-----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, WywtNAao+V9i/Hyz/ZIqUzEE5mxc3B8LXw7kKUSzLUvjDW/1VuO1J/zaHbpxzZEJ qeyiS6xWz4rB4R5zWHaj3g== 0000950135-99-001502.txt : 19990326 0000950135-99-001502.hdr.sgml : 19990326 ACCESSION NUMBER: 0000950135-99-001502 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIMBERLAND CO CENTRAL INDEX KEY: 0000814361 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 020312554 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09548 FILM NUMBER: 99572557 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, 1998 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission File Number 1-9548 ------ The Timberland Company ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 02-0312554 --------------------------------- ------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 200 Domain Drive, Stratham, New Hampshire 03885 - ----------------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: (603) 772-9500 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Class A Common Stock, par value $.01 per share New York Stock Exchange - ---------------------------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None ---- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Class A Common Stock of the Company held by non-affiliates of the Company was approximately $539,925,000 on February 19, 1999. For purposes of the foregoing sentence the term "affiliate" includes each director and executive officer of the Company. See Item 12 of this Form 10-K. 9,178,937 shares of Class A Common Stock and 2,337,849 shares of Class B Common Stock of the Company were outstanding on February 19, 1999. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's Annual Report to security holders for the fiscal year ended December 31, 1998 are incorporated by reference in Part I, Item 1, and Part II, Items 5, 6, 7, 7A and 8, of this Form 10-K. Portions of the Company's definitive Proxy Statement for the 1999 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference in Part III, Items 10, 11, 12 and 13, of this Form 10-K. ================================================================================ 2 PART I ITEM 1. BUSINESS OVERVIEW The Timberland Company was incorporated in Delaware on December 20, 1978. It is the successor to Abington Shoe Company, which was incorporated in Massachusetts in 1933 (The Timberland Company, together with its subsidiaries, is referred to herein as "Timberland" or the "Company," unless the context indicates otherwise). The Company designs, develops, engineers, markets and distributes, under the Timberland(R) brand, premium-quality footwear, apparel and accessories products for men, women and children. Timberland(R) products provide functional performance, classic styling and lasting protection from the elements. The Company believes that the combination of these features distinguishes the Timberland brand from competing brands and makes Timberland products an outstanding value. Timberland products are sold primarily through independent retailers, better-grade department stores and athletic stores which reinforce the high level of quality, performance and service associated with the Timberland brand. In addition, Timberland products are sold in Timberland(R) specialty stores and Timberland(R) factory outlet stores dedicated exclusively to selling Timberland products. CURRENT PRODUCTS The Company's products fall into two primary groups: (1) footwear and (2) apparel and accessories (including product care and licensed products). The following table presents the percentage of the Company's total product revenue (excluding royalties from third party distributors and licensees) derived from the Company's sales of footwear and of apparel and accessories for the past three years: Product 1998 1997 1996 ------- ---- ---- ---- Footwear 76.9% 75.4% 74.8% Apparel and Accessories 23.1 24.6 25.2 FOOTWEAR In 1973, the Company produced its first pair of waterproof leather boots under the Timberland brand. The Company currently offers a broad variety of footwear products for men, women and children, featuring premium materials, state-of-the-art functional design and components and advanced construction methods. The Company's footwear design and development group is organized into the following teams: men's, women's, kids, boots and performance. Each team is responsible for all aspects of the footwear development process. Timberland(R) men's and women's 1998 footwear products included the Work Casual, Casual, Boat Shoes, Sandals and Rugged collections. Timberland(R) kids' footwear products are scaled-down versions of Company's high-quality adult footwear products. Timberland(R) boots 1 3 include the classic work boots for which the Company is widely recognized. 