-----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, QYs80P2NQCbsMBk9v037tpOr9cfqQQvApcfHqpeDp3W+7VBLkGAGLXbdT2pKwmgi VV+O5kQ8POdT24ZgHvuScA== 0000950135-97-001343.txt : 19970327 0000950135-97-001343.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950135-97-001343 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 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: 1934 Act SEC FILE NUMBER: 001-09548 FILM NUMBER: 97563403 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, 1996 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission File Number 1-9548 ------ The Timberland Company ---------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 02-0312554 -------- ---------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 200 Domain Drive, Stratham, New Hampshire 03885 - ----------------------------------------- ----- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: (603) 772-9500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Class A Common Stock, par value New York Stock Exchange - ------------------------------- ----------------------- $.01 per share -------------- 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 $338,446,708 on March 3, 1997. 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. 8,431,889 shares of Class A Common Stock and 2,717,936 shares of Class B Common Stock of the registrant were outstanding on March 3, 1997. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Annual Report to security holders for the fiscal year ended December 31, 1996 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 1997 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference in Part III of this Form 10-K. ================================================================================ The Exhibits Index appears on page 23 of this report. 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 products for men, women and children and apparel and accessories products for men and women. 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 in the United States and in more than 60 countries worldwide, primarily through independent retailers, better-grade department stores and athletic stores which reinforce the Timberland image of quality, performance and service. Timberland products are also sold through Timberland(R) specialty stores and factory outlet stores devoted exclusively to Timberland products. During 1996, the Company focused its efforts on returning to profitability and building on the balance sheet improvements achieved in 1995. As part of this focus, the Company enhanced its business controls and exercised greater discipline in the day-to-day operation of its business. The Company introduced new product lines, such as kids' and women's casual footwear, and developed many new product offerings for introduction in 1997. The Company also continued to shift production of its products to third party manufacturers. CURRENT PRODUCTS The Company's products fall into two broad types - footwear products and apparel and accessories products (including product care and licensed products). Revenues from sales of the Company's footwear products represented 74.8%, 74.9% and 80.5% of total product sales for 1996, 1995 and 1994, respectively. Revenues attributable to sales of apparel and accessories products represented 25.2%, 25.1% and 19.5% of total product sales for 1996, 1995 and 1994, 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 waterproof or water resistant leathers and/or fabric uppers, selected use of waterproof fabric linings and, in certain models, hand-sewn construction. The Company's footwear design and development group is organized into the following teams: men's footwear, women's footwear, kids' footwear, performance footwear and boots. Each team is responsible for all aspects of the footwear development process. 1 3 Timberland(R) casual footwear products for men and women include the classic Weatherbuck collection, loafers, cap toes, wing tips, tassel slip-ons, oxfords, rugged hand-sewns and boat shoes, as well as more fashion-focused hand-sewn wovens, slip-ons and loafers specifically designed for women. In 1996, Timberland introduced a line of kids' footwear based on selected models of its adult footwear styles. 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, such as bouldering, trail scrambling, mountain biking and hiking. 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. In 1996, the Company introduced a line of multi-purpose outdoor footwear, or "MPOs," designed for use in a variety of outdoor activities. Other new footwear product introductions in 1996 included the Country Trails series of rugged trekkers and a women's dress casual collection. Timberland(R) boots include the classic work boots for which the Company is famous, which were updated in new colors and leathers in 1996. APPAREL AND ACCESSORIES Timberland(R) apparel products consist primarily of rugged outerwear, sweaters, shirts, pants, shorts and skirts. 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 1996, the Company continued to coordinate and merchandise its men's apparel offerings into apparel collections to compete in the collection sportswear market. The Company also continued to focus its women's apparel offerings on classic items distributed principally through Timberland(R) specialty stores and through several premium retailers outside the United States. Additionally, the Company expanded the number of products in its performance apparel product line that have the ACT system, and added a grouping of active colorful sportswear designed primarily for outdoor leisure activities. Timberland(R) accessories 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 and eyewear, were introduced to the market in 1996 or early 1997 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 reduce the risks to the Company associated with pursuing such opportunities. Timberland receives a royalty on sales of these licensed products. Timberland accessories for 1996 also included caps and hats, an expanded and enhanced collection of leather care products and a limited collection of leather goods: luggage, briefcases, handbags, wardrobe accessories and other small leather goods. PRODUCT SALES Timberland(R) products are primarily sold in the United States and internationally through independent retailers, better-grade department stores and athletic stores which reinforce the 2 4 Timberland image of quality, performance and service. In 1996, 1995 and 1994, 70.4%, 70.2% and 73.5%, respectively, of the Company's revenues were generated in the United States. In addition to the Company's wholesale customers, Timberland(R) products are sold through Timberland(R) specialty stores and factory outlet stores devoted exclusively to 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 1996, 1995 and 1994, revenues from Company-operated specialty and outlet stores accounted for 23.5%, 19.6% and 13.3%, respectively, of the Company's revenues. This increase was due primarily to the expansion of the Company's factory outlet store operations. UNITED STATES WHOLESALE OPERATIONS The Company's wholesale customer accounts within the United States range from better-grade department and retail stores to athletic stores. 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 on Fifth Avenue in New York City and two regional showrooms located in Dallas and Seattle. In 1996, the Company created a separate women's footwear sales force and expanded and enhanced its footwear sales planning group. The Company continually seeks to increase the number of locations and expand the size of selling spaces which its wholesale customer accounts dedicate exclusively to Timberland products. During 1996, the Company opened 42 such dedicated areas, or "concept shops," principally in men's collection sportswear departments, of which six were dedicated to footwear and 36 to apparel (including four apparel concept shops that carry both footwear and apparel). The Company also developed a concept shop focused on merchandising performance footwear and apparel products, which is currently in several test markets in the United States. INTERNATIONAL WHOLESALE OPERATIONS 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. 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. Additionally, certain of the Company's international distributors and franchisees operate specialty stores and concept shops devoted exclusively to Timberland products in Europe, the Middle East, Central America, South America and the Asia/Pacific region. In 1996, the Company entered into an agreement for the exclusive distribution of certain Timberland products and the operation of Timberland specialty stores throughout the Middle East and North Africa. This agreement requires the opening of a minimum number of new specialty stores and concept shops over a specified time period, and requires the distributors to meet requirements for minimum purchases of Timberland products during each year. The 3 5 Company entered into similar distribution agreements in 1995 for the Asia/Pacific region and the southern cone of South America. All of these agreements are intended to expand the Timberland(R) brand to appropriate and well-defined geographical territories in which the Company has not had an appreciable presence, in a manner designed to reduce the risk to the Company associated with pursuing such opportunities. RETAIL OPERATIONS In addition to providing an environment to showcase the Timberland brand as an integrated source of footwear, apparel and accessories, Timberland(R) 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. The Company operates 31 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 of the Timberland brand and to maximize the return associated with the sale of such products. The Company operates 40 factory outlet stores worldwide. The Company also opened several temporary factory outlet stores in locations where the Company was able to enter into low-cost, short-term leases. DISTRIBUTION The Company operates footwear distribution facilities in Danville, Kentucky and Aguadilla, Puerto Rico. The Company also fills footwear orders from a third-party distribution facility in City of Industry, California. All apparel and accessories orders are centrally distributed from the Company's distribution facility in Grove City, Ohio. As part of its efforts to streamline its distribution operations, in 1996, the Company closed two distribution centers in the United States and two third-party distribution centers in France and Germany. The Company has entered into a lease for a centralized European distribution facility in Holland, which is expected to be operational by mid-1997. 