title: Senior Vice President EX-13 3 PORTIONS OF ANNUAL REPORT 1 EXHIBIT 13 FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA SELECTED STATEMENT OF OPERATIONS DATA (Dollars in Thousands, Except Per Share Data)
Years Ended December 31, 1997 1996 1995 1994 1993 - ------------------------ ---- ---- ---- ---- ---- Revenue $796,458 $689,973 $655,138 $638,097 $420,062 Net income (loss) 47,321 20,419 (11,635) 17,710 22,521 Basic earnings (loss) per share 4.20 1.84 (1.06) 1.63 2.08 Diluted earnings (loss) per share 4.03 1.81 (1.06) 1.58 2.01
SELECTED BALANCE SHEET DATA (Dollars in Thousands)
December 31, 1997 1996 1995 1994 1993 - ------------ ---- ---- ---- ---- ---- Cash and equivalents $ 98,771 $ 93,336 $ 38,389 $ 6,381 $ 3,281 Working capital 242,911 269,603 268,115 266,529 155,660 Total assets 420,003 449,586 421,408 473,264 290,611 Notes payable - - - 22,513 10,061 Total long-term debt 100,000 189,454 207,187 214,815 91,491 Stockholders' equity 214,895 165,360 142,221 149,090 128,363
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discusses the Company's results of operations and liquidity and capital resources. The discussion should be read in conjunction with "The Year in Review" and the consolidated financial statements and related notes. RESULTS OF OPERATIONS (Amounts in Thousands, Except Per Share Data)
Years Ended December 31, 1997 1996 1995(1) - ------------------------ ---- ---- ------- Revenue $ 796,458 100.0% $689,973 100.0% $655,138 100.0% Gross profit 311,921 39.2 251,909 36.5 203,397 31.0 Total operating expenses 228,068 28.6 201,020 29.1 210,330 32.1 Operating income (loss) 83,853 10.5 50,889 7.4 (6,933) (1.1) Interest expense 14,833 1.9 20,582 3.0 22,861 3.5 Net income (loss) 47,321 5.9 20,419 3.0 (11,635) (1.8) Basic earnings (loss) per share $ 4.20 $ 1.84 $ (1.06) Average shares outstanding 11,280 11,092 11,000 Diluted earnings (loss) per share $ 4.03 $ 1.81 $ (1.06) Average shares outstanding 11,737 11,255 11,000
(1) Includes a $16.0 million pre-tax restructuring charge in 1995 which reduced earnings and earnings per share by $9.9 million and $.90, respectively, and a $12.1 million non-recurring pre-tax gain in 1995 which increased earnings and earnings per share by $7.5 million and $.68, respectively. THE TIMBERLAND COMPANY 13 2 FINANCIAL REVIEW Revenue increased 15.4% to $796.5 million in 1997 from $690.0 million in 1996 and $655.1 million in 1995. The increases in 1997 and 1996 were the result of unit volume growth in footwear and apparel. Footwear revenue was $593.0 million in 1997, $511.3 million in 1996 and $483.1 million in 1995. This represents an increase of 16.0% in 1997 and an increase of 5.8% in 1996 each compared to the prior year. Revenue attributable to apparel and accessories was $193.8 million in 1997, $172.4 million in 1996 and $162.3 million in 1995. This represents an increase of 12.5% in 1997 and an increase of 6.2% in 1996 each compared to the prior year. Domestic revenue amounted to $578.4 million in 1997, $485.4 million in 1996 and $459.8 million in 1995, or 72.6%, 70.4% and 70.2% of total revenue for each of the three years, respectively. The gross profit margin was 39.2% in 1997, 36.5% in 1996 and 31.0% in 1995. The increase in the margin percent in 1997 from 1996 was due primarily to the introduction of higher margin products and lower unit costs in footwear manufacturing and sourcing. The increase in the gross margin percent in 1996 from 1995 was due primarily to improved manufacturing efficiencies, an expanded and enhanced sourcing effort, improvements in sales returns and allowances and fewer off-price sales. During the second quarter of 1995, the Company closed its manufacturing facilities in Boone, North Carolina and Mountain City, Tennessee, reduced its manufacturing operations in the Dominican Republic and downsized its corporate work force due to a reorganized management structure. These actions resulted in a one-time pre-tax charge of $16.0 million and the elimination of approximately 1,800 positions. Of the total charge for restructuring in 1995, $9.9 million related to anticipated losses associated with the disposal of assets and was a non-cash item; $3.9 million related to payments for contractual lease obligations and anticipated expenditures to close idle facilities; and $2.2 million related to payments for severance and other employee liabilities. The Company has completed the restructuring. Operating expense was $228.1 million or 28.6% of revenue in 1997, $201.0 million or 29.1% of revenue in 1996 and $210.3 million or 32.1% of revenue in 1995. Operating expense increased $27.1 million in 1997 from 1996 principally due to higher sales volume and higher expenditures for marketing and product development. Operating expense in 1996 increased $6.7 million from 1995, excluding the restructuring charge. This increase in operating expense in 1996 was principally a result of increased selling expense attributable to increased sales volume in both footwear and apparel and accessories. Operating income, which is pre-tax earnings before interest and other expense, was $83.9 million in 1997, $50.9 million in 1996 and $9.1 million in 1995 (excluding the restructuring charge). As a percentage of revenue, operating income was 10.5% in 1997, 7.4% in 1996 and 1.4% in 1995 (excluding the restructuring charge). Interest expense was $14.8 million in 1997 compared to $20.6 million in 1996 and $22.9 million in 1995. The decrease in the successive years was due to lower levels of borrowings. In January 1995, the Company appointed Inchcape plc ("Inchcape") as the exclusive distributor of Timberland(R) products throughout most of the Asia/Pacific region. The agreement with Inchcape also included Inchcape's acquisition of the Company's Australian and New Zealand subsidiaries for a total sum of $24.0 million. The agreement, as amended, resulted in a non-recurring pre-tax gain of approximately $12.1 million in 1995. The gain is included in "Other expense (income)" in the Consolidated Statements of Operations. The effective income tax rate was 30.0% in 1997, 34.0% in 1996 and 38.0% in 1995. For an analysis of the changes in the effective tax rate, see the "Income Taxes" note (Note 8) to the Company's consolidated financial statements. The Company believes that inflation has not had a significant impact on the Company's operations over the past three years. LIQUIDITY AND CAPITAL RESOURCES Cash generated by operations amounted to $113.8 million in 1997, $85.7 million in 1996 and $48.1 million in 1995. Higher profitability and lower working capital requirements were primarily responsible for the improvements in operating cash flow in 1997 and 1996. The improvement in inventory levels experienced in 1997 and 1996 was due to strengthening supply chain management, which enhanced reliability and the Company's ability to react faster to market place change. Inventory turns were 2.9 times in 1997 compared to 2.3 times in 1996 and 1.9 times in 1995. Days sales outstanding at December 31, 1997 were 29 days compared to 41 days at 14 THE TIMBERLAND COMPANY 3 December 31, 1996 and 49 days at December 31, 1995. Domestic wholesale days sales outstanding were 36 days, 52 days and 63 days at the end of 1997, 1996 and 1995, respectively. Net cash used by investing activities amounted to $25.2 million in 1997, $25.7 million of which was for capital expenditures. Net cash used by investing activities amounted to $15.4 million in 1996, $15.1 million of which was for capital expenditures. Cash provided by investing activities amounted to $11.7 million in 1995, due primarily to the $24.0 million cash proceeds received from the agreement with Inchcape partially offset by capital expenditures of $13.5 million. A significant portion of capital expenditures during the three years ended December 31, 1997 was for distribution and transportation equipment, manufacturing machinery and equipment, retail store improvements and information systems improvements. During 1997, 1996 and 1995, net cash used in financing activities amounted to $82.7 million, $15.6 million and $28.2 million, respectively. In 1997, $89.5 million was used to repay long-term debt, including prepayments totaling $82.0 million. The 1996 amount reflects the repayment of $17.7 million in long-term debt, including a prepayment of $10.0 million. During 1995, $22.5 million in short-term debt and $8.1 million in long-term debt were repaid. The Company uses funds from operations and unsecured revolving and committed lines of credit as the primary sources of financing for its seasonal and other working capital