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. Most Timberland(R) performance footwear products and many other Timberland(R) footwear products offer advanced technologies such as Active Comfort Technology(TM) (ACT(TM)), an integrated system developed by the Company that combines some or all of the following features: - Advanced Combination Construction - designed to deliver forefoot flexibility for maneuverability and rear-foot stability for rugged terrain; - B.S.F.P.(TM) motion efficiency system - Timberland's patent pending technology designed to deliver improved traction, energy-return and length of wear; - Guaranteed Waterproof Construction; and - Climate Control - moisture-wicking, breathable linings to help control foot perspiration. APPAREL AND ACCESSORIES Timberland(R) adult apparel products consist primarily of rugged outerwear, sweaters, shirts, pants and shorts for men. These products feature, in certain models, premium waterproof leathers, waterproof and water resistant fabric, rust-proof hardware, canvas, denim, high-quality specialty cotton, wool and other quality performance materials. While the Company currently does not manufacture or distribute women's apparel, it is evaluating alternatives for women's apparel, including third party licensing. Timberland(R) boys' apparel products are designed, manufactured and distributed pursuant to a license agreement. Timberland(R) accessories for men, women and children include all products sold under the Timberland(R) brand other than footwear and apparel products. Many of these products, including watches, men's belts, day packs and travel gear, socks and legwear, gloves, sunglasses and ophthalmic frames, and men's small leather goods, are designed, manufactured and distributed pursuant to licensing agreements with third parties. Timberland receives a royalty on sales of these licensed products. Third-party licensing enables the Company to expand the Timberland brand to appropriate and well-defined product categories and to benefit from the expertise of the licensees, in a manner that reduces the risks to the Company associated with pursuing such opportunities. In 1998, the Company entered into a license agreement with Paramount Headwear, Inc. for the design, manufacture and distribution of Timberland(R) hats and caps beginning in 1999. Timberland accessories also include leather care products and a limited collection of leather goods, including luggage, briefcases, handbags, wardrobe accessories and small leather goods. PRODUCT SALES; BUSINESS SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREA Timberland(R) products are sold in the United States and internationally primarily through independent retailers, better-grade department stores and athletic stores which reinforce the high level of quality, performance and service associated with the Timberland(R) brand. In addition, 2 4 Timberland(R) products are sold in Timberland(R) specialty stores and Timberland(R) factory outlet stores dedicated exclusively to selling Timberland products. The Company operates in an industry which includes the designing, engineering, marketing and distribution of footwear and apparel and accessories products for men, women and children. The Company has five revenue generating business units having separate management teams and financial reporting accountability. For financial reporting purposes, the Company aggregates these business units into the following three reportable segments, each sharing similar product, distribution, marketing and economic conditions: U.S. Wholesale, U.S. Retail and International. The U.S. Wholesale segment is comprised of the Company's worldwide product development and manufacturing/sourcing for footwear and apparel and accessories, and the sale of such products to wholesale customers in the United States. The U.S. Wholesale segment also includes royalties from licensed products sold in the United States and the management costs and expenses associated with the Company's worldwide licensing efforts. The U.S. Retail segment includes the Company operated specialty and factory outlet stores in the United States. The International segment consists of the marketing, selling and distribution of footwear, apparel and accessories and licensed products outside of the United States, including the Company's European subsidiaries (which use wholesale and retail channels to sell footwear and apparel and accessories), independent distributors and licensees. The following table presents the percentage of the Company's total revenue generated by each of these reporting segments for the past three years: 1998 1997 1996 ---- ---- ---- U.S. Wholesale 52.3% 53.7% 50.2% U.S. Retail 18.5 18.9 20.2 International 29.2 27.4 29.6 More detailed information regarding these reportable segments and each of the geographic areas in which the Company operates, is set forth in Note 10 to the Company's consolidated financial statements, entitled "Business Segments and Geographical Information," appearing in the Company's 1998 Annual Report to security holders (the "1998 Annual Report"), which information is incorporated herein by reference. U. S. WHOLESALE The Company's wholesale customer accounts within the United States range from better-grade department and retail stores to athletic stores. Many of these wholesale accounts merchandise Timberland products in selling areas dedicated exclusively to Timberland products, or "concept shops." These accounts are serviced through a combination of field and corporate-based sales teams aligned with these channels. The Company also services its wholesale accounts through its principal showroom in New York City and a regional showroom in Dallas, Texas. 