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 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. During 1996, the Company's national and regional advertising campaigns appeared mainly in various active-lifestyle, fashion and sports-focused consumer periodicals and trade press outlets. The Company reinforced these advertising campaigns with a variety of in-store promotions, point-of-purchase marketing materials and cooperative advertising programs with its 4 6 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 1996, particularly on the third quarter, when the Company's revenues are traditionally highest. During 1996, the Company produced internally all advertising, product catalogs and point-of-purchase marketing materials and all packaging and hang-tag designs for both its 1996 and 1997 product offerings. SEASONALITY In 1996, as has traditionally been the case, the Company's revenues were 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 represented a larger percentage of revenues in the first two quarters of 1996 than in the last two quarters of 1996. The Company expects this seasonality to continue in 1997. BACKLOG At December 31, 1996, Timberland's backlog of orders from its customers was approximately $129 million, compared to $102 million at December 31, 1995 and $132 million at December 31, 1994. 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 1997. The Company does not believe that its order backlog at year-end is representative of the orders which will be filled during 1997, due to the shift toward "at-once" orders and away from "future" orders being adopted by many retailers. MANUFACTURING The Company's two manufacturing facilities are located in Puerto Rico and the Dominican Republic. During 1996, the Company manufactured approximately 35% of its footwear unit volume, compared to approximately 40% during 1995 and 60% during 1994. 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 and South America. Of the unit volume of the Company's footwear products, approximately 23% and 14%, respectively, was produced by two independent manufacturers during 1996. No other independent manufacturer produced more than 5% of the Company's footwear unit volume in 1996. The Company currently plans to retain its internal manufacturing capability in order to continue benefiting from expertise gained with respect to footwear manufacturing methods and from the research and development activities 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 5 7 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 to supervise the Company's sourcing activities conducted in the Asia/Pacific region. In 1996, the quality management group developed a database to monitor product returns data more closely and to make such data more readily accessible. The quality management group also instituted regular reporting of its product quality audit findings, established standards for returning defective products to manufacturers, reissued finished goods quality guidelines and established a footwear lab where product testing can be performed at an earlier stage in the product development process. RAW MATERIALS In 1996, four suppliers provided more than 10% each, or an aggregate of approximately 79%, of the Company's leather purchases. Two of these suppliers provided an aggregate of approximately 50% of the Company's leather purchases. 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. The Company believes that this centralized approach helps reduce the cost and provides greater consistency of raw materials procured to produce Timberland(R) products and improves 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 [GRAPHIC OMITTED], which have been registered in the United States and in certain 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; Boots, Shoes, Clothing, Wind, Water, Earth and Sky; Cream Buff; Fastpacker; Grime Squad; Guaranteed Waterproof Construction; Hydro Balm; Jackson Mountain; Mill River; More Quality Than You May Ever Need; Mountain to River; Nothing Can Stop You; TBL; The Boot Company; The Elements of Design are the Elements Themselves, Wind, Water, Earth and Sky; This is a trip; This is not baggage; This is your new best friend; Timberland 1049; Tims; Toporelief; Topozoic; Trail Grip; Treeline; Waximum; Weathergear; Where is your outdoors?; and Wind, Water, Earth, and Sky; as well as the following design logos: [GRAPHIC] 6 8 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 of its 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 and 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, 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 and apparel and accessories products. However, the Company does have a variety of major competitors in each of its separate footwear and apparel and accessories products. 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 boots and sandal sales, at least thirteen major competitors in dress casual footwear sales and at least four 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 and women'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 men's and women'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 footwear and apparel and accessories 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 introduced under Timberland's dress casual footwear line) is less sensitive to changing trends in fashion than other products that are designed specifically to meet such trends. 7 9 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. EMPLOYEES At December 31, 1996, the Company had approximately 5,700 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 and marketing and distribution of footwear products for men, women and kids and apparel and accessories products for men and women. Information regarding revenues, operating income and identifiable assets 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 13 to the Company's consolidated financial statements, entitled "Industry Segment and Geographical Area Information," appearing in the Company's 1996 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 owns a facility in Hampton, New Hampshire, which served as the Company's headquarters. In connection with the purchase financing for the Hampton, New Hampshire, property, industrial revenue bonds are outstanding in the principal amount of $5,345,000, which are due in 2014. These bonds bear interest at 6.20% through 1999 and, thereafter, at rates adjusted every five years, through maturity. These bonds are secured by a mortgage on such real estate and by a security interest on assets located at the property. 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 February 1998. The Company owns its distribution facilities in Grove City, Ohio, and Danville, Kentucky, and leases its warehouse in City of Industry, California. The Company has also entered into a lease for a centralized European distribution facility in Enschede, Holland, which is expected to be operational by mid-1997. 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. 8 10 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 have been 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 alleges that defendants violated federal securities laws by making material misstatements and omissions in certain of the Company's public filings and statements in 1994. Specifically, the Amended Complaint alleges that such statements and omissions had the effect of artificially inflating the market price for the Company's Class A Common Stock until the disclosure by the Company on December 9, 1994, of its expectation that results for the fourth quarter were not likely to meet analysts' anticipated levels. Damages are unspecified. On March 18, 1996, the District Court denied defendants' motion to dismiss the Amended Complaint. On March 19, 1996, the District Court granted plaintiffs' motion for class certification for all purchasers of the Company's Class A Common Stock between May 12, 1994 and December 9, 1994. Management believes this action is without merit and intends to defend it vigorously. Accordingly, at this time, management does not expect the outcome of such litigation to have a material adverse effect on the Company's consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended December 31, 1996, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. 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 61 Chairman of the Board, President, Chief Executive Officer and Director Jeffrey B. Swartz 37 Executive Vice President, Chief Operating Officer and Director Keith D. Monda 50 Senior Vice President-Finance and Administration and Chief Financial Officer
9 11 Gregory W. VanWormer 41 Senior Vice President and General Manager-Apparel/Retail/Marketing Dennis W. Hagele 53 Vice President-Finance and Corporate Controller (Chief Accounting Officer) Jane E. Owens 43 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 Executive Vice President since March 1990 and as Chief Operating Officer since May 1991. Jeffrey Swartz is the son of Sidney W. Swartz. Keith D. Monda joined the Company in December 1993 as Senior Vice President-Finance and Administration and Chief Financial Officer. From May 1990 to December 1993, Mr. Monda was Executive Vice President of Finance and Administration of J. Crew Group, Inc. Gregory W. VanWormer joined the Company in May 1994 as Senior Vice President-Retail. Effective January 1, 1995, Mr. VanWormer was promoted to Senior Vice President and General Manager-Apparel/Retail. Effective January 1, 1996, Mr. VanWormer was promoted to Senior Vice President and General Manager-Apparel/Retail/Marketing. 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. Jane E. Owens joined the Company in September 1992 as Vice President and General Counsel. From June 1990 to August 1992, Ms. Owens was Counsel for Reebok International Ltd. 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 1996 Annual Report to security holders under the caption "Quarterly Market Information and Related Matters" and is incorporated herein by reference. 10 12 ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included in the registrant's 1996 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 1996 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included in the registrant's 1996 Annual Report to security holders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information set forth under the caption "Executive Officers of the Registrant" in Item 4A of Part I of this report and to information under the caption "Information with Respect to Nominees" in the registrant's definitive proxy statement (the "registrant's 1997 Proxy Statement") relating to its 1997 Annual Meeting of Stockholders, to be filed with the Commission within 120 days after the close of the registrant's fiscal year ended December 31, 1996, which information is incorporated herein by reference. Reference is also made to the information set forth in the registrant's 1997 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 1997 Proxy Statement, which information is incorporated herein by reference. 11 13 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the registrant's 1997 Proxy Statement, which information is incorporated herein by reference. For purposes of calculating the aggregate market value of the Class A Common Stock on March 3, 1997 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 1997 Proxy Statement, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS. The following financial statements appearing in the Company's 1996 Annual Report to security holders are incorporated by reference in this report:
ANNUAL REPORT PAGE ---- Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995 17 For the years ended December 31, 1996, 1995 and 1994: 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 31
12 14 (a)(2) FINANCIAL STATEMENT SCHEDULE. The following additional financial data should be read in conjunction with the Consolidated Financial Statements in the registrant's 1996 Annual Report to security holders:
FORM 10-K PAGE ---- Independent Auditors' Report on Schedule VIII F-1 Schedule VIII - Valuation and Qualifying Accounts F-2
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange 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 1996. (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 Securities and Exchange Commission in accordance with the provisions of Rule 12b-32 of the Exchange Act. EXHIBIT DESCRIPTION - ------------------------------------------------------------------------------ (3) Articles of incorporation and by-laws ------------------------------------- 3.1 Restated Certificate of Incorporation (1) 3.2 By-Laws, as amended May 19, 1993 (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, filed herewith (10) Material Contracts ------------------ 10.1 Agreement dated as of August 29, 1979 between The Timberland Company and Sidney W. Swartz (1) 10.2 The Company's 1987 Stock Option Plan, as amended (8) 10.3 The Company's 1991 Employee Stock Purchase Plan, as amended (2) 13 15 EXHIBIT DESCRIPTION - ------------------------------------------------------------------------------- (10) Material Contracts ------------------ 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) 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) (i) Lease dated July 20, 1992 among Louise Minges, Mitchell Minges and The Timberland Company (4) (ii) Amendment dated July 16, 1993 to Lease (5) (d) Lease dated March 31, 1981 between the Puerto Rico Industrial Development and The Timberland Company (4) (e) Lease dated September 7, 1992 between Corporacion Zona Franca Industrial De Santiago, Inc. and The Recreational Footwear Company (4) (f) Lease dated December 2, 1992 between Corporacion Zona Franca Industrial De Santiago, Inc. and The Recreational Footwear Company (4) (g) Lease dated as of June 29, 1993 between Timberland Dominicana, S.A. and Santiago Norte, S.A. (Pisano) Industrial Park (5) 14 16 EXHIBIT DESCRIPTION - ------------------------------------------------------------------------------- (10) Material Contracts ------------------ (h) Lease dated as of November 30, 1993 between Timberland Dominicana, S.A. and Santiago Norte, S.A. (Pisano) Industrial Park (5) (i) Lease dated as of December 16, 1993 between Timberland Dominicana, S.A. and Santiago Norte, S.A. (Pisano) Industrial Park (5) (j) Lease dated as of March 31, 1993 between Talbot Operations, Inc. and The Timberland Company (5) (k) (i) Sublease dated March 31, 1994 between Hewlett-Packard Company and The Timberland Company (6) (ii) Amendment No. 1 dated July 15, 1994 to Sublease (7) 10.10 (a) Amended and Restated Note Agreements dated as of April 1, 1994 regarding $35,000,000 9.70% Senior Notes due December 1, 1999 (6) (b) Amendment No. 1 dated as of April 1, 1995 to Amended and Restated Note Agreements (9) (c) Amendment No. 2 dated as of June 28, 1995 to Amended and Restated Note Agreements (9) (d) Amendment No. 3 dated as of June 21, 1996 to Amended and Restated Note Agreements (11) 10.11 (a) Note Agreements dated as of April 1, 1994 regarding $65,000,000 7.16% Senior Notes due April 15, 2000 (6) (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) 15 17 EXHIBIT DESCRIPTION - ------------------------------------------------------------------------------- (10) Material Contracts ------------------ 10.12 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) 10.13 (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 1996 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. Financial Data Schedules, 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 16 18 - ------------ (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. 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. 17 19 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 26, 1997 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 26, 1997 - ----------------------- (Sidney W. Swartz) Executive Vice President, Chief /s/ Jeffrey B. Swartz Operating Officer and Director March 26, 1997 - ------------------------- (Jeffrey B. Swartz) Senior Vice President-Finance and Administration and Chief /s/ Keith D. Monda Financial Officer March 26, 1997 - ------------------------- (Keith D. Monda) Vice President-Finance and Corporate Controller /s/ Dennis W. Hagele (Chief Accounting Officer) March 26, 1997 - ------------------------ (Dennis W. Hagele) /s/ Robert M. Agate Director March 26, 1997 - ------------------------- (Robert M. Agate) /s/ John F. Brennan Director March 26, 1997 - ------------------------- (John F. Brennan) /s/ Ian W. Diery Director March 26, 1997 - -------------------- (Ian W. Diery) /s/ John A. Fitzsimmons Director March 26, 1997 - --------------------------- (John A. Fitzsimmons) /s/ Abraham Zaleznik Director March 26, 1997 - --------------------------- (Abraham Zaleznik)
20 Item 14(d) 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, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated February 5, 1997; such consolidated financial statements and report are included in your 1996 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. 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 5, 1997 F-1 21 SCHEDULE VIII THE TIMBERLAND COMPANY VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Additions Balance at -------------------------------- Deductions Balance at Beginning Charged to Costs Charged to Net of End Description of Period and Expenses Other Accounts Write-Offs of Period - ----------- --------- ------------ -------------- ---------- --------- Allowance for doubtful accounts: Year ended December 31, 1996 $2,658 $2,046 -- $1,164 $3,540 December 31, 1995 2,704 3,697 -- 3,743 2,658 December 31, 1994 1,014 1,938 -- 248 2,704 Group insurance reserve: Year ended December 31, 1996 $2,774 $3,402 -- $5,141 $1,035 December 31, 1995 1,810 5,467 -- 4,503 2,774 December 31, 1994 1,319 7,983 -- 7,492 1,810
F-2 22 Timberland; [GRAPHIC]; Active Comfort Technology; ACT; Aero Balm; B.S.F.P.; Balm Shelter; Black Ridge Mountain; Bootness; Boots, Shoes, Clothing, Wind, Water, Earth and Sky; Cream Buff; Fastpacker; Grime Squad; Guaranteed Waterproof Construction; Hydro Balm; Jackson Mountain; Mill River; More Quality Than You May Ever Need; Mountain to River; Nothing Can Stop You; TBL; The Boot Company; The Elements of Design are the Elements Themselves, Wind, Water, Earth and Sky; This is a trip; This is not baggage; This is your new best friend; Timberland 1049; Tims; Toporelief; Topozoic; Trail Grip; Treeline; Waximum; Weathergear; Where is your outdoors?; and Wind, Water, Earth, and Sky are trademarks or registered trademarks of The Timberland Company. (C) The Timberland Company 1997 All Rights Reserved. 983-10K1-97 EX-4.1 2 SPECIMEN STOCK CERTIFICATE 1 EXHIBIT 4.1 CLASS A COMMON STOCK PAR VALUE $.01 PER SHARE TIMBERLAND(R) [LOGO](R) ------------------ SHARES ------------------ THE TIMBERLAND COMPANY INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, NEW YORK, CHICAGO AND LOS ANGELES CUSIP 887100 105 - -------------------------------------------------------------------------------- THIS CERTIFIES THAT IS THE OWNER OF - -------------------------------------------------------------------------------- FULLY PAID AND NONASSESSABLE SHARES OF THE CLASS A COMMON STOCK OF The Timberland Company transferable only on the books of the Corporation by the holder hereof in person or by attorney upon surrender of this Certificate duly endorsed or assigned. This Certificate and the shares represented hereby are subject to the laws of the State of Delaware and to the provisions of the Certificate of Incorporation and By-Laws of the Corporation as from time to time amended. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. Witness the seal of the Corporation and the signatures of its duly authorized officers. Dated: [LOGO] John E. Beard Sidney W. Swartz SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED: THE FIRST NATIONAL BANK OF BOSTON, TRANSFER AGENT AND REGISTRAR, BY AUTHORIZED SIGNATURE. 2 THE TIMBERLAND COMPANY The shares evidenced by this certificate represent one of three classes of stock of the Corporation and are subject to the respective powers, designations, preferences and relative participation, optional and other special rights of the classes of the Corporation's stock, and the qualifications, limitations and restrictions of such preferences and rights, set forth in the Certificate of Incorporation, as amended. The Corporation will furnish a copy of such powers, designations, preferences and relative participation, optional and other special rights, and the qualifications, limitations and restrictions of such preferences and rights, to the holder of this certificate without charge, upon request. ASSIGNMENT For Value Received,________________________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------------- - --------------------------------------- - ------------------------------------------------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE - ------------------------------------------------------------------------------- _________________________________________________________________________ Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint____________________________________________________________Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated ____________________ 19__ ___________________________________________ NOTICE: The signature of this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration enlargement or any change whatever. EX-13 3 1996 ANNUAL REPORT 1 EXHIBIT 13 FINANCIAL REVIEW - -------------------------------------------------------------------------------- FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- SELECTED STATEMENT OF OPERATIONS DATA
(Dollars in Thousands Except Per Share Data) Years Ended December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------- Revenues $ 689,973 $ 655,138 $ 638,097 $ 420,062 $ 292,571 - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) 20,419 (11,635) 17,710 22,521 12,919 - ---------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share 1.81 (1.04) 1.58 2.01 1.18 - ----------------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA (Dollars in Thousands)
December 31, 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- Cash and equivalents $ 93,336 $38,389 $ 6,381 $ 3,281 $ 1,220 - ----------------------------------------------------------------------------------------------------------------------- Working capital 269,603 268,115 266,529 155,660 94,427 - ----------------------------------------------------------------------------------------------------------------------- Total assets 449,586 421,408 473,264 290,611 194,117 - ----------------------------------------------------------------------------------------------------------------------- Notes payable - - 22,513 10,061 6,851 - ----------------------------------------------------------------------------------------------------------------------- Total long-term debt 189,454 207,187 214,815 91,491 44,176 - ----------------------------------------------------------------------------------------------------------------------- Stockholders' equity 165,360 142,221 149,090 128,363 104,600
- -------------------------------------------------------------------------------- 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 "The Year in Review" and the consolidated nancial statements and related notes.