requirements. On June 21, 1996, the Company entered into a revolving credit agreement to provide for up to $80.0 million in letters of credit under an overall $100.0 million committed facility. The agreement expires on June 21, 1998. The Company's debt to capital ratio was 31.8% at December 31, 1997, 53.4% at December 31, 1996 and 59.3% at December 31, 1995. Management believes that the Company's capital needs for 1998 will be met through its existing credit facilities and cash flow from operations without the need for additional permanent financing. However, the Company's ability to obtain any replacement credit facilities will depend upon prevailing market conditions and the terms and conditions of such replacement facilities. NEW ACCOUNTING PRONOUNCEMENTS A discussion of new accounting pronouncements is included in the "Summary of Significant Accounting Policies" note (Note 1) to the consolidated financial statements. YEAR 2000 The Company utilizes and is dependent upon its financial, operational and planning information systems in all phases of its business functions. Most of these systems were purchased as packaged applications from external vendors. In 1996, the Company made a preliminary assessment of the capabilities of its systems to recognize and process dates properly in the year 2000 and beyond. Based on the findings of this assessment, the Company determined that, while some of its systems are year 2000 compliant, modifications will be required to others. The Company has developed and is implementing a plan to render its enterprise business systems year 2000 compliant by the end of 1998. The Company is also seeking to obtain commitments of year 2000 compliance from external vendors and to develop alternative solutions to minimize the impact on the Company in the event such vendors do not meet their year 2000 commitments. Management believes that the cost of completing this plan will not have a material adverse effect on the Company's current financial position, liquidity or results of operations. THE TIMBERLAND COMPANY 15 4 FORWARD-LOOKING INFORMATION Management is unaware of any trends or conditions that could have a material adverse effect on the Company's consolidated financial position, future results of operations or capital or liquidity needs. However, as discussed in an exhibit to the Company's Form 10-K for the year ended December 31, 1997, entitled "Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995", investors should be aware of factors that could affect the Company's actual results and could cause such results to differ from those contained in forward-looking statements made by or on behalf of the Company. These factors include political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the business in each of the Company's markets; competitive product, advertising, promotional and pricing activity; dependence on the rate of development and degree of acceptance of new product introductions in the marketplace; and the difficulty of forecasting sales at certain times in certain markets. QUARTERLY MARKET INFORMATION AND RELATED MATTERS The Company's Class A Common Stock is traded on the New York Stock Exchange under the symbol TBL. There is no market for shares of the Company's Class B Common Stock; however, shares of Class B Common Stock may be converted into shares of Class A Common Stock on a one-for-one basis and will automatically be converted upon any transfer (except for estate planning transfers and any transfer approved by the Board of Directors). The following table presents the high and low closing sales prices of the Company's Class A Common Stock for the past two years as reported by the New York Stock Exchange.
1997 1996 ---- ---- HIGH LOW High Low ---- --- ---- --- First Quarter $47 $37 3/4 $22 $18 1/4 Second Quarter 67 1/8 43 1/8 24 3/4 21 1/8 Third Quarter 79 61 23 17 Fourth Quarter 82 7/8 51 3/4 40 1/8 20 1/2
As of March 3, 1998, the number of record holders of the Company's Class A Common Stock was approximately 700 and the number of record holders of the Company's Class B Common Stock was 8. The closing sales price of the Company's Class A Common Stock on March 3, 1998 was $73 7/8 per share. No cash dividends have ever been declared on either the Company's Class A or Class B Common Stock and none are contemplated in the foreseeable future. In addition, the Company's ability to pay cash dividends is limited pursuant to various loan agreements (See notes to the consolidated financial statements). FINANCIAL REVIEW 16 THE TIMBERLAND COMPANY 5 CONSOLIDATED BALANCE SHEETS As of December 31, 1997 and 1996
(Dollars in Thousands, Except Per Share Data) 1997 1996 ASSETS Current assets Cash and equivalents $ 98,771 $ 93,336 Accounts receivable, net of allowance for doubtful accounts of $3,742 in 1997 and $3,540 in 1996 75,793 100,556 Inventory 142,613 159,058 Prepaid expense 12,856 9,351 Deferred income taxes 11,973 9,167 -------- -------- Total current assets 342,006 371,468 -------- -------- Property, plant and equipment 116,503 103,650 Less accumulated depreciation and amortization (63,593) (54,666) -------- -------- Net property, plant and equipment 52,910 48,984 -------- -------- Excess of cost over fair value of net assets acquired, net 20,902 22,587 Other assets, net 4,185 6,547 -------- -------- Total assets $420,003 $449,586 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ -- $ 17,778 Accounts payable 20,390 21,348 Accrued expense Payroll and related 28,233 15,173 Interest and other 32,786 35,753 Income taxes payable 17,686 11,813 -------- -------- Total current liabilities 99,095 101,865 -------- -------- Long-term debt, less current maturities 100,000 171,676 Deferred income taxes 6,013 10,685 Stockholders' equity Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued -- -- Class A Common Stock, $.01 par value (1 vote per share); 30,000,000 shares authorized; 8,765,013 shares issued at December 31, 1997 and 8,430,998 shares at December 31, 1996 88 84 Class B Common Stock, $.01 par value (10 votes per share); convertible into Class A shares on a one-for-one basis; 15,000,000 shares authorized; 2,605,432 shares issued at December 31, 1997 and 2,734,301 shares at December 31, 1996 26 27 Additional paid-in capital 68,568 61,806 Retained earnings 147,921 100,600 Cumulative translation adjustment (1,595) 2,963 Less treasury stock at cost; 17,369 shares at December 31, 1997 and 18,369 shares at December 31, 1996 (113) (120) -------- -------- Total stockholders' equity 214,895 165,360 -------- -------- Total liabilities and stockholders' equity $420,003 $449,586 -------- --------
The accompanying notes are an integral part of these consolidated financial statements. THE TIMBERLAND COMPANY 17 6 CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1997, 1996 and 1995
(Amounts in Thousands, Except Per Share Data) 1997 1996 1995 Revenue $ 796,458 $ 689,973 $ 655,138 Cost of goods sold 484,537 438,064 451,741 --------- --------- --------- Gross profit 311,921 251,909 203,397 --------- --------- --------- Operating expense Selling 174,729 152,834 145,924 General and administrative 51,654 46,502 46,721 Amortization of goodwill 1,685 1,684 1,685 Restructuring charge - - 16,000 --------- --------- --------- Total operating expense 228,068 201,020 210,330 --------- --------- --------- Operating income (loss) 83,853 50,889 (6,933) --------- --------- --------- Other expense (income) Interest expense 14,833 20,582 22,861 Other, net 1,419 (631) (11,028) --------- --------- --------- Total other expense 16,252 19,951 11,833 --------- --------- --------- Income (loss) before income taxes 67,601 30,938 (18,766) Provision (benefit) for income taxes 20,280 10,519 (7,131) --------- --------- --------- Net income (loss) $ 47,321 $ 20,419 $ (11,635) --------- --------- --------- Basic earnings (loss) per share $ 4.20 $ 1.84 $ (1.06) --------- --------- --------- Average shares outstanding 11,280 11,092 11,000 --------- --------- --------- Diluted earnings (loss) per share $ 4.03 $ 1.81 (1.06) --------- --------- --------- Average shares outstanding 11,737 11,255 11,000 --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. FINANCIAL REVIEW 18 THE TIMBERLAND COMPANY 7 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, 1997, 1996 and 1995