3 5 U. S. RETAIL At December 31, 1998, the Company operated 17 specialty stores and 37 factory outlet stores in the United States. TIMBERLAND(R) SPECIALTY STORES. These stores carry current season, first quality merchandise and provide: - an environment to showcase the Timberland(R) brand as an integrated source of footwear, apparel and accessories; - sales and consumer-trend information which assists the Company in developing its marketing strategies, including point-of-purchase marketing materials; and - training and customer service programs, which also serve as models which may be adopted by the Company's wholesale customers. TIMBERLAND(R) FACTORY OUTLET STORES. These stores serve as a primary channel for the sale of excess, damaged or discontinued products. The Company views these factory outlet stores as a way to preserve the integrity of the Timberland(R) brand, while maximizing the return associated with the sale of such products. INTERNATIONAL The Company sells its products internationally through its operating divisions in the United Kingdom, France, Germany, Italy, Spain and Austria. The Company recently established a subsidiary in Chile. The Company's European operating divisions provide support for the sale of Timberland(R) products to wholesale customers and operate Timberland specialty stores and factory outlet stores in their respective countries. At December 31, 1998, the Company operated 13 specialty stores and seven factory outlet stores in Europe. Timberland products are sold elsewhere in Europe and in the Middle East, Africa, Central America, South America and the Asia/Pacific region by distributors, franchisees and commission agents, some of which also may operate Timberland specialty and factory outlet stores located in their respective countries. DISTRIBUTION The Company distributes its products through three Company-managed distribution facilities, located in Danville, Kentucky, Ontario, California, and Enschede, Holland. During 1998, the Company continued to consolidate and centralize its distribution center operations through the following initiatives: - consolidating into the Danville, Kentucky facility the apparel and accessories distribution functions formerly conducted at the Grove City, Ohio facility; - completing and opening the Ontario, California facility; and - completing the consolidation of all of its European distribution facilities into the Enschede centralized facility. 4 6 ADVERTISING AND MARKETING The Company designs its advertising campaigns to increase brand awareness among consumers and to emphasize the features that distinguish the Timberland(R) brand from competing brands and make Timberland(R) products an outstanding value. The Company's distributors and licensees also fund marketing campaigns, over which the Company maintains approval rights to ensure consistent and effective brand presentation. During 1998, the Company's national and regional advertising campaigns mainly appeared in the following media: active-lifestyle, fashion, business and sports-oriented consumer periodicals; trade press outlets; and outdoor advertising placements. The Company's advertising campaigns focused on the second half of 1998, particularly on the third quarter, when the Company's revenue historically has been highest. The Company reinforced these advertising efforts with a variety of promotional campaigns, retail promotions, point-of-purchase displays and materials, public relations efforts, and cooperative advertising programs with its retailers, as well as retail sales clerk training and other sales incentive programs. The Company maintains an internet web site - www.timberland.com - for use in its marketing efforts. The Company also promoted its products at various industry trade shows in the United States and internationally. SEASONALITY In 1998, as historically has been the case, the Company's revenue was higher in the last two quarters of the year than in the first two quarters. Accordingly, the amount of fixed costs related to the Company's operations typically represented a larger percentage of revenue in the first two quarters of 1998 than in the last two quarters of 1998. The Company expects this seasonality to continue in 1999. BACKLOG At December 31, 1998, Timberland's backlog of orders from its customers was approximately $188 million, compared to $186 million at December 31, 1997 and $129 million at December 31, 1996. 