RESULTS OF OPERATIONS (Amounts in Thousands Except Per Share Data) Years Ended December 31, 1996 % 1995 % 1994 % - ------------------------------------------------------------------------------------------------------------------------------ Net revenues $689,973 100.0% $655,138 100.0% $638,097 100.0% - ------------------------------------------------------------------------------------------------------------------------------ Gross profit 251,909 36.5 203,397 31.0 209,395 32.8 - ------------------------------------------------------------------------------------------------------------------------------ Total operating expenses1 201,020 29.1 210,330 32.1 165,779 26.0 - ------------------------------------------------------------------------------------------------------------------------------ Operating income (loss)1 50,889 7.4 (6,933) (1.1) 43,616 6.8 - ------------------------------------------------------------------------------------------------------------------------------ Interest expense 20,582 3.0 22,861 3.5 15,052 2.4 - ------------------------------------------------------------------------------------------------------------------------------ Net income (loss)2 20,419 3.0 (11,635) (1.8) 17,710 2.8 - ------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) per share $ 1.81 $ (1.04) $ 1.58 - ------------------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding 11,255 11,171 11,209 1 Includes a $16.0 million pre-tax restructuring charge in 1995 which reduced earnings and earnings per share by $9.9 million and $.89, respectively. 2 Includes a $16.0 million pre-tax restructuring charge in 1995 which reduced earnings and earnings per share by $9.9 million and $.89, 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 $.67, respectively.
THE TIMBERLAND COMPANY 13 2 FINANCIAL REVIEW Revenues increased 5.3% to $690.0 million in 1996 from $655.1 million in 1995 and $638.1 million in 1994. The increase in 1996 was due to unit volume growth in both footwear and apparel and accessories. The increase in 1995 compared to 1994 was the result of unit volume growth in apparel and accessories offset by a decrease in unit volume in footwear. The average selling price of footwear was comparable in 1996 and 1995 after having declined in 1995 compared to 1994. The average selling price of apparel and accessories declined during 1996 and 1995 each when compared to the preceding year. Much of the 1996 price decline is attributable to the expansion of the Company's factory outlet stores. Footwear revenues were $511.3 million in 1996, $483.1 million in 1995, and $513.5 million in 1994. This represents an increase of 5.8% in 1996 and a decrease of 5.9% in 1995 each compared to the prior year. Revenues attributable to apparel and accessories were $172.4 million in 1996, $162.3 million in 1995, and $124.0 million in 1994. This represents increases of 6.2% and 30.9% in 1996 and 1995 each compared to the prior year, respectively. Domestic revenues amounted to $485.4 million in 1996, $459.8 million in 1995, and $469.3 million in 1994 or 70.4%, 70.2%, and 73.5% of total revenues for each of the three years, respectively. The gross profit margin was 36.5% in 1996, 31.0% in 1995, and 32.8% in 1994. The increase in the 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. The decrease in the gross margin percent in 1995 from 1994 was due to a change in product sales mix. Although sales of first quality inventory represented a substantial majority of total revenues, off-price sales comprise d a greater percentage of total revenues in 1995 compared to 1994. In addition, lower production levels in the Company's manufacturing facilities in 1995 had a negative effect on overhead cost absorption, which further reduced gross profit margins. 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 workforce 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. The Company has two remaining manufacturing facilities: one in Puerto Rico and one in the Dominican Republic . All other product is sourced by the Company from third party contract manufacturers. 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 substantially completed these restructuring actions with the exception of remaining lease payments and other obligations relating to one of the manufacturing facilities. Cash expenditures related to the restructuring plan of $4.6 million have been incurred through December 31, 1996. The Company has funded the cost of the restructuring plan from internal sources and available borrowing capacity. The restructuring plan began lowering operating costs in the third quarter of 1995. Based on recent manufacturing plant production levels, annual savings were approximately $10.0 million. Operating expenses were $201.0 million or 29.1% of revenues in 1996, $210.3 million or 32.1% of revenues in 1995 and $165.8 million or 26.0% of revenues in 1994. Operating expenses increased $6.7 million in 1996 from 1995, excluding the restructuring charge, principally due to increased selling expenses attributable to increased unit volume growth in both footwear and apparel and accessories. Excluding the restructuring charge, operating expenses in 1995 increased $28.6 million from 1994 to $194.3 million, or 29.7% of revenues in 1995. The increase in operating expenses in 1995 was principally a result of the Company's growing retail organization, the inclusion of the Company's Italian operations for a full year, and the larger core infrastructure which was designed to support higher revenue levels. Operating income, which is pretax earnings before interest and other expenses, was $50.9 million in 1996, $9.1 million in 1995 (excluding the restructuring charge) and $43.6 million in 1994. As a percent of revenues, operating income was 7.4% in 1996, 1.4% (excluding the restructuring charge) in 1995 and 6.8% in 1994. Interest expense was $20.6 million in 1996 compared to $22.9 million in 1995 and $15.1 million in 1994. The decrease in 1996 primarily reflected lower borrowings compared to 1995. The increase in 1995 from 1994 primarily reflected higher debt levels attributable to business growth and the need to support higher than anticipated inventory levels. 14 THE TIMBERLAND COMPANY 3 FINANCIAL REVIEW In January 1995, the Company appointed Inchcape plc as the exclusive distributor of TimberlandRegistration Mark 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 million. During the third quarter of 1995, this agreement was amended to include South Korea. These transactions resulted in a non-recurring pretax gain of approximately $12.1 million in 1995. The gain is included in "Other income" in the Consolidated Statements of Operations. The effective income tax rate was 34.0% in 1996, 38.0% in 1995, and 37.0% in 1994. The decrease in 1996 primarily reflected a relative increase in Puerto Rican sourced income. For an analysis of the changes in the effective tax rate, see the "Income Taxes" note to the Company's consolidated financial statements. The Company continued to experience in 1996 the higher level of fixed costs related to its retail businesses which adversely affected profitability in the first half of the year, given that historically the Company's revenues have been weighted more heavily to the second half of the year. 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 $85.7 million in 1996 and $48.1 million in 1995 while operations absorbed $88.8 million in 1994. The significant improvement in operating cash flow in 1996 and 1995 was primarily attributable to the reduction in inventory levels and improvement in accounts receivable days sales outstanding and, in 1996, a return to profitability. Net cash used by operations in 1994 was primarily the result of the Company's growth, and, with respect to inventory, higher inventory positions than anticipated. The improvement in inventory levels experienced in 1996 and 1995 was due to strengthening supply chain management, which enhanced reliability and the Company's ability to react faster to marketplace change. Inventory turns were 2.3 times in 1996 compared to 1.9 times in 1995 and 2.3 times in 1994. Days sales outstanding at December 31, 1996 were 41 days compared to 49 days at December 31, 1995 and 64 days at December 31, 1994. The improvement in days sales outstanding reflects an increase in retail sales as a percent of total revenues and also improvement in and strengthening of credit and cash collection procedures and policies. Domestic wholesale days sales outstanding were 52 days, 63 days and 74 days at the end of 1996, 1995 and 1994, respectively. Net cash used by investing activities amounted to $15.4 million in 1996, $15.1 million of which was for capital expenditures. Net cash provided by investing activities amounted to $11.7 million in 1995, due primarily to the $24 million of cash proceeds received from the agreement with Inchcape plc discussed above partially offset by capital expenditures of $13.5 million. Cash used in investing activities amounted to $45.8 million in 1994, $31.5 million of which was for capital expenditures. A significant portion of capital expenditures during the three years ended December 31, 1996 were for manufacturing machinery and equipment, retail store additions and information systems improvements. Cash used for investing activities in 1994 included $14.1 million to terminate the Company's distributorship agreement in Italy and to acquire certain assets of that distributor. During 1996 and 1995, cash used in financing activities amounted to $15.6 million and $28.2 million, respectively. In 1996, $17.7 million was used to repay long-term debt, including a prepayment of $10.0 million. The 1995 amount reflects the repayment of $22.5 million in short-term debt and $8.1 million of long-term debt. During 1994, $137.7 million was provided by financing activities. In April and December 1994, the Company completed private placements of senior unsecured notes of $65 million and $106 million, respectively. The proceeds from these private placements were principally used to repay existing indebtedness. The Company uses 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, which expires on June 21, 1998, to provide for up to $80 million in letters of credit under an overall $100 million committed facility. The Company's debt to capital ratio was 53.4% at December 31, 1996, 59.3% at December 31, 1995, and 61.4% at December 31, 1994. Management believes that the Company's capital needs for 1997 will be met through its existing credit facilities and cash flow from operations without the need for additional permanent financing. However, several risks and uncertainties could cause the Company to need to raise additional capital through equity and/or debt financing. The availability and terms of any such financing would be subject to the Company's financial condition and prevailing market and other factors at that time. THE TIMBERLAND COMPANY 15 4 FINANCIAL REVIEW 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, 1996, entitled "Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995," investors should also be aware of factors that could affect the Company's actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of the Company. These factors include political, economic or other factors such as currency exchange rates, inflatio n rates, recessionary or expansive trends, taxes and regulations and laws affecting the worldwide 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 shall automatically be converted upon any transfer (except for estate planning transfers and any transfer approved by the Board of Directors). The following table presents the high and low closing sales prices of the Company's Class A Common Stock for the past two years as reported by the New York Stock Exchange.