Class A Class B Additional Cumulative Consolidated Common Common Paid-in Retained Translation Treasury Stockholders' (Dollars in Thousands) Stock Stock Capital Earnings Adjustment Stock Equity - ---------------------- ----- ----- ------- -------- ---------- ----- ------ Balance, January 1, 1995 $82 $ 27 $57,756 $ 91,816 $ (471) $(120) $ 149,090 --- ---- ------- --------- ------- ----- --------- Issuance of shares under employee stock option and stock purchase plans and other transactions 1 -- 1,534 -- -- -- 1,535 Tax benefit from stock option plans -- -- 426 -- -- -- 426 Net loss -- -- -- (11,635) -- -- (11,635) Translation adjustment -- -- -- -- 2,805 -- 2,805 --- ---- ------- --------- ------- ----- --------- Balance, December 31, 1995 83 27 59,716 80,181 2,334 (120) 142,221 --- ---- ------- --------- ------- ----- --------- Issuance of shares under employee stock option and stock purchase plans and other transactions 1 -- 1,587 -- -- -- 1,588 Tax benefit from stock option plans -- -- 503 -- -- -- 503 Net income -- -- -- 20,419 -- -- 20,419 Translation adjustment -- -- -- -- 629 -- 629 --- ---- ------- --------- ------- ----- --------- Balance, December 31, 1996 84 27 61,806 100,600 2,963 (120) 165,360 --- ---- ------- --------- ------- ----- --------- Issuance of shares under employee stock option and stock purchase plans and other transactions 4 (1) 4,362 -- -- 7 4,372 Tax benefit from stock option plans -- -- 2,400 -- -- -- 2,400 Net income -- -- -- 47,321 -- -- 47,321 Translation adjustment -- -- -- -- (4,558) -- (4,558) --- ---- ------- --------- ------- ----- --------- BALANCE, DECEMBER 31, 1997 $88 $ 26 $68,568 $ 147,921 $(1,595) $(113) $ 214,895 --- ---- ------- --------- ------- ----- ---------
The accompanying notes are an integral part of these consolidated financial statements. THE TIMBERLAND COMPANY 19 8 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in Thousands) 1997 1996 1995 Cash flows from operating activities: Net income (loss) $ 47,321 $ 20,419 $(11,635) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred income taxes (7,478) 905 (2,560) Depreciation and amortization 20,292 21,370 19,138 Loss on disposal of property, plant and equipment 1,564 -- -- Gain on distributorship transaction -- -- (12,107) Restructuring charge -- -- 9,914 Increase (decrease) in cash from changes in working capital items, net of effects of distributorship transaction: Accounts receivable 24,799 (5,541) 29,186 Inventory 14,270 22,475 31,834 Prepaid expense (3,707) 3,747 884 Accounts payable (454) (4,000) (11,967) Accrued expense 11,165 14,692 4,427 Income taxes 6,001 11,608 (8,999) --------- -------- -------- Net cash provided by operating activities 113,773 85,675 48,115 --------- -------- -------- Cash flows from investing activities: Proceeds from distributorship transaction -- -- 24,000 Proceeds from sale of property, plant and equipment 3,772 1,268 1,756 Additions to property, plant and equipment (25,704) (15,090) (13,508) Other, net (3,250) (1,605) (567) --------- -------- -------- Net cash provided (used) by investing activities (25,182) (15,427) 11,681 --------- -------- -------- Cash flows from financing activities: Net payments under short-term credit facilities -- -- (22,513) Proceeds from long-term obligations -- -- 525 Payments on long-term debt and capital lease obligations (89,454) (17,733) (8,137) Issuance of common stock 4,372 1,588 1,535 Tax benefit from stock option plans 2,400 503 426 --------- -------- -------- Net cash used by financing activities (82,682) (15,642) (28,164) --------- -------- -------- Effect of exchange rate changes on cash (474) 341 376 --------- -------- -------- Net increase in cash and equivalents 5,435 54,947 32,008 Cash and equivalents at beginning of year 93,336 38,389 6,381 --------- -------- -------- Cash and equivalents at end of year $ 98,771 $ 93,336 $ 38,389 --------- -------- -------- Supplemental disclosures of cash flow information: Interest paid $ 15,650 $ 18,916 $ 22,194 Income taxes paid (refunded) 21,885 (2,671) 4,428
The accompanying notes are an integral part of these consolidated financial statements. FINANCIAL REVIEW 20 THE TIMBERLAND COMPANY 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of The Timberland Company and its subsidiaries (the "Company"). All material intercompany transactions have been eliminated in consolidation. RECOGNITION OF REVENUE Revenue consists of sales to customers, license fees and royalties. Sales are recognized upon shipment of product to customers. License fees and royalties are recognized when earned. TRANSLATION OF FOREIGN CURRENCIES The Company translates financial statements denominated in foreign currency by translating balance sheet accounts at the end of period exchange rate and statement of operations accounts at the average exchange rate for the period. Translation gains and losses are recorded in stockholders' equity and transaction gains and losses are reflected in income. DERIVATIVES The Company is exposed to foreign exchange risk when the Company sells goods in local currencies through its foreign subsidiaries. It is the Company's policy to hedge a portion of this risk through forward sales of foreign currencies, thereby locking in the future exchange rates. Gains and losses on the underlying contracts are accounted for using hedge accounting. Accordingly, the change in the fair value of the contracts that hedge firm commitments is deferred and recognized as part of the related foreign currency transaction upon occurrence. CASH AND EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments which have original maturities to the Company of three months or less. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets or over the terms of the related leases, if such periods are shorter. The principal estimated useful lives are: building and improvements, 4 to 30 years; machinery and equipment, 3 to 12 years; lasts, patterns and dies, 5 years. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED The excess of cost over the fair value of net assets acquired is being amortized on a straight-line basis over periods of 10, 15 and 40 years. Accumulated amortization amounted to $10,872 and $9,187 at December 31, 1997 and 1996, respectively. ACCRUED INSURANCE COSTS The Company is self-insured for workers' compensation, healthcare, dental and short-term disability up to certain specified limits. Expenses associated with such self-insurance programs are accrued based upon estimates of the amounts required to cover incurred incidents. INCOME TAXES Income taxes are determined based on the income reported in the Company's financial statements, regardless of when such taxes are payable. In addition, tax assets and liabilities are adjusted to reflect changes in U.S. and applicable foreign income tax laws when enacted. Future tax benefits, such as net operating loss carry forwards, are recognized to the extent realization of such benefits is more likely to occur than not. THE TIMBERLAND COMPANY 21 10 ACCOUNTING FOR ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make assumptions that affect the estimates reported in these consolidated financial statements. Actual results may differ from these estimates. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which became effective for the Company in the fourth quarter of 1997. Previously reported earnings per share ("EPS") have been restated to conform with SFAS No. 128. Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the periods presented. Diluted EPS reflects the potential dilution that would occur if securities such as stock options were exercised. Dilutive securities (Note 14) included in the calculation of diluted weighted average shares were 457,050 in 1997 and 162,477 in 1996. Dilutive securities were not included in 1995 due to their anti-dilutive effect. LONG-LIVED ASSETS The Company continually evaluates the carrying values and estimated useful lives of its long-lived assets, primarily property, plant and equipment and intangible assets. When factors indicate that such assets should be evaluated for possible impairment, the Company uses estimates of future operating results and cash flows to determine whether the assets are economically recoverable. STOCK-BASED COMPENSATION The Company accounts for stock options using the method prescribed by Accounting Principles Board Opinion No. 25 and related interpretations. NEW ACCOUNTING PRONOUNCEMENTS During 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". These statements may require additional disclosures in future financial statements. The Company will adopt these statements in 1998. 2. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The following table illustrates the U.S. dollar equivalent, including offsetting positions, of foreign exchange contracts at December 31, 1997 and 1996, along with maturity dates, net unrealized gain (loss) and net unrealized gain (loss) deferred.