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 1999. The Company does not believe that its order backlog at year-end is representative of the orders which will be filled during 1999, due to the risk that such orders could be canceled, the seasonality of the Company's revenue described above and the portion of the Company's sales historically made up of "at-once" orders, the planning for which is more difficult than "future" orders. MANUFACTURING The Company has two manufacturing facilities located in Puerto Rico and the Dominican Republic. During 1998, the Company manufactured approximately 20% of its footwear unit volume, compared to approximately 28% during 1997 and 35% during 1996. The remainder of the Company's footwear products and all of its apparel and accessories products were produced 5 7 by independent manufacturers and licensees in Asia, Europe, South America and Mexico. Approximately 56% of the Company's 1998 footwear unit volume was produced by independent manufacturers in China and Taiwan. One of these manufacturers produced approximately 30% of the Company's 1998 footwear volume. The Company currently plans to retain its internal manufacturing capability in order to continue benefiting from reduced lead times, favorable duty rates and tax benefits. To the extent that the Company manufactures its products outside the United States or is dependent upon foreign operations with unaffiliated parties, the Company is subject to the usual risks of doing business abroad. These risks potentially include, among other risks, foreign exchange rate fluctuations, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. The Company maintains a quality management group, which develops, reviews and updates the Company's quality and production standards. To help ensure such standards are 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, Taichung, Taiwan, and Zhu Hai, China, to supervise the Company's sourcing activities conducted in the Asia/Pacific region. RAW MATERIALS In 1998, four suppliers provided, in the aggregate, more than 60% of the Company's leather purchases. One of these suppliers provided approximately 30% of the Company's leather purchases in 1998. The Company believes that leather will continue to be available from these or alternative sources. The Company has established a central network of suppliers through which the Company's manufacturing facilities and independent manufacturers can purchase raw materials. In 1999, the Company expects to increase sourcing of leather from premier Asian tanneries that process United States hides, including current suppliers, in an effort to reduce lead times while maintaining the Company's high quality standards. The Company believes that key strategic alliances with leading raw material vendors help reduce the cost and provide greater consistency of raw materials procured to produce Timberland(R) products and improve compliance with the Company's production standards. TRADEMARKS AND TRADE NAMES; PATENTS; RESEARCH & DEVELOPMENT The Company's principal trade name is The Timberland Company and the Company's principal trademarks are TIMBERLAND and the TREE DESIGN LOGO, which have been registered in the United States and several foreign countries. Other Company trademarks or registered trademarks are 24-7 Comfort Suspension, ACT, Active Comfort Technology, Aero Balm, Balm Shelter, Bootness, B.S.F.P., Cream Buff, Euro Rec, Euro TecRec, Fastpacker, Gear For Outdoor Athletes, Grime Squad, Guaranteed Waterproof Construction, Hydro Balm, Jackson Mountain, Lockseam, Mill River, More Quality Than You May Ever Need, Mountain to River, Mountain Athletics, Path of Service, Pull On Your Boots, Pull On Your Boots and Make a Difference, TBL, The Boot Company, This is a trip, This is not baggage, This is your new best friend, Timberland Pro, Trail Grip, Treeline, Waximum, Weathergear, and Workboots For The Professional, and the following design logos: 6 8 [TREE DESIGN LOGO] [REVERSE IMAGE TREE DESIGN LOGO] [TIMBERLAND PRO DESIGN LOGO] [MOUNTAIN ATHLETICS DESIGN LOGO(3)] [GEAR DESIGN LOGO] [TIMBERLAND PRO SERIES DESIGN LOGO] [24-7 COMFORT SUSPENSION DESIGN LOGO] [TIMBERLAND MILLRIVER DESIGN LOGO] [MOUNTAIN TO RIVER DESIGN LOGO] The Company regards its trade name and trademarks as valuable assets and believes that they are important factors in marketing its products. The Company protects and defends vigorously its trade name and trademarks against infringement under the laws of the United States and other countries. In addition, the Company seeks to protect and defend vigorously its patents, designs, copyrights and all other proprietary rights under applicable laws. The Company conducts research, design and development efforts for its products, including field testing of a number of its products to evaluate and improve product performance. However, the Company's expenses relating to research, design and development have not represented a material expenditure relative