1996 1995 -------------------- ----------------------- High Low High Low First Quarter $22 $18 1/4 $28 1/4 $20 1/2 Second Quarter 24 3/4 21 1/8 26 1/8 20 3/4 Third Quarter 23 17 35 3/4 25 1/2 Fourth Quarter 40 1/8 20 1/2 31 3/8 18 3/8
As of March 3, 1997, the number of record holders of the Company's Class A Common Stock was approximately 921 and the number of record holders of the Company's Class B Common Stock was eight. The closing sales price of the Company's Class A Common Stock on March 3, 1997 was $40 3/8 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.) 16 THE TIMBERLAND COMPANY 5 FINANCIAL REVIEW - ---------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------------------------------- As of December 31, 1996 and 1995 (Dollars in Thousands, Except Per Share Data) 1996 1995 ASSETS Current assets Cash and equivalents $ 93,336 $ 38,389 Accounts receivable, net of allowance for doubtful accounts of $3,540 in 1996 and $2,658 in 1995 100,556 95,786 Inventories 159,058 180,636 Prepaid expenses 9,351 12,752 Deferred and refundable income taxes 9,167 10,267 - --------------------------------------------------------------------------------------------------------- Total current assets 371,468 337,830 - --------------------------------------------------------------------------------------------------------- Property, plant and equipment 103,650 95,937 Less accumulated depreciation and amortization (54,666) (43,533) - --------------------------------------------------------------------------------------------------------- Net property, plant and equipment 48,984 52,404 - --------------------------------------------------------------------------------------------------------- Excess of cost over fair value of net assets acquired, net 22,587 24,271 Other assets, net 6,547 6,903 - --------------------------------------------------------------------------------------------------------- Total assets $449,586 $421,408 - --------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 17,778 $ 7,733 Accounts payable 21,348 25,207 Accrued expenses Payroll and related 15,173 7,882 Interest and other 35,753 28,001 Income taxes payable 11,813 892 - --------------------------------------------------------------------------------------------------------- Total current liabilities 101,865 69,715 - --------------------------------------------------------------------------------------------------------- Long-term debt, less current maturities 171,676 199,454 Deferred income taxes 10,685 10,018 Commitments and contingencies Stockholders' equity Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued -- -- Class A Common Stock, $.01 par value (1 vote per share); 30,000,000 shares authorized; 8,430,998 shares issued at December 31, 1996 and 8,316,554 shares at December 31, 1995 84 83 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; 2,734,301 shares issued at December 31, 1996 and 2,735,381 shares at December 31, 1995 27 27 Additional paid-in capital 61,806 59,716 Retained earnings 100,600 80,181 Cumulative translation adjustment 2,963 2,334 Less treasury stock at cost; 18,369 shares at December 31, 1996 and 1995 (120) (120) - ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 165,360 142,221 - ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $449,586 $421,408 - ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. THE TIMBERLAND COMPANY 17 6 FINANCIAL REVIEW - ----------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - -----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996, 1995 and 1994 (Amounts in Thousands Except Per Share Data) 1996 1995 1994 Revenues $ 689,973 $ 655,138 $ 638,097 Cost of goods sold 438,064 451,741 428,702 - ----------------------------------------------------------------------------------------------------------------------- Gross profit 251,909 203,397 209,395 - ----------------------------------------------------------------------------------------------------------------------- Operating expenses Selling 152,834 145,924 124,386 General and administrative 46,502 46,721 40,213 Amortization of goodwill 1,684 1,685 1,180 Restructuring charge -- 16,000 -- - ----------------------------------------------------------------------------------------------------------------------- Total operating expenses 201,020 210,330 165,779 - ----------------------------------------------------------------------------------------------------------------------- Operating income (loss) 50,889( 6,933) 43,616 - ----------------------------------------------------------------------------------------------------------------------- Other expense (income) Interest expense 20,582 22,861 15,052 Other, net (631) (11,028) 452 - ----------------------------------------------------------------------------------------------------------------------- Total other expense 19,951 11,833 15,504 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 30,938 (18,766) 28,112 Provision (benefit) for income taxes 10,519 (7,131) 10,402 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 20,419 $ (11,635) $ 17,710 - ----------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share $ 1.81 $ (1.04) $ 1.58 - ----------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding and share equivalents 11,255 11,171 11,209 - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 18 THE TIMBERLAND COMPANY 7 FINANCIAL REVIEW - ----------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - -----------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996, 1995 and 1994 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, 1994 $76 $32 $55,805 $74,106 $(1,536) $(120) $128,363 - ----------------------------------------------------------------------------------------------------------------------------- Issuance of shares under employee stock option and stock purchase plans and other transactions 6 (5) 1,566 -- -- -- 1,567 Tax benefit from stock option plans -- -- 385 -- -- -- 385 Net income -- -- -- 17,710 -- -- 17,710 Translation adjustment -- -- -- -- 1,065 -- 1,065 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 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 - -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. THE TIMBERLAND COMPANY 19 8 FINANCIAL REVIEW - ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996, 1995 and 1994 (Dollars in Thousands) 1996 1995 1994 Cash flows from operating activities: Net income (loss) $20,419 $(11,635) $17,710 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Deferred income taxes 905 (2,560) 2,383 Depreciation and amortization 21,370 19,138 15,348 Gain on distributorship transaction -- (12,107) -- Restructuring charge -- 9,914 -- Increase (decrease) in cash from changes in working capital items, net of effects of business acquisition and disposition: Accounts receivable (5,541) 29,186 (36,614) Inventories 22,475 31,834 (101,009) Prepaid expenses 3,747 884 (4,995) Accounts payable (4,000) (11,967) 4,270 Accrued expenses 14,692 4,427 8,762 Income taxes 11,608 (8,999) 5,381 - -------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 85,675 48,115 (88,764) - -------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from distributorship transaction -- 24,000 -- Proceeds from sale of equipment 1,268 1,756 -- Additions to property, plant and equipment, net (15,090) (13,508) (31,452) Acquisition of Italian distributor -- -- (14,086) Other, net (1,605) (567) (269) - -------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (15,427) 11,681 (45,807) - -------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowings (payments) under short-term credit facilities -- (22,513) 12,462 Proceeds from long-term obligations -- 525 173,990 Payments on long-term debt and capital lease obligations (17,733) (8,137) (50,682) Issuance of common stock 1,588 1,535 1,567 Tax benefit from stock option plans 503 426 385 - -------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (15,642) (28,164) 137,722 - -------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 341 376 (51) - -------------------------------------------------------------------------------------------------------------------- Net increase in cash and equivalents 54,947 32,008 3,100 Cash and equivalents at beginning of year 38,389 6,381 3,281 - -------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of year $93,336 $38,389 $6,381 - -------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Interest paid $18,916 $22,194 $13,688 Income taxes paid (refunded) (2,671) 4,428 2,648
The accompanying notes are an integral part of these consolidated financial statements. 20 THE TIMBERLAND COMPANY 9 FINANCIAL REVIEW - -------------------------------------------------------------------------------- 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 Revenues consist 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. Financial Instruments and Concentration of Credit Risk The Company is exposed to foreign exchange risk when the Company sells goods in local currencies through its foreign subsidiaries. It is the Company's policy to hedge a portion of this risk through forward sales of foreign currencies, thereby locking in the future exchange rate. Cash and Equivalents Cash equivalents consist of short-term, highly liquid investments which have original maturities to the Company of three months or less. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Property, Plant and Equipment Property, plant and equipment are depreciated using the straight-line method over the estimated useful lives of the assets or over the terms of the related leases, if such periods are shorter. The principal estimated useful lives are: building and improvements, 4 to 30 years; machinery and equipment, 3 to 10 years; lasts, patterns and dies, 5 years. Excess of Cost Over Fair Value of Net Assets Acquired The excess of cost over the fair value of net assets acquired is being amortized on a straight-line basis over periods of 10, 15 and 40 years. Accumulated amortization amounted to $9,187 and $7,503 at December 31, 1996 and 1995, 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. New Accounting Pronouncements The Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of", effective January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adopting SFAS No. 121 did not have a material effect on the Company's consolidated financial statements. During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation". The Company has continued to apply the provisions of APB Opinion No. 25 to its stock-based compensation awards to employees and has disclosed the required pro forma effect on net income and earnings per share in note 15. 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. 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 Earnings per share are calculated by dividing net income for each period by the weighted average number of common shares outstanding and share equivalents during each period. Fully diluted earnings per share are not materially different from primary earnings per share. THE TIMBERLAND COMPANY 21 10 FINANCIAL REVIEW 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, 1996 and 1995 along with maturity dates, net unrealized gain (loss), and net unrealized gain (loss) deferred.