Contract Unrealized Unrealized Net Net Unrealized Amount Maturity Gross Gross Unrealized Gain (Loss) (U.S. $ Equivalent) Date Gain (Loss) Gain (Loss) Deferred December 31, 1997 Pounds Sterling $ 2,527 1998 $ 1 $ (197) $(196) $ (122) Deutsche Marks 4,285 1998 254 (15) 239 254 French Francs 3,039 1998 253 (48) 205 253 Italian Lire 10,814 1998 322 -- 322 278 ------- ---- ------ -------- ------ ------ Total $20,665 $ 830 $ (260) $ 570 $ 663 ------- ---- ------ -------- ------ ------ December 31, 1996 Pounds Sterling $ 8,104 1997 $ 71 $ (872) $ (801) $ (534) Deutsche Marks 4,836 1997 209 -- 209 168 French Francs 2,379 1997 202 -- 202 174 Italian Lire 19,153 1997 18 (292) (274) (147) Spanish Pesetas 1,928 1997 -- (15) (15) -- ------- ---- ------ -------- ------ ------ Total $36,400 $500 $ (1,179) $ (679) $ (339) ------- ---- ------ -------- ------ ------
22 THE TIMBERLAND COMPANY 11 The unrealized net gain (loss) deferred on such contracts as of December 31, 1997 and 1996 was $663 and $(339), respectively. Unrealized gains or losses are determined based on the difference between the settlement and the year-end rates. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions, thereby minimizing exposure to concentrations of credit risk. Credit risk with respect to trade receivables is limited, due to the large number of customers included in the Company's customer base. The Company had an allowance for uncollectible accounts receivable of $3,742 and $3,540 at December 31, 1997 and 1996, respectively. 3. RESTRUCTURING CHARGE During the second quarter of 1995, the Company closed its manufacturing facilities in Boone, North Carolina and Mountain City, Tennessee, reduced its manufacturing operations in the Dominican Republic and downsized its corporate office workforce due to a reorganized management structure. These actions resulted in a one-time pre-tax charge of $16,000. Of the total charge for restructuring, $9,914 related to anticipated losses associated with the disposal of assets and was a non-cash item; $3,891 related to payments for contractual lease obligations and expenditures to close idle facilities; and $2,195 related to payments for severance and other employee liabilities. The Company has completed the restructuring. 4. OTHER INCOME On January 26, 1995, the Company appointed Inchcape plc ("Inchcape") as the exclusive distributor of Timberland(R) products throughout most of the Asia/Pacific region. The agreement with Inchcape included Inchcape's acquisition of the Company's Australian and New Zealand subsidiaries and future consideration provided to Inchcape for the total sum of $24,000. The agreement, as amended, resulted in a pre-tax gain of approximately $12,107. 5. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
December 31, 1997 1996 ---- ---- CARRYING OR Carrying or CONTRACT AMOUNT FAIR VALUE Contract Amount Fair Value Cash and equivalents(1) $ 98,771 $ 98,771 $ 93,336 $ 93,336 Long-term debt(2) 100,000 108,610 189,454 199,011 Foreign currency contracts(3) 20,665 20,095 36,400 37,079
1 The carrying amounts of cash and equivalents approximate their fair values. 2 The fair value of the Company's long-term debt is estimated based on current rates available to the Company as of December 31, 1997 and 1996 for debt of the same remaining maturities. 3 The fair value of foreign currency contracts is estimated by obtaining the appropriate year-end rates as of December 31, 1997 and 1996, respectively. THE TIMBERLAND COMPANY 23 12 6. INVENTORY Inventory consists of the following:
December 31, 1997 1996 ---- ---- Raw materials $ 8,010 $ 9,770 Work-in-process 4,103 3,979 Finished goods 130,500 145,309 -------- -------- Total $142,613 $159,058 -------- --------
7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
December 31, 1997 1996 ---- ---- Land and improvements $ 501 $ 1,149 Building and improvements 29,089 34,263 Machinery and equipment 76,655 59,000 Lasts, patterns and dies 10,258 9,238 -------- -------- Total $116,503 $103,650 -------- --------
8. INCOME TAXES The components of the provision (benefit) for income taxes are as follows:
Years Ended December 31, 1997 1996 1995 ---- ---- ---- CURRENT DEFERRED Current Deferred Current Deferred Federal $21,368 $(5,956) $5,357 $637 $(5,255) $(3,920) State 3,958 (2,078) 1,411 36 (228) 1,046 Puerto Rico 828 556 468 232 195 314 Foreign 1,604 -- 2,378 -- 717 -- ------- ------- ------ ---- ------- ------- Total $27,758 $(7,478) $9,614 $905 $(4,571) $(2,560) ------- ------- ------ ---- ------- -------
The provision (benefit) for income taxes differs from the amount computed using the statutory federal income tax rate of 35% due to the following:
Years Ended December 31, 1997 1996 1995 ---- ---- ---- Federal income tax at statutory rate $23,660 35.0% $10,828 35.0% $(6,568) (35.0)% Federal tax exempt operations in Puerto Rico (5,261) (7.8) (2,973) (9.6) (1,242) (6.6) State taxes, net of applicable federal benefit 2,294 3.4 1,232 4.0 (207) (1.1) Other, net (413) (0.6) 1,432 4.6 886 4.7 ------- ---- ------- ---- ------- ----- Total $20,280 30.0% $10,519 34.0% $(7,131) (38.0)% ------- ---- ------- ---- ------- -----
FINANCIAL REVIEW 24 THE TIMBERLAND COMPANY 13 The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 1997 and 1996 consist of the following:
1997 1996 ---- ---- ASSETS LIABILITIES Assets Liabilities Current: Inventory $ 5,111 $ -- $ 2,812 $ -- Receivable allowances 5,069 -- 3,505 -- Intercompany profit elimination 163 -- 713 -- Other 1,630 -- 2,137 -- -------- -------- ------- -------- Total $ 11,973 $ -- $ 9,167 $ -- -------- -------- ------- -------- Non-current: Accelerated depreciation and amortization $ 3,853 $ -- $ -- $ (187) Puerto Rico tollgate taxes -- (2,453) -- (1,897) Undistributed foreign earnings -- (8,308) -- (8,601) Other 895 -- -- -- Net operating loss carryforwards 1,095 -- 1,066 -- Less-valuation allowance (1,095) -- (1,066) -- -------- -------- ------- -------- Total $ 4,748 $(10,761) $ -- $(10,685) -------- -------- ------- --------
The valuation allowance at December 31, 1997 of $1,095 includes $357 which arose during 1997. The valuation allowance relates to foreign net operating loss carryforwards that may not be realized. The Company's consolidated income (loss) before taxes included earnings from its subsidiary in Puerto Rico, which are substantially exempt from Puerto Rico and federal income taxes under an exemption which expires in 2002. However, if the earnings were remitted to the Company, they would be subject to a Puerto Rico tollgate tax not to exceed 10%. Deferred tollgate taxes have been provided on all of the accumulated earnings of the subsidiary in Puerto Rico. Deferred income taxes are also provided on the undistributed earnings of the Company's foreign subsidiaries. Losses before income taxes from foreign operations were $(1,190), $(100) and $(3,063) for the years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, the Company had $3,649 of foreign operating loss carryforwards available to offset future foreign taxable income. Of these operating loss carry-forwards, $642 will expire in 1998, $548 in 1999, $458 in 2000, $82 in 2001 and $1,919 thereafter. 9. NOTES PAYABLE On June 21, 1996, the Company entered into an unsecured committed revolving credit agreement (the "Credit Agreement") with a group of banks. The Credit Agreement provides for up to $80,000 in letters of credit under an overall $100,000 committed facility expiring on June 21, 1998. Under the terms of the Credit Agreement, the Company may borrow at interest rates based upon the lenders' cost of funds plus an applicable spread (6.45% at December 31, 1997). Further, the Credit Agreement provides for a facility fee of 3/8% per annum on the full commitment, places limitations on the payment of dividends and the incurrence of additional debt, and contains certain other financial and operating covenants. Additionally, the Company had uncommitted lines of credit available from certain banks totaling $16,000 at December 31, 1997. There were no outstanding balances at year end. Borrowings under these lines are at prevailing money market rates (6.15% at December 31, 1997). These arrangements may be terminated at any time at the option of the banks or the Company. There were no outstanding balances under short-term borrowing arrangements at December 31, 1997 or 1996 or at any month end during 1997 and 1996. THE TIMBERLAND COMPANY 25 14 10. LONG-TERM DEBT Long-term debt consists of the following at December 31, 1997 and 1996:
Interest Year of Rate Maturity 1997 1996 ---- -------- ---- ---- Senior Notes 8.94% 2001 $100,000 $106,000 Senior Notes 7.16 2000 - 55,000 Senior Notes 9.70 1997 - 1999 - 21,000 Industrial revenue bonds 6.20 2014 - 5,345 Other 6.00 1999 - 2,109 ---- ---- -------- -------- 100,000 189,454 Less-current maturities - (17,778) ---- ---- -------- -------- Total $100,000 $171,676 ---- ---- -------- --------
In both November 1996 and February 1997, the Company prepaid $10,000 of the unsecured notes maturing in the year 2000. The prepayment in February 1997 was classified in current maturities as of December 31, 1996. In addition to the $10,000 prepayment in February 1997, the remaining $45,000 of these notes was prepaid during 1997 -- $15,000 in April, $10,000 in June and $20,000 in November. In December 1997, a prepayment of $6,000 of the notes maturing in 2001 and $14,000 of the 9.70% notes maturing in 1998 and 1999 was made. This was in addition to the scheduled December payment of $7,000 of the 9.70% notes. In April 1997, the Company prepaid the Industrial Revenue Bond and in October 1997 prepaid the remainder of the other 6.00% debt outstanding. The 8.94% notes place limitations on the payment of dividends and the incurrence of additional debt, and also require maintenance of certain operational and financial covenants. These notes mature on December 15, 2001. 11. LEASE COMMITMENTS The Company leases its corporate headquarters facility, manufacturing facilities, retail stores, showrooms and certain equipment under noncancellable operating leases expiring at various dates through the year 2014. The approximate minimum rental commitments under all noncancellable leases as of December 31, 1997 are as follows: 1998 $16,151 1999 14,556 2000 13,134 2001 11,732 2002 9,944 Thereafter 28,989 ------- Total $94,506 -------
Most of the leases for retail space provide for renewal options, contain normal escalation clauses and require the Company to pay real estate taxes, maintenance and other expenses. The aggregate base rent obligation for a lease is expensed on a straight-line basis over the term of the lease. Rental expense for all operating leases was $18,487, $17,189 and $16,196 for the years ended December 31, 1997, 1996 and 1995, respectively. FINANCIAL REVIEW 26 THE TIMBERLAND COMPANY 15 12. INDUSTRY SEGMENT AND GEOGRAPHICAL AREA INFORMATION The Company operates in a single industry segment which includes the designing, engineering, marketing and distribution of footwear, apparel and accessories products for men, women and children. These products are sold worldwide, primarily through independent retailers, better-grade department stores and athletic stores. Timberland(R) products are also sold through Timberland(R) specialty stores and factory outlet stores devoted exclusively to Timberland products. The following summarizes the Company's operations in different geographical areas for the years ended December 31, 1997, 1996 and 1995, respectively.