to its other expenses. COMPETITION The Company's footwear, apparel and accessories products are marketed in highly competitive environments which are subject to rapid changes in consumer preference. Although the footwear industry is fragmented to a great degree, many of the Company's competitors are larger and have substantially greater resources than the Company, including athletic shoe companies, many of which compete directly with some of the Company's products. In addition, the Company faces competition from retailers that are establishing products under private labels and from at least two direct mail companies in the United States. Product quality, performance, design, styling and pricing, as well as consumer awareness, are all important elements of competition in the footwear and the apparel and accessories markets served by the Company. Although changing fashion trends generally affect demand for particular products, the Company believes that, because of the functional performance, classic styling and high quality of Timberland(R) footwear products, demand for most Timberland footwear products is less sensitive to changing trends in fashion than other products that are designed specifically to meet such trends. 7 9 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 product categories, as follows: Number of --------- Product Category Competitors ---------------- ----------- Footwear: work boots 9 casual and comfort 11 dress casual 12 performance 13 kids' 6 Apparel: men's 12 kids' 10 ENVIRONMENTAL MATTERS Compliance with federal, state and local environmental regulations has not had, nor is it expected to have, any material effect on the capital expenditures, earnings or competitive position of the Company based on information and circumstances known to the Company at this time. EMPLOYEES At December 31, 1998, the Company had approximately 5,200 employees worldwide. Management considers its employee relations to be good. None of the Company's employees is represented by a labor union, and the Company has never suffered a material interruption of business caused by labor disputes. ITEM 2. PROPERTIES Since April 1994, the Company has leased its worldwide headquarters located in Stratham, New Hampshire, under a lease which expires in September 2000. The Company considers its headquarters facilities adequate and suitable for its current needs. The Company leases its manufacturing facilities located in Isabela, Puerto Rico, and Santiago, Dominican Republic, under 11 leasing arrangements, which expire on various dates through April 2002. The Company owns its distribution facility in Danville, Kentucky, and leases its facilities in Ontario, California, and Enschede, Holland. The Company leases all of its specialty and factory outlet stores. The Company's subsidiaries also lease office and warehouse space to meet their individual requirements. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various litigation and legal matters which have arisen in the ordinary course of business. Management believes that the ultimate resolution of any existing 8 10 matter will not have a material adverse effect on the Company's consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year ended December 31, 1998, 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 table lists the names, ages and principal occupations during the past five years of the Company's executive officers. All executive officers serve at the discretion of the Company's Board of Directors. 9 11
NAME AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS ---- --- ----------------------------------------------- Sidney W. Swartz 63 Chairman of the Board since June 1986; Chief Executive Officer and President, June 1986-June 1998. Jeffrey B. Swartz 39 President and Chief Executive Officer since June 1998; Chief Operating Officer, May 1991-June 1998; Executive Vice President, March 1990-June 1998. Jeffrey Swartz is the son of Sidney Swartz. Geoffrey J. Hibner 49 Senior Vice President-Finance and Administration and Chief Financial Officer since May 1997. Frontier Technologies Corporation: Chief Financial Officer, August 1995-May 1997. Universal Foods Corporation: Vice President, Finance, July 1988-January 1995. Lisa H. Macpherson 38 Senior Vice President-Global Marketing since November 1998. Fisher-Price, a division of Mattel, Inc.: Senior Vice President, Marketing, March 1997-November 1998; Senior Vice President, International Marketing, October 1995-March 1998; Vice President, Marketing Development, January 1994-October 1995. Kenneth P. Pucker 36 Senior Vice President and General Manager-Footwear since December 1997; Vice President and General Merchandising Manager-Footwear, April 1996-December 1997; Vice President-Strategic Initiatives, January 1995-April 1996; General Manager-The Outdoor Footwear Company (a subsidiary of the Company), October 1993-January 1995. Carden N. Welsh 45 Senior Vice President-International since May 1998; Treasurer, April 1991-May 1998. Dennis W. Hagele 55 Vice President-Finance and Corporate Controller (Chief Accounting Officer) since October 1994. Independent financial consultant, July 1993-September 1994. Danette Wineberg 52 Vice President and General Counsel since October 1997. Little Caesar Enterprises, Inc.: General Counsel, November 1993-October 1997.