Contract Unrealized Unrealized Net Net Unrealized Amount Maturity Gross Gros Unrealized Gain (Loss) December 31, 1996 ($U.S. Equivalent) Date Gain (Loss) Gain (Loss) Deferred 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) - --------------------------------------------------------------------------------------------------------------------------------- December 31, 1995 Pounds Sterling $5,547 1996 $112 $ -- $112 $112 Deutsche Marks 5,892 1996 135 (55) 80 17 French Francs 3,355 1996 75 (23) 52 5 Italian Lire 13,555 1996 5 (367) (362) (236) Spanish Pesetas 2,044 1996 -- (9) (9) (9) - --------------------------------------------------------------------------------------------------------------------------------- Total $30,393 $327 $(454) $(127) $(111) - ---------------------------------------------------------------------------------------------------------------------------------
The unrealized net loss deferred on such contracts as of December 31, 1996 and 1995 was $(339) and $(111), respectively. Unrealized gains or losses are determined based on the difference between the settlement and 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 $3,540 and $2,658 at December 31, 1996 and 1995, respectively. 22 THE TIMBERLAND COMPANY 11 FINANCIAL REVIEW 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. The Company has two remaining manufacturing facilities: one in Puerto Rico and one in the Dominican Republic. All other product is sourced by the Company from third party contract manufacturers. 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 substantially completed these restructuring actions. Cash expenditures related to the restructuring plan of $4,583 have been incurred through December 31, 1996. The Company has funded the restructuring plan from internal sources and available borrowing capacity. 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. During the third quarter of 1995, this agreement was amended to include South Korea. These transactions resulted in a pre-tax gain of approximately $12,107. In 1994, combined revenues of the Company's Australian and New Zealand subsidiaries accounted for less than 2% of total consolidated revenues. 5. ACQUISITION OF ITALIAN DISTRIBUTOR In April 1994, the Company entered into a Distributorship Termination Agreement (the "Termination Agreement") with its Italian distributor, which terminated all Italian distribution rights of the distributor on May 31, 1994. In accordance with the Termination Agreement, the Company also acquired certain assets of the distributor. Effective on the termination date, the Company assumed the distribution of its own products in Italy. This transaction has been accounted for as a purchase and, accordingly, the results of operations of the Company's Italian business have been included in the consolidated statements of operations from the acquisition date. The results of the Italian operations are not significant to the consolidated results of operations and, accordingly, pro forma data has been omitted. The total purchase price of $14,086 exceeded the fair value of net assets acquired, consisting primarily of inventory, by $8,979. This excess is being amortized on a straight-line basis over 10 years. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
December 31, 1996 1995 ----------------------------------- ----------------------------------- Carrying or Carrying or Contract Amount Fair Value Contract Amount Fair Value Cash and equivalents(1) $ 93,336 $ 93,336 $ 38,389 $ 38,389 Long-term debt(2) 189,454 199,011 207,187 220,494 Foreign currency contracts(3) 36,400 37,079 30,393 30,520 1 The carrying amounts of cash and equivalents approximate their fair values. 2 The fair value of the Company's long-term debt are estimated based on current rates available to the Company as of December 31, 1996 and 1995 for debt of the same remaining maturities. 3 The fair value of foreign currency contracts are estimated by obtaining the appropriate year-end rates as of December 31, 1996 and 1995, respectively.
7. INVENTORIES Inventories consist of the following:
December 31, 1996 1995 Raw materials $ 9,770 $ 10,374 Work-in-process 3,979 5,494 Finished goods 145,309 164,768 - ------------------------------------------------------------------------- Total $159,058 $180,636 - -------------------------------------------------------------------------
8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
December 31, 1996 1995 Land and improvements $ 1,149 $ 649 Building and improvements 34,263 31,534 Machinery and equipment 59,000 52,788 Lasts, patterns and dies 9,238 8,869 Assets held for sale - 2,097 - ------------------------------------------------------------------------- Total $103,650 $95,937 - -------------------------------------------------------------------------
Property, plant and equipment are stated at cost, except for assets held for sale which are stated at net realizable value. THE TIMBERLAND COMPANY 23 12 FINANCIAL REVIEW 9. INCOME TAXES The components of the provision (benefit) for income taxes are as follows:
Years Ended December 31, 1996 1995 1994 ------------------------- -------------------------- ------------------------- Current Deferred Current Deferred Current Deferred Federal $ 5,357 $ 637 $(5,255) $(3,920) $ 5,713 $ 1,548 State 1,411 36 (228) 1,046 1,984 713 Puerto Rico 468 232 195 314 289 122 Foreign 2,378 -- 717 -- 33 - --------------------------------------------------------------------------------------------------------------------------------- Total $ 9,614 $ 905 $(4,571) $(2,560) $ 8,019 $ 2,383 - ---------------------------------------------------------------------------------------------------------------------------------
The deferred tax provision (benefit) consists of the following:
Years Ended December 31, 1996 1995 1994 (Increase) decrease in reserves not currently deductible $ 2,058 $(6,058) $(1,111) Tax depreciation over (under) book depreciation and amortization (2,483) (900) 2,624 Puerto Rico tollgate taxes 232 314 122 Undistributed foreign earnings 720 4,159 849 Other, net 378 (75) (101) - ------------------------------------------------------------------------------------------------------------------------ Total $ 905 $(2,560) $ 2,383 - ------------------------------------------------------------------------------------------------------------------------
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, 1996 % 1995 % 1994 % Federal income tax at statutory rate $ 10,828 35.0% $ (6,568) (35.0)% $ 9,839 35.0% Federal tax exempt operations in Puerto Rico (2,973) (9.6) (1,242) (6.6) (1,834) (6.5) State taxes, net of applicable federal benefit 1,232 4.0 (207) (1.1) 1,753 6.2 Other, net 1,432 4.6 886 4.7 644 2.3 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 10,519 34.0% $ (7,131) (38.0)% $ 10,402 37.0% - -----------------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences and carry forwards that give rise to significant portions of deferred tax assets and liabilities at December 31 consist of the following:
1996 1995 ------------------------------- ----------------------------- Assets Liabilities Assets Liabilities Current Inventories 2,812 $ -- $ 2,446 $ -- Receivable allowances 3,505 -- 3,589 -- Intercompany profit elimination 713 -- 1,070 -- Other 2,137 -- 2,300 -- - --------------------------------------------------------------------------------------------------------------------------- Total $ 9,167 $ -- $ 9,405 $ -- - --------------------------------------------------------------------------------------------------------------------------- Non-current Accelerated depreciation and amortization $ -- $ (187) $ -- $ (2,670) Restructuring reserves -- -- 2,555 -- Puerto Rico tollgate taxes -- (1,897) -- (1,665) Undistributed foreign earnings -- (8,601) -- (8,238) Net operating loss carry-forwards 1,066 -- 1,020 -- Less valuation allowance (1,066) -- (1,020) -- - --------------------------------------------------------------------------------------------------------------------------- Total $ -- $(10,685) $ 2,555 $(12,573) - ---------------------------------------------------------------------------------------------------------------------------
24 THE TIMBERLAND COMPANY 13 FINANCIAL REVIEW The valuation allowance at December 31, 1996 of $1,066 includes $33 and $213 which arose during 1996 and 1995, respectively. The valuation allowance relates to foreign net operating loss carry forwards 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 $(100), $(3,063), and $(1,285) for the years ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, the Company had $3,134 of foreign operating loss carry forwards available to offset future foreign taxable income. Of these operating loss carry forwards, $99 will expire in 1997, $735 will expire in 1998, $619 will expire in 1999, $506 in 2000, and $1,175 thereafter. 10. 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 (5.65% at December 31, 1996). The 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 $14,000 at December 31, 1996, of which none was outstanding at year end. Borrowings under these lines are at prevailing money market rates (5.59% at December 31, 1996). 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, 1996 or 1995. There were no short-term borrowings outstanding at any month end during 1996. The maximum short-term borrowings at any month end were $83,000 and $119,200 during 1995 and 1994, respectively. Average borrowings under all short-term credit arrangements were $46,270 in 1995 and $65,790 in 1994. The weighted average interest rates were 6.55% and 5.38% in 1995 and 1994, respectively. 11. LONG-TERM DEBT Long-term debt consists of the following as of December 31:
Interest Year of Rate Maturity 1996 1995 Senior Notes 8.94% 2001 $106,000 $106,000 Senior Notes 7.16 2000 55,000 65,000 Senior Notes 9.70 1997-99 21,000 28,000 Industrial revenue bonds 6.20 2014 5,345 5,345 Other 6.00 1999 2,109 2,842 189,454 207,187 Less-current maturities (17,778) (7,733) - --------------------------------------------------------------------------------------------------- Total $171,676 $199,454 - ---------------------------------------------------------------------------------------------------
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 has been classified in current maturities as of December 31, 1996. The notes place limitations on the payment of dividends and the incurrence of additional debt, and also require maintenance of certain operational and financial covenants. THE TIMBERLAND COMPANY 25 14 FINANCIAL REVIEW The industrial revenue bonds bear interest at 6.20% through November 30, 1999, at which time the rate will be reset for another five-year period. According to the terms of the bonds, at every fifth anniversary, beginning in 1989 and continuing to the maturity date, the Company is required to repurchase any bonds tendered by the bondholders at face value. The next anniversary date will occur in November 1999 prior to the 1999 rate reset. The bonds are collateralized by a mortgage on certain real estate and equipment and contain financial and operational covenants and limitations similar to the Credit Agreement described in Note 10. Additionally, the Company has obtained an irrevocable standby letter of credit which secures the outstanding principal of the bonds through 1999. The Company's long-term debt at December 31, 1996 is scheduled to become due as follows: 1997 $ 17,778 1998 7,826 1999 7,505 2000 45,000 2001 106,000 Thereafter 5,345 - ---------------------------------------------------- Total $189,454 - ----------------------------------------------------
12. 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 2014. The approximate minimum rental commitments under all noncancellable leases as of December 31, 1996 are as follows: 1997 $ 15,373 1998 13,952 1999 12,508 2000 11,247 2001 10,032 Thereafter 38,122 - ----------------------------------------------------------- Total $101,234 - -----------------------------------------------------------