Adjustments United Other and 1997 States Europe Foreign Eliminations Consolidated ------ ------ ------- ------------ ------------ Revenue from unaffiliated customers $610,105 $186,353 $ -- $ -- $ 796,458 Transfers between geographic areas 6,896 -- 19,417 (26,313) -- --------- -------- -------- ----------- --------- Geographic revenue 617,001 186,353 19,417 (26,313) 796,458 Operating income (loss) 73,724 10,488 (2,718) 2,359 83,853 Identifiable assets at December 31, 1997 374,909 141,620 11,344 (107,870) 420,003 --------- -------- -------- ----------- --------- 1996 Revenue from unaffiliated customers $ 517,781 $172,192 $ -- $ -- $ 689,973 Transfers between geographic areas 65,850 -- 19,588 (85,438) -- --------- -------- -------- ----------- --------- Geographic revenue 583,631 172,192 19,588 (85,438) 689,973 Operating income (loss) 43,375 8,311 (1,665) 868 50,889 Identifiable assets at December 31, 1996 383,512 144,509 11,935 (90,370) 449,586 --------- -------- -------- ----------- --------- 1995 Revenue from unaffiliated customers $ 498,144 $156,098 $ 896 $ -- $ 655,138 Transfers between geographic areas 56,149 -- 25,865 (82,014) -- --------- -------- -------- ----------- --------- Geographic revenue 554,293 156,098 26,761 (82,014) 655,138 Operating income (loss) (16,207) 6,314 220 2,740 (6,933) Identifiable assets at December 31, 1995 397,643 91,822 7,095 (75,152) 421,408 --------- -------- -------- ----------- ---------
Export sales from the United States to unaffiliated customers, principally distributors, amounted to 4.3% in 1997, 5.0% in 1996 and 6.1% in 1995 of consolidated revenue. THE TIMBERLAND COMPANY 27 16 13. STOCKHOLDERS' EQUITY The Company's Class A Common Stock and Class B Common Stock are identical in all respects, except that shares of Class A Common Stock carry one vote per share while the shares of Class B Common Stock carry ten votes per share. In addition, holders of Class A Common Stock have the right, voting separately as a class, to elect 25% of the directors of the Company, and to vote together with the holders of Class B Common Stock for the remaining directors. On February 14, 1997, 469 shares of Class B Common Stock were converted to Class A Common Stock and on July 24, 1997, 128,400 shares of Class B Common Stock were converted to Class A Common Stock. 14. STOCK AND EMPLOYEE BENEFIT PLANS On May 16, 1997, the 1997 Incentive Plan (the "1997 Plan") was approved by the Company's stockholders. Under the 1997 Plan, 1,000,000 shares of Class A Common Stock have been reserved for issuance. In addition to stock options, any of the following incentives may be awarded to participants under the 1997 Plan: stock appreciation rights ("SARs"), restricted stock, unrestricted stock, awards entitling the recipient to delivery in the future of Class A Common Stock or other securities, securities which are convertible into or exchangeable for shares of Class A Common Stock and cash bonuses. The 1997 Plan replaced the Company's 1987 Stock Option Plan (the "1987 Plan"), under which 2,100,000 shares of Class A Common Stock had been authorized for issuance. On February 4, 1997, the Company's ability to grant stock options under the 1987 Plan expired, leaving 1,052,400 authorized shares unissued thereunder. On February 27, 1997, the Company granted stock options to purchase an aggregate of 134,750 shares of Class A Common Stock under the 1997 Stock Option Plan for Non-Executive Employees (collectively with the 1997 Incentive Plan, the "1997 Plans"). The option price per share and vesting periods of stock options are determined by the Compensation Committee of the Board of Directors. All awards granted under the 1987 and 1997 Plans have been at fair market value. All stock options which have been granted under the 1987 and 1997 Plans and are currently outstanding become exercisable in equal installments over four years beginning one year after the grant date and expire ten years after the date of grant. In addition to the 1987 and 1997 Plans, the Company has, on occasion, granted "non-qualified" stock options at fair market value to non-employees to purchase Class A Common Stock. On December 19, 1995, the Board of Directors approved a plan to reprice outstanding options which had been granted under the 1987 Plan. Under the repricing plan, employees could have elected to exchange some or all of their stock options issued under the 1987 Plan for new stock options repriced at an exercise price of $20.50, the fair market value on December 19, 1995, covering a reduced number of shares based on a formula. Repriced stock options expire on the same date as the original stock options and have an extended vesting period of one year. Stock options to purchase up to 609,050 shares (when originally granted) at per share exercise prices ranging from $21.38 to $83.25 were repriced, resulting in stock options to purchase up to 322,120 shares being granted. Under its 1991 Stock Option Plan for Non-Employee Directors (the "1991 Plan"), the Company has reserved 100,000 shares of Class A Common Stock for the granting of stock options to eligible non-employee directors of the Company. Under the terms of the 1991 Plan, stock option grants are awarded on a predetermined formula basis, and no grant can be made after November 15, 2001. The exercise price of options granted under the 1991 Plan is the fair market value of the stock on the date of grant. Stock options granted under the 1991 Plan become exercisable in equal installments over four years beginning one year after the grant date and expire ten years after the grant date. Options to purchase an aggregate of 283,072, 297,202 and 379,881 shares were exercisable under all option arrangements at December 31, 1997, 1996 and 1995, respectively. Under the existing stock option plans, there were 927,314 and 1,112,283 shares available for future grants at December 31, 1997 and 1996, respectively. 28 THE TIMBERLAND COMPANY 17 The following summarizes transactions under all stock option arrangements for the years ended December 31, 1997, 1996 and 1995:
Number Range of Weighted-Average of Shares Exercise Prices Exercise Price --------- --------------- -------------- January 1, 1995 1,260,639 $ 6.38 - 83.25 $34.17 --------- -------------- ------ Granted 531,105 19.50 - 31.13 22.37 Exercised (59,784) 6.38 - 26.00 13.85 Canceled (830,524) 8.75 - 83.25 41.41 --------- -------------- ------ December 31, 1995 901,436 6.38 - 83.25 21.86 --------- -------------- ------ Granted 194,900 17.38 - 39.00 22.43 Exercised (89,557) 6.38 - 26.00 11.39 Canceled (254,152) 6.38 - 83.25 30.76 --------- -------------- ------ December 31, 1996 752,627 6.38 - 83.25 20.25 --------- -------------- ------ Granted 314,500 40.63 - 77.63 50.26 Exercised (190,130) 6.38 - 40.63 19.39 Canceled (68,312) 15.00 - 50.13 30.92 --------- -------------- ------ DECEMBER 31, 1997 808,685 6.38 - 83.25 31.24 --------- -------------- ------