10 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is included in the Company's 1998 Annual Report under the caption "Quarterly Market Information and Related Matters" and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included in the Company's 1998 Annual Report 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 Company's 1998 Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is included in the Company's 1998 Annual Report under the caption "Quantitative and Qualitative Disclosures about Market Risk" and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included in the Company's 1998 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 the information under the caption "Information with Respect to Nominees" in the Company's definitive Proxy Statement (the "1999 Proxy Statement") relating to its 1999 Annual Meeting of Stockholders, to be filed with 11 13 the Securities and Exchange Commission (the "Commission") within 120 days after the close of the Company's fiscal year ended December 31, 1998, which information is incorporated herein by reference. Reference is also made to the information set forth in the Company's 1999 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 Company's 1999 Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's 1999 Proxy Statement, which information is incorporated herein by reference. The aggregate market value of the Class A Common Stock held by non-affiliates of the Company appearing on the cover page of this report includes the shares owned by The Sidney W. Swartz 1982 Family Trust, The Swartz Foundation and The Sidney and Judith Swartz Charitable Remainder Unitrust. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the information set forth under the caption "Certain Relationships and Related Transactions" in the Company's 1999 Proxy Statement, which information is incorporated herein by reference. 12 14 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 1998 Annual Report are incorporated by reference in this report: ANNUAL REPORT PAGE ---- Consolidated Balance Sheets as of December 31, 1998 and 1997 19 For the years ended December 31, 1998, 1997 and 1996: Consolidated Statements of Income 20 Consolidated Statements of Changes in Stockholders' Equity 21 Consolidated Statements of Cash Flows 22 Notes to Consolidated Financial Statements 23 Independent Auditors' Report 33 (a)(2) FINANCIAL STATEMENT SCHEDULE. The following additional financial data should be read in conjunction with the consolidated financial statements in the Company's 1998 Annual Report: FORM 10-K PAGE --------- Independent Auditors' Report on Schedule II F-1 Schedule II - Valuation and Qualifying Accounts F-2 All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable and have, therefore, been omitted. (b) REPORTS ON FORM 8-K. On October 21, 1998, the Company filed a report on Form 8-K with respect to the approval by its Board of Directors of a stock repurchase program. (c) EXHIBITS. Listed below are all the Exhibits filed as part of this report, some of which are incorporated by reference from documents previously filed by the Company with the Commission in accordance with the provisions of Rule 12b-32 of the Exchange Act. 13 15 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, filed herewith (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 (2) (10) MATERIAL CONTRACTS 10.1 Agreement dated as of August 29, 1979 between The Timberland Company and Sidney W. Swartz (1) 10.2 (a) The Company's 1987 Stock Option Plan, as amended (3) (b) The Company's 1997 Stock Option Plan for Non-Executive Employees (4) (c) The Company's 1997 Incentive Plan (4) 10.3 The Company's 1991 Employee Stock Purchase Plan, as amended (5) 10.4 The Company's 1991 Stock Option Plan for Non-Employee Directors (6) 10.5 The Timberland Company Short Term Incentive Plan, filed herewith - ----------------- (1) Filed as an exhibit to Registration Statement on Form S-1, numbered 33-14319, and incorporated herein by reference. (2) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference. (3) Filed on June 21, 1995, as an exhibit to Registration Statement on Form S-8, numbered 33-60457, and incorporated herein by reference. (4) Filed on September 9, 1997 as an exhibit to Registration Statement on Form S-8, numbered 333-35223, and incorporated herein by reference. (5) Filed on June 21, 1995, as an exhibit to Registration Statement on Form S-8, numbered 33-60459, and incorporated herein by reference. (6) Filed on August 18, 1992, as an exhibit to Registration Statement on Form S-8, numbered 33-50998, and incorporated herein by reference. 