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 $17,189, $16,196 and $9,726 for the years ended December 31, 1996, 1995 and 1994, respectively. 26 THE TIMBERLAND COMPANY 15 FINANCIAL REVIEW 13. INDUSTRY SEGMENT AND GEOGRAPHICAL AREA INFORMATION The Company operates in a single industry segment which includes the designing, engineering, marketing and distribution of footwear products for men, women and children and apparel and accessories products for men and women. These products are sold in the United States and in more than 60 countries worldwide, primarily through independent retailers, better-grade department stores and athletic stores. TimberlandRegistration Mark products are also sold through TimberlandRegistration Mark 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, 1996, 1995 and 1994, respectively.
Adjustments United Other and 1996 States Europe Foreign Eliminations Consolidated Revenues from unaffiliated customers $ 517,781 $ 172,192 $ -- $ -- $ 689,973 Transfers between geographic areas 65,850 - 19,588 (85,438) -- - ------------------------------------------------------------------------------------------------------------------------------ Geographic revenues 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 Revenues from unaffiliated customers $ 498,144 $ 156,098 $ 896 $ -- $ 655,138 Transfers between geographic areas 56,149 - 25,865 (82,014) -- - ------------------------------------------------------------------------------------------------------------------------------ Geographic revenues 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 - ------------------------------------------------------------------------------------------------------------------------------ 1994 Revenues from unaffiliated customers $ 505,182 $ 123,304 $ 9,611 $ -- $ 638,097 Transfers between geographic areas 78,195 - 34,530 (112,725) -- - ------------------------------------------------------------------------------------------------------------------------------ Geographic revenues 583,377 123,304 44,141 (112,725) 638,097 - ------------------------------------------------------------------------------------------------------------------------------ Operating income 41,783 3,008 1,615 (2,790) 43,616 - ------------------------------------------------------------------------------------------------------------------------------ Identifiable assets at December 31, 1994 468,637 132,199 22,140 (149,712) 473,264 - ------------------------------------------------------------------------------------------------------------------------------ Export sales from the United States to unaffiliated customers, principally to distributors, amounted to 5.0% in 1996, and 6.1% in each of 1995 and 1994 of consolidated revenues.
THE TIMBERLAND COMPANY 27 16 FINANCIAL REVIEW 14. 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 vote together with the holders of Class B Common Stock for the remaining directors. On February 14, 1996, 1,080 shares of Class B Common Stoc k were converted to Class A Common Stock. 15. STOCK AND EMPLOYEE BENEFIT PLANS Under its 1987 Stock Option Plan, as amended (the "1987 Plan"), the Company has reserved 2,100,000 shares of Class A Common Stock for the granting of stock options to its employees. Pursuant to the terms of the 1987 Plan, grants may be made by the Board of Directors from time to time, but no grant shall be made after February 3, 1997. The option price per share shall not be less than the fair market value of stock at the time such option is granted in the case of options intended to qualify as "incentive" stock options under the Internal Revenue Code of 1986, as amended, and shall not be less than 50% of such fair market value in the case of "non-qualified" stock options for employees who are subject to Section 16 of the Securities Exchange Act of 1934, as amended. All stock options have been granted at fair market value. Stock options which have been granted under the 1987 Plan become exercisable in equal installments over four years beginning one year after the grant date, except for options granted in March 1995 to certain employees in lieu of cash bonus awards for 1994, which fully vest after one year and expire six months after the date of full vesting. In addition to the 1987 Plan, the Company has, on occasion, granted "non-qualified" stock options at fair market value to non-employees to purchase Class A Common Stock. 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 will expire on the same date as the original stock options, and have an extended vesting period of one year. Any repriced options exercisable as of December 19, 1995 could not be exercised prior to December 19, 1996. 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 shall be the fair market value of the stock on the date of grant, and the stock options become exercisable in equal installments over four years beginning one year after the grant date. Options granted under the 1987 Plan and the 1991 Plan generally expire ten years after the date of grant. Options for 297,202, 379,881 and 292,344 shares were exercisable under all option arrangements at December 31, 1996, 1995 and 1994, respectively. Under the existing stock option plans there were 1,112,283 and 1,053,031 shares available for future grants at December 31, 1996 and 1995, respectively. The following summarizes transactions under all stock option arrangements for the years ended December 31, 1996, 1995 and 1994:
Number of Per Share Weighted-Average Shares Option Price Exercise Price - -------------------------------------------------------------------------------- January 1, 1994 754,686 $ 6.38-83.25 $29.94 - -------------------------------------------------------------------------------- Granted 693,125 21.38-46.63 37.48 Exercised (59,551) 6.38-32.00 13.85 Canceled (127,621) 6.38-83.25 36.67 - -------------------------------------------------------------------------------- December 31, 1994 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 - --------------------------------------------------------------------------------
28 THE TIMBERLAND COMPANY 17 FINANCIAL REVIEW The following summarizes information about all stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ------------------------------------------------------- ----------------------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price $ 6.38-9.25 44,310 4.1 years $ 6.95 44,310 $ 6.95 12.00-19.50 191,984 6.3 15.62 106,146 14.15 20.50 298,319 6.6 20.50 76,629 20.50 21.00-26.00 159,264 8.1 22.40 53,648 23.49 31.13-39.00 55,750 8.6 36.62 14,283 34.66 46.63-83.25 3,000 6.9 75.66 2,186 76.50 - -------------------------------------------------------------------------------------------------------------------- Total 752,627 6.8 20.25 297,202 17.84 - --------------------------------------------------------------------------------------------------------------------
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 23,807 shares in 1996, 33,030 shares in 1995 and 31,016 shares in 1994 at prices ranging from $17.11 to $19.55. At December 31, 1996, a total of 61,646 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 1996 and 1995 were $6.08 and $5.96, respectively. The Company applies APB Opinion 25 and related Interpretations in accounting for its stock plans. 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 during 1996 and 1995 been determined under the provisions of SFAS No. 123, the Company's net income and earnings per share would have been $19,378 and $1.72 in 1996 and the net loss and loss per share would have been $12,498 and $1.12 in 1995. The pro forma effect on net income and earnings per share for 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 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 1996 and 1995, respectively: expected volatility of 55.9% and 52.6%; risk-free interest rates of 6.1% and 5.9%; expected lives of 4 and 3 years; no dividend payments. The weighted-average fair values per share of stock options granted during 1996 and 1995 were $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 2% of the employee's compensation or, if less, 50% of the employee's contribution. Vesting of the Company contribution begins at 25% after one year of service and increases by 25% each year until full vesting occurs. The Company's contribution expense was $542 in 1996, $499 in 1995 and $334 in 1994. The Company maintains a non-contributory profit sharing plan for eligible hourly employees not covered by the 401(k) Plan who are at least 21 years of age with one or more years of service. Contributions are at the discretion of the Company and fully vest to the employee upon completing three years of service. The Company's contribution expense was $230 in 1996, $175 in 1995 and $360 in 1994. 16. 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 have been named as defendants in two actions filed in the United States District Court for the District of New Hampshire, one filed by THE TIMBERLAND COMPANY 29 18 FINANCIAL REVIEW 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 alleges that defendants violated federal securities laws by making material misstatements and omissions in certain of the Company's public filings and statements in 1994. Specifically, the Amended Complaint alleges that such statements and omissions had the effect of artificially inflating the market price for the Company's Class A Common Stock until the disclosure by the Company on December 9, 1994 of its expectation that results for the fourth quarter were not likely to meet analysts' anticipated levels. Damages are unspecified. On March 18, 1996, the District Court denied defendants' motion to dismiss the Amended Complaint. On March 19, 1996, the District Court granted plaintiffs' motion for class certification for all purchasers of the Company's Class A Common Stock between May 12, 1994 and December 9, 1994. Management believes this action is without merit and intends to defend it vigorously. Accordingly, at this time, management does not expect the outcome of such litigation to have a material adverse effect on the Company's consolidated financial statements. 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the quarterly results of operations for the years ended December 31, 1996, 1995 and 1994, respectively (Dollars in Thousands Except Per Share Data): - ------------------------------------------------------------------------------------------------------------------
1996 Quarter Ended March 29 June 28 September 27 December 31 - ------------------------------------------------------------------------------------------------------------------ Revenues $ 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 Earnings (loss) per share (.09) (.61) 1.51 .99 - ------------------------------------------------------------------------------------------------------------------ 1995 Quarter Ended March 31(1) June 30(2) September 29(1) December 31 - ------------------------------------------------------------------------------------------------------------------ Revenues $ 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 Earnings (loss) per share .08 (1.83) .63 .07 - ------------------------------------------------------------------------------------------------------------------ 1994 Quarter Ended April 1 July 1 September 30 December 31 - ------------------------------------------------------------------------------------------------------------------ Revenues $ 108,318 $ 127,254 $ 222,188 $ 180,337 Gross profit 32,716 40,459 76,520 59,700 Net income (loss) (1,619) 145 16,329 2,855 Earnings (loss) per share (.14) .01 1.45 .26 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.