The following summarizes information about all stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ------------------- ------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price $ 6.38 - 17.38 119,382 5.52 years $13.30 84,491 $11.61 17.50 - 19.50 35,352 8.02 17.77 11,172 18.23 20.50 204,993 6.50 20.50 99,005 20.50 21.00 - 21.38 90,626 7.50 21.21 46,562 21.31 21.75 - 39.00 72,082 7.17 30.14 39,092 29.42 40.63 104,750 9.16 40.63 -- -- 50.13 119,500 9.37 50.13 -- -- 50.38 - 76.50 38,750 9.65 69.41 500 56.00 77.63 21,000 9.85 77.63 -- -- 83.25 2,250 5.86 83.25 2,250 83.25 ------- ---- ----- ------- ----- 6.38 - 83.25 808,685 7.60 31.24 283,072 19.68 ------- ---- ----- ------- -----
THE TIMBERLAND COMPANY 29 18 Pursuant to the terms of its 1991 Employee Stock Purchase Plan, as amended on May 18, 1995 (the "ESPP Plan"), the Company is authorized to issue up to an aggregate of 200,000 shares of its Class A Common Stock to eligible employees electing to participate in the ESPP Plan. Eligible employees may contribute, through payroll withholdings, from 2% to 10% of their regular base compensation during six month participation periods beginning January 1 and July 1 of each year. At the end of each participation period, the accumulated deductions are applied toward the purchase of Class A Common Stock at a price equal to 85% of the market price at the beginning or end of the participation period, whichever is lower. Employee purchases amounted to 15,016 shares in 1997, 23,807 shares in 1996 and 33,030 shares in 1995 at prices ranging from $17.11 to $49.35. At December 31, 1997, a total of 46,630 shares were available for future purchases. Compensation cost is recognized for the fair value of the employee's purchase rights. The weighted-average fair value of those purchase rights granted in 1997, 1996 and 1995 were $12.87, $6.08 and $5.96, respectively. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock plans and provides certain pro-forma disclosures regarding the Company plans as required by SFAS No. 123 "Accounting for Stock Based Compensation". Accordingly, no compensation cost has been recognized for stock option grants issued under any of the Company's stock option plans. Had compensation cost for stock option grants issued been determined under the provisions of SFAS No. 123, the Company's net income (loss) and diluted earnings (loss) per share in 1997, 1996 and 1995 would have been, respectively: $45,078 and $3.84, $19,378 and $1.72 and $(12,498) and $(1.14). The pro forma effect on net income (loss) and earnings (loss) per share for 1997, 1996 and 1995 is not representative of the pro forma effect on net income in future years, because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. The fair value of each stock option granted in 1997, 1996 and 1995 under the Company's plans was estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used to value grants issued under the plans in 1997, 1996 and 1995, respectively: expected volatility of 43.9%, 55.9% and 52.6%; risk-free interest rates of 6.2%, 6.1% and 5.9%; expected lives of 4.9, 4.4 and 3.3 years; no dividend payments. The weighted-average fair values per share of stock options granted during 1997, 1996 and 1995 was $22.46, $11.04 and $8.13, respectively. The Company maintains a contributory 401(k) Retirement Earnings Plan (the "401(k) Plan") for eligible salaried and hourly employees who are at least 18 years of age with six or more months of service. Under the provisions of the 401(k) Plan, employees may contribute between 2% and 16% of their base salary up to certain limits. The 401(k) Plan provides for Company matching contributions not to exceed 3% of the employee's compensation (the increase from 2% to 3% was implemented in the fourth quarter of 1997) or, if less, 50% of the employee's contribution. Vesting of the Company contribution begins at 25% after one year of service and increases by 25% each year until full vesting occurs. The Company's contribution expense was $692 in 1997, $542 in 1996 and $499 in 1995. The Company maintains two contributory 165(e) Retirement Earnings Plans (the "165(e) Plans") for eligible salaried and hourly employees of its manufacturing facilities and a non-contributory profit sharing plan for eligible hourly employees not covered by the 401(k) or 165(e) Plans. The Company's contribution expense was $81 in 1997, $285 in 1996 and $178 in 1995. 30 THE TIMBERLAND COMPANY 19 15. LITIGATION The Company is involved in various litigation and legal matters which have arisen in the ordinary course of business. Management believes that the ultimate resolution of any existing matter will not have a material adverse effect on the Company's consolidated financial statements. The Company and two of its officers and directors were named as defendants in two actions filed in the United States District Court for the District of New Hampshire, one filed by Jerrold Schaffer on December 12, 1994 and the other filed by Gershon Kreuser on January 4, 1995. On April 24, 1995, the District Court granted plaintiffs' motion, assented to by defendants, to consolidate the two actions. On June 23, 1995, plaintiffs filed a consolidated amended complaint (the "Amended Complaint") with the District Court. The Amended Complaint alleged that defendants violated federal securities laws by making material misstatements and omissions in certain of the Company's public filings and statements in 1994. On July 9, 1997, the parties filed a Stipulation and Agreement of Compromise, Settlement and Release (the "Stipulation") with the District Court for approval. On July 31, 1997, the District Court entered an order preliminarily approving the Stipulation. On December 29, 1997, the District Court entered an order granting final approval of the Stipulation. Under the terms of the Stipulation, the settlement of this litigation was final and effective on January 29, 1998. The settlement of this litigation did not have a material adverse effect on the Company's financial position, results of operations or cash flows. THE TIMBERLAND COMPANY 31 20 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the quarterly results of operations for the years ended December 31, 1997, 1996 and 1995, respectively.
1997 QUARTER ENDED MARCH 28 JUNE 27 SEPTEMBER 26 DECEMBER 31 - ------------------ -------- ------- ------------ ----------- Revenue $150,684 $132,180 $274,699 $238,895 Gross profit 61,614 51,855 106,641 91,811 Net income 4,296 557 24,957 17,511 Basic earnings per share .38 .05 2.20 1.54 Diluted earnings per share .37 .05 2.11 1.48
1996 Quarter Ended March 29 June 28 September 27 December 31 - ------------------ -------- ------- ------------ ----------- Revenue $ 127,684 $ 113,648 $ 227,547 $ 221,094 Gross profit 46,025 40,081 83,301 82,502 Net income (loss) (975) (6,880) 16,901 11,373 Basic earnings (loss) per share (.09) (.62) 1.52 1.02 Diluted earnings (loss) per share (.09) (.62) 1.51 .99
1995 Quarter Ended March 31(1) June 30(2) September 29(1) December 31 - ------------------ ----------- ---------- --------------- ----------- Revenue $ 141,583 $ 125,143 $ 212,597 $ 175,815 Gross profit 44,972 36,079 63,556 58,790 Net income (loss) 919 (20,381) 7,068 759 Basic earnings (loss) per share .08 (1.86) .64 .07 Diluted earnings (loss) per share .08 (1.86) .63 .07
1 Includes non-recurring pre-tax gains of $7.4 million and $4.7 million in the first and third quarters of 1995, respectively. 2 Includes a $16.0 million pre-tax restructuring charge in the second quarter of 1995. 32 THE TIMBERLAND COMPANY 21 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The Timberland Company: WE HAVE AUDITED the accompanying consolidated balance sheets of The Timberland Company and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the companies at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts February 4, 1998 THE TIMBERLAND COMPANY 33 EX-21 4 LIST OF SUBSIDIARIES 1 EXHIBIT 21 NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION THE OUTDOOR FOOTWEAR COMPANY DELAWARE THE TIMBERLAND FINANCE COMPANY DELAWARE THE TIMBERLAND WORLD TRADING COMPANY DELAWARE TIMBERLAND EUROPE, INC. DELAWARE TIMBERLAND INTERNATIONAL SALES CORPORATION U.S. VIRGIN ISLANDS TIMBERLAND DIRECT SALES, INC. DELAWARE TIMBERLAND RETAIL, INC. DELAWARE TIMBERLAND MANUFACTURING COMPANY DELAWARE TIMBERLAND AVIATION, INC. DELAWARE TIMBERLAND NETHERLANDS, INC. (Formerly Timberland Scandinavia, Inc.) DELAWARE TIMBERLAND INTERNATIONAL, INC. DELAWARE TIMBERLAND SAS FRANCE THE TIMBERLAND WORLD TRADING GMBH GERMANY TIMBERLAND (UK) LIMITED UNITED KINGDOM TIMBERLAND GMBH AUSTRIA TIMBERLAND ESPANA, S.A. SPAIN THE RECREATIONAL FOOTWEAR COMPANY (DOMINICANA), S.A. DOMINICAN REPUBLIC COMPONENT FOOTWEAR DOMINICANA, S.A. DOMINICAN REPUBLIC TIMBERLAND FOOTWEAR & CLOTHING COMPANY INC. LES VETEMENTS & CHAUSSURES TIMBERLAND INC. CANADA THE RECREATIONAL FOOTWEAR COMPANY CAYMAN ISLANDS TIMBERLAND NETHERLANDS HOLDING B.V. THE NETHERLANDS EX-23 5 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-35223, 33-60459, 33-67128, 33-56913, 33-17552, 33-41660, 33-19183, and 33-50998 of The Timberland Company on Forms S-8 and Registration Statement No. 33-56921 on Form S-3 of our reports dated February 4, 1998, appearing in and incorporated by reference in this Annual Report on Form 10-K of The Timberland Company for the year ended December 31, 1997. Deloitte & Touche LLP Boston, Massachusetts March 23, 1998 EX-99 6 CAUTIONARY STATEMENT 1 Exhibit 99 Filed as exhibit 99 to Form 10-K for the fiscal year ended December 31, 1997 CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Timberland Company (the "Company") wishes to take advantage of The Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information. Prospective information is based on management's then current expectations or forecasts. Such information is subject to the risk that such expectations or forecasts, or the assumptions used in making such estimates or forecasts, may become inaccurate. The following discussion identifies important factors that could affect the Company's actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of the Company: DEPENDENCE ON SALES FORECASTS. The Company's investments in infrastructure and product are based on sales forecasts and are necessarily made in advance of actual sales. The markets in which the Company does business are highly competitive, and the Company's business is affected by a variety of factors, including brand awareness, changing consumer preferences, product innovations, fashion trends, retail market conditions, weather conditions and economic and other factors. One of management's principal challenges is to improve its ability to predict these factors, in order to enable the Company to better match production of its products with demand. In addition, the Company's growth over the years has created the need to increase these investments in infrastructure and product and to enhance the Company's operational systems. To the extent sales forecasts are not achieved, these investments would represent a higher percentage of revenue, and the Company would experience higher inventory levels and associated carrying costs, all of which would adversely affect the Company's financial performance. CONSUMER ACCEPTANCE OF PRODUCTS. The success of the Company's products and marketing strategy will depend on a favorable reception by the Company's wholesale customers and consumers at retail. The Company believes that its more fashion-focused women's footwear product line and men's collection apparel products are also more susceptible to changing fashion trends and consumer preferences than are the Company's other products. In addition, any delays in production or delivery of such new products could affect the sales of such products. CONSUMER TRENDS AND RETAIL MARKET CONDITIONS. Sales of the Company's products are subject to consumer trends and economic and other factors affecting the retail market. For example, decreased consumer spending, a shift towards discount retailers and softness in the retail market could adversely affect the Company's sales. In addition, warmer than anticipated weather conditions have, in past fall/winter selling seasons, reduced sales as a result of decreased consumer demand at retail for the Company's higher margin products. Such conditions could adversely affect the 2 Company's financial performance in the future, especially if a greater proportion of the Company's revenue were to be made up of "at-once" orders. RETAIL ORGANIZATION. In 1986, the Company opened the first Timberland(R) store dedicated exclusively to Timberland(R) products. At the end of 1997, the Company operated 30 Timberland(R) specialty stores and 43 Timberland(R) factory outlet stores worldwide, and revenue from these stores represented 22.7% of the Company's revenue for 1997. The Company has made significant capital investments in opening these stores and incurs significant expenditures in operating these stores. The higher level of fixed costs related to the Company's retail organization adversely affects profitability, particularly in the first half of the year, as the Company's revenue historically has been more heavily weighted to the second half of the year. The performance of the Company's retail organization is subject to the same retail market conditions as the Company's wholesale customers described above. The Company's ability to recover the investment in and expenditures of its retail organization, particularly its specialty stores, would be adversely affected if sales at its retail stores are lower than anticipated. Although the Company believes its factory outlet stores enable the Company to control the sale of factory-second and close-out products, and maximize the return associated with such sales, the Company's gross margin could be adversely affected if off-price sales increase as a percentage of revenue. YEAR 2000. The Company utilizes and is dependent upon its financial, operational and planning information systems in all phases of its business functions. Most of these systems were purchased as packaged applications from external vendors. In 1996, the Company made a preliminary assessment of the capabilities of its systems to recognize and process dates properly in the year 2000 and beyond. Based on the findings of this assessment, the Company determined that, while some of its systems are year 2000 compliant, modifications will be required to others. The Company has developed and is implementing a plan to render its enterprise business systems year 2000 compliant by the end of 1998. The Company is also seeking to obtain commitments of year 2000 compliance from external vendors, and to develop alternative solutions to minimize the impact on the Company in the event such vendors do not meet their year 2000 commitments. Management believes that the cost of completing this plan will not have a material effect on the Company's current financial position, liquidity or results of operations. COMPETITION. The Company markets its products in highly competitive environments. Many of the Company's competitors are larger and have substantially greater resources than the Company for marketing, research and development, and other purposes. These competitors include athletic footwear companies, branded apparel companies and private labels established by retailers. Furthermore, efforts by the Company's footwear competitors to dispose of their excess inventory could put -2- 3 downward pressure on retail prices and could cause the Company's wholesale customers to redirect some of their purchases away from the Company's products. INTERNATIONAL. The Company manufactures and sources a majority of its products outside the United States and sells its products in more than 90 countries worldwide through its stores, operating divisions, distributors, commission agents, franchisees and licensees. Accordingly, the Company is subject to the risks of doing business abroad, including, among other risks, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. In addition, although the Company pays for the purchase and manufacture of its products primarily in U.S. dollars, it does sell its products in markets where the local currency is not the U.S. dollar. Therefore, the Company is subject to fluctuations in foreign exchange rates. The recent downturn in the economic conditions in the Asia/Pacific region has received much public attention. These events did not reduce the revenue the Company received in 1997 from its authorized distributor in that region. However, the Company has been advised that sales through Timberland(R) specialty stores operated by that distributor, particularly in Japan, have been adversely impacted. While revenue from this distributor comprised less than 