30 THE TIMBERLAND COMPANY 19 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, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts February 5, 1997 THE TIMBERLAND COMPANY 31 20 CORPORATE INFORMATION DIRECTORS Robert M. Agate (Retired) Senior Executive Vice President and Chief Financial Officer Colgate-Palmolive Company John F. Brennan Dean of the School of Management Suffolk University Ian W. Diery Consultant John A. Fitzsimmons Senior Vice President-Consumer Electronics Circuit City Stores, Inc. Jeffrey B. Swartz Executive Vice President and Chief Operating Officer The Timberland Company Sidney W. Swartz Chairman, President and Chief Executive Officer The Timberland Company Abraham Zaleznik Professor Emeritus Harvard Business School CORPORATE OFFICERS Sidney W. Swartz Chairman, President and Chief Executive Officer Jeffrey B. Swartz Executive Vice President and Chief Operating Officer Keith D. Monda Senior Vice President-Finance and Administration and Chief Financial Officer Gregory W. VanWormer Senior Vice President-General Manager Apparel/Retail/Marketing Dennis W. Hagele Vice President-Finance and Corporate Controller (Chief Accounting Officer) Jane E. Owens Vice President and General Counsel and Assistant Secretary Carden N. Welsh Treasurer John E. Beard Secretary Partner, Ropes & Gray CORPORATE COUNSEL Ropes & Gray Boston, Massachusetts INDEPENDENT ACCOUNTANTS Deloitte & Touche LLP Boston, Massachusetts ANNUAL MEETING OF SHAREHOLDERS May 16, 1997 at 9:30 a.m. The Timberland Company Headquarters 200 Domain Drive Stratham, New Hampshire 03885 FORM 10-K This report is available at no charge upon written request from the Investor Relations Department, The Timberland Company, 200 Domain Drive, Stratham, New Hampshire 03885, telephone 603.772.9500. CLASS A COMMON STOCK LISTING New York Stock Exchange: TBL STOCK CERTIFICATES, NAME CHANGES OR TRANSFERS The First National Bank of Boston c/o Boston EquiServe Mail Stop 45-01-05 P.O. Box 644 Boston, Massachusetts 02102-0644 617.575.3120 Timberland, [Timberland logo], The Boot Company, Active Comfort Technology and ACT are trademarks or registered trademarks of The Timberland Company. City Year is a registered trademark of City Year, Inc. (C)The Timberland Company 1997. All Rights Reserved. 32 THE TIMBERLAND COMPANY EX-21 4 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 LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-60457, 33-60459, 33-67128, 33-56913, 33-17552, 33-41660, 33-19183 and 33-50998 on Forms S-8 and Registration Statement No. 33-56921 on Form S-3 of the Timberland Company of our reports dated February 5, 1997, appearing in and incorporated by reference in this Annual Report on Form 10-K of The Timberland Company for the year ended December 31, 1996. Deloitte & Touche Boston, Massachusetts March 17, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED 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 0 111 165,240 449,586 689,973 689,973 438,064 438,064 1,684 2,046 20,582 30,938 10,519 20,419 0 0 0 20,419 1.81 0
EX-99 7 CAUTIONARY STATEMENTS 1 EXHIBIT 99 Filed as Exhibit 99 to Form 10-K for the fiscal year ended December 31, 1996 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, 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 what it produces and sells. In addition, the Company's rapid 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 net revenues, and the Company would experience higher inventory levels and associated carrying costs, all of which could 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's expanded men's dress casual footwear product line, its more fashion-focused women's footwear product line and its 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 continued 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 Company's sales in the future, especially as the Company's business shifts towards "at-once" orders being adopted by many retailers. 2 GROWING RETAIL ORGANIZATION. In 1986, the Company opened the first Timberland(R) store devoted exclusively to Timberland(R) products. At the end of 1996, the Company operated 31 specialty stores and 40 factory outlet stores worldwide, and revenues from these stores represented 23.5% of the Company's revenues for 1996. The Company has made a significant capital investment in opening these stores and incurs significant expenditures in operating these stores. The Company continued to experience in 1996 the higher level of fixed costs related to its retail organization which adversely affected profitability in the first half of the year, given that historically the Company's revenues have 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, could 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 profit margin could be adversely affected if the off-price sales increase as a percentage of revenues. 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(R) brand in these products or territories will, therefore, largely depend on the efforts of its licensees. Most of the products to be manufactured under the Company's existing product licensing agreements will not be available at retail until at least late 1996 or early 1997, and the Company's territorial licensing agreement covering parts of South America was signed in late 1995. Accordingly, the long-term performance of the licensees under these agreements has not yet been tested. The Company is pursuing additional licensing opportunities. There can be no assurance that the Company will be able to locate licensees and negotiate acceptable terms with licensees for additional products and territories. PRICING OF PRODUCTS. The average selling prices of the Company's footwear products declined in 1995 and 1994, and the average selling prices of the Company's apparel and accessories products declined in 1996, 1995 and 1994. The prices the Company is able to obtain for its new and expanded product offerings, and 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. -2- 3 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 and private labels established by retailers. RAW MATERIALS. The Company depends on several key sources for leather, its principal raw material, and other proprietary materials used in its products. The Company could be adversely affected by unanticipated price increases or shortages of such materials. DEPENDENCE UPON INDEPENDENT MANUFACTURERS. In 1996, approximately 65% 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 and South America. (See the "International" paragraph below 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 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. 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 and from the research and development activities 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. 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 approximately 88% 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. -3- 4 LIQUIDITY AND CAPITAL RESOURCES. Management believes that the Company's capital needs for 1997 can be met through its existing credit facilities and cash flow from operations, without the need for additional permanent financing. However, the Company may need to raise additional capital in the future in order to finance its anticipated growth and capital requirements beyond 1997. The terms and availability of any such additional financing would be subject to prevailing market conditions and other factors at that time. 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. At December 31, 1996, the Company's debt to equity ratio was 53.4%. Although this ratio has decreased from December 31, 1995 and 1994, the Company is subject to the risks associated with relatively high levels of interest expense and financial leverage. INTERNATIONAL. The Company manufactures and sources a majority of its products outside the United States and sells its products in more than 60 countries worldwide through its stores, operating divisions, distributors and commission agents. 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. 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. -4- -----END PRIVACY-ENHANCED MESSAGE-----