2% of the Company's total revenue for 1997, a prolonged downturn could adversely impact such distributor's future sales and, hence, the Company's revenue. In addition, while the Company believes it has chosen third party manufacturers with sufficient financial strength to weather the economic downturn, there is a risk that the Company's suppliers could fail to make and ship orders placed by the Company. The Company could utilize its own factories and sourced manufacturers in other countries in such an event to cover any resulting shortfall; however, delivery of these products would be delayed from the original production schedule. RAW MATERIALS. The Company depends on a few key sources for leather, its principal raw material, and other proprietary materials used in its products. The Company would be adversely affected by unanticipated price increases or shortages of such materials. DEPENDENCE UPON INDEPENDENT MANUFACTURERS. In 1997, approximately 72% of the unit volume of the Company's footwear products and all of its apparel and accessories were produced by independent manufacturers in Asia, Europe, Mexico and South America. (See the "International" paragraph above for a discussion of the risks of doing business abroad to which the Company may be subject.) The Company believes that the shift towards sourcing product from independent manufacturers will continue to reduce manufacturing overhead and product costs, increase product quality and increase the Company's flexibility to meet changing consumer demand for particular product lines. However, the success of these measures depends on the ability of the Company's independent manufacturers to provide high quality product at lower cost and to do so with rapid turn-around times. There can be no assurance that the Company will be able to maintain current relationships or locate additional manufacturers who can meet the Company's requirements. -3- 4 MANUFACTURING. The Company currently plans to retain its internal manufacturing capability in order to continue benefiting from expertise the Company has gained with respect to footwear manufacturing methods conducted at its manufacturing facilities. The Company continues to evaluate its manufacturing facilities and independent manufacturing alternatives in order to determine the appropriate size and scope of its manufacturing facilities. There can be no assurance that the costs of products that continue to be manufactured by the Company can remain competitive with sourced products. LICENSING. Since late 1994, the Company has entered into several licensing agreements which enable the Company to expand the Timberland(R) brand to product categories and geographic territories in which the Company has not had an appreciable presence. The rights granted under these agreements are typically exclusive, and the Company may not terminate these agreements at will, although the Company has reserved its right to terminate these agreements for cause. The success of the Timberland brand in these products or territories will, therefore, largely depend on the efforts of its licensees. Many of the products to be manufactured under the Company's existing product licensing agreements were not available at retail until late 1996 or early 1997. Accordingly, the long-term performance of the licensees under these agreements has not yet been tested. In addition, although the Company is pursuing additional licensing opportunities, including women's apparel, there can be no assurance that the Company will be able to locate licensees and negotiate acceptable terms with licensees for additional products and territories. PRICING OF PRODUCTS. The prices the Company is able to obtain for its new and expanded product offerings, and the Company's ability to increase prices of its other products, will depend upon consumer acceptance of such prices, as well as competitive and other market factors. MANAGEMENT AND CONTROL. Sidney W. Swartz, the Chairman, President and Chief Executive Officer of the Company, and various trusts established for the benefit of his family or for charitable purposes, hold over 80% of the combined voting power of the Company's capital stock in the aggregate, enabling Sidney Swartz to control the Company's affairs and to influence the election of the two directors entitled to be elected by the holders of Class A Common Stock voting separately as a class. Jeffrey B. Swartz, Executive Vice President and Chief Operating Officer of the Company, is the son of Sidney Swartz. The loss or retirement of these and other key executives could adversely affect the Company. LIQUIDITY AND CAPITAL RESOURCES. Management believes that the Company's capital needs for 1998 can be met through its existing credit facilities and cash flow from operations, without the need for additional long-term financing. However, the Company may need to raise additional capital in the future in order to finance its anticipated growth and capital requirements beyond 1998. Further, the Company's revolving credit facility -4- 5 expires in June 1998. The terms and availability of any such additional or replacement financing will be subject to prevailing market conditions and other factors at that time. In addition, the Company's revolving credit facility and senior notes place limitations on the payment of cash dividends and contain other financial and operational covenants with which the Company must comply. If the Company does not comply with such covenants, the Company's ability to use such credit facilities or to obtain other financing could be adversely affected. LITIGATION. The Company is involved in various litigation and legal matters which have arisen and will arise in the ordinary course of business. The costs of prosecuting or defending these matters or an unfavorable outcome in these matters could adversely affect the Company's operating results. INTELLECTUAL PROPERTY. The Company has spent, and may be required in the future to spend, significant amounts to protect and defend its trade name, trademarks, patents, designs and other proprietary rights. The Company is also susceptible to injury from parallel trade and counterfeiting of its products. ACCOUNTING STANDARDS. Changes in the accounting standards promulgated by the Financial Accounting Standards Board or other authoritative bodies could have an adverse affect on the Company's future reported operating results. ENVIRONMENTAL AND OTHER REGULATION. The Company is subject to various environmental and other laws and regulations, which may change periodically. Compliance with such laws or changes therein could have a negative impact on the Company's future reported operating results. -5- EX-27.FY97 7 FINANCIAL DATA SCHEDULE FOR YEAR ENDING 12/31/1997
5 This schedule contains summary financial information extracted from the Company's Condensed Consolidated Balance Sheet as of December 31, 1997 and the Consolidated Statement of Operations for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1997 DEC-31-1997 98,771 0 79,535 3,742 142,613 342,006 116,503 63,593 420,003 99,095 100,000 0 0 114 214,781 420,003 796,458 796,458 484,537 484,537 1,685 3,605 14,833 67,601 20,280 47,321 0 0 0 47,321 4.20 4.03
EX-27.Q397 8 RESTATED FINANCIAL DATA SCHEDULE FOR 09/26/1997
5 This schedule contains summary financial information extracted from the Company's Condensed Consolidated Balance Sheet as of September 26, 1997 and the Condensed Consolidated Statement of Operations for the nine months ended September 26, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1997 SEP-26-1997 37,485 0 171,005 5,416 168,790 396,615 112,342 63,860 470,690 147,497 120,000 0 0 113 194,516 470,690 557,563 557,563 337,453 337,453 1,264 2,510 11,568 42,586 12,776 29,810 0 0 0 29,810 2.63 2.53
EX-27.Q297 9 RESTATED FINANCIAL DATA SCHEDULE FOR 06/27/1997
5 This schedule contains summary financial information extracted from the Company's Condensed Consolidated Balance Sheet as of June 27, 1997 and the Condensed Consolidated Statement of Operations for the six months ended June 27, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1997 JUN-27-1997 31,052 0 90,843 3,807 198,347 336,971 108,986 60,225 412,946 113,998 120,924 0 0 113 169,152 412,946 282,864 282,864 169,395 169,395 842 807 8,130 6,933 2,080 4,853 0 0 0 4,853 .43 .42
EX-27.Q197 10 RESTATED FINANCIAL DATA SCHEDULE FOR 3/28/97
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 28, 1997 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 MAR-28-1997 95,894 0 95,218 3,669 158,843 366,056 105,009 57,474 441,082 127,364 136,129 0 0 112 167,124 441,082 150,684 150,684 89,070 89,070 421 387 4,577 6,137 1,841 4,296 0 0 0 4,296 .38 .37
EX-27.FY96 11 RESTATED FINANCIAL DATA SCHEDULE FOR 12/31/1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 DEC-31-1996 93,336 0 104,096 3,540 159,058 371,468 103,650 54,665 449,586 101,865 171,676 0 0 111 165,249 449,586 689,973 689,973 438,064 438,064 1,684 2,046 20,582 30,938 10,519 20,419 0 0 0 20,419 1.84 1.81
EX-27.Q396 12 RESTATED FINANCIAL DATA SCHEDULE FOR 09/27/1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 27, 1996 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 SEP-27-1996 18,676 0 156,528 3,870 192,753 383,958 103,930 56,312 459,988 99,184 198,875 0 0 111 151,799 459,988 468,879 468,879 299,472 299,472 1,263 1,785 15,143 13,706 4,660 9,046 0 0 0 9,046 .81 .80
EX-27.Q296 13 RESTATED FINANCIAL DATA SCHEDULE FOR 06/28/1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 28, 1996 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JUN-28-1996 19,937 0 90,850 3,599 209,018 339,236 99,523 49,560 418,073 74,268 199,071 0 0 111 134,604 418,073 241,332 241,332 155,226 155,226 842 968 10,287 (12,468) (4,613) (7,855) 0 0 0 (7,855) (.70) (.70)
EX-27.Q196 14 RESTATED FINANCIAL DATA SCHEDULE FOR 03/29/1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 29, 1996 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 MAR-29-1996 32,811 0 99,495 3,066 183,067 336,382 99,207 47,181 418,586 68,208 199,264 0 0 110 140,985 418,586 127,684 127,684 81,659 81,659 421 281 4,798 (1,573) (598) (975) 0 0 0 (975) (.09) (.09)
EX-27.FY95 15 RESTATED FINANCIAL DATA SCHEDULE FOR 12/31/1995
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 12-MOS DEC-31-1995 DEC-31-1995 1 38,389 0 98,444 2,658 180,636 337,830 95,937 43,533 421,408 69,715 199,454 0 0 110 142,111 421,408 665,138 665,138 451,741 451,741 17,685 3,697 22,861 (18,766) (7,131) (11,635) 0 0 0 (11,635) (1.06) (1.06)
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