14 16 EXHIBIT DESCRIPTION - -------------------------------------------------------------------------------- 10.6 The Timberland Company Retirement Earnings 401(k) Plan and Trust Agreements (7) 10.7 The Timberland Company Profit Sharing Plan and Trust Agreements (7) 10.8 Credit Agreement dated as of April 30, 1998 among The Timberland Company, certain banks listed therein and Morgan Guaranty Trust Company of New York, as Agent (8) 10.9 (a) Note Agreements dated as of December 15, 1994 regarding $106,000,000 8.94% Senior Notes due December 15, 2001 (9) (b) Amendment No. 1 dated as of April 1, 1995 to Note Agreements (10) (c) Amendment No. 2 dated as of June 28, 1995 to Note Agreements (10) (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 the 1998 Annual Report as incorporated herein by reference, filed herewith (21) SUBSIDIARIES 21. List of subsidiaries of the registrant, filed herewith - ------------------------- (7) 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. (8) Filed as an exhibit to the Quarterly Report on Form 10-Q for the fiscal period ended June 26, 1998, and incorporated herein by reference. (9) 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. (10) 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. (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. 15 17 EXHIBIT DESCRIPTION - -------------------------------------------------------------------------------- (23) CONSENT OF EXPERTS AND COUNSEL 23. Consent of Deloitte & Touche LLP, filed herewith (27) FINANCIAL DATA SCHEDULE 27. Financial Data Schedule for the year ended December 31, 1998, filed herewith (99) ADDITIONAL EXHIBIT 99. Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, filed herewith Pursuant to paragraph 4(iii) of Item 601(b), Regulation S-K, the Company has filed as Exhibits only the instruments defining the rights of holders of long-term debt of the Company and its consolidated subsidiaries with respect to which the total amount of securities authorized thereunder exceeds 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish to the Commission, upon its request, copies of other instruments defining the rights of holders of long-term debt of the Company and its subsidiaries, with respect to which the total amount does not exceed 10% of such assets. The Company also agrees to furnish to the Commission, upon its request, copies of any omitted schedule or exhibit to any Exhibit filed herewith. 16 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TIMBERLAND COMPANY March 24, 1999 By: /s/ Jeffrey B. Swartz ------------------------------- Jeffrey B. Swartz, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Sidney W. Swartz Chairman of the Board - ------------------------ and Director March 24, 1999 Sidney W. Swartz /s/ Jeffrey B. Swartz President, Chief Executive - ------------------------ Officer and Director (Principal March 24, 1999 Jeffrey B. Swartz Executive Officer) /s/ Geoffrey J. Hibner Senior Vice President-Finance - ------------------------- and Administration and Chief March 24, 1999 Geoffrey J. Hibner Financial Officer /s/ Dennis W. Hagele Vice President-Finance - ------------------------- and Corporate Controller March 24, 1999 Dennis W. Hagele (Chief Accounting Officer) /s/ Robert M. Agate - ------------------------ Director March 24, 1999 Robert M. Agate /s/ John F. Brennan - ------------------------ Director March 24, 1999 John F. Brennan /s/ Ian W. Diery - ------------------------ Director March 24, 1999 Ian W. Diery /s/ John A. Fitzsimmons - ------------------------ Director March 24, 1999 John A. Fitzsimmons /s/ Indra K. Nooyi - ------------------------ Director March 24, 1999 Indra K. Nooyi /s/ Abraham Zaleznik - ------------------------ Director March 24, 1999 Abraham Zaleznik
19 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The Timberland Company: We have audited the consolidated financial statements of The Timberland Company and subsidiaries as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 3, 1999; such consolidated financial statements and report are included in your 1998 Annual Report to security holders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of The Timberland Company listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts February 3, 1999 F-1 20 SCHEDULE II THE TIMBERLAND COMPANY VALUATION AND QUALIFYING ACCOUNTS (Dollars In Thousands)
Additions Deductions ---------------------------------- ---------- Balance at Write-Offs, Balance at Beginning Charged to Costs Charged to Net of End of Period and Expenses Other Accounts Recoveries of Period ---------- ---------------- -------------- ----------- ---------- Description - ----------- Allowance for doubtful accounts: Year ended December 31, 1998 $3,742 $2,383 - $1,356 $4,769 December 31, 1997 3,540 3,605 - 3,403 3,742 December 31, 1996 2,658 2,046 - 1,164 3,540 Group insurance reserve: Year ended December 31, 1998 $1,100 $4,377 - $4,400 $1,077 December 31, 1997 1,035 6,803 - 6,738 1,100 December 31, 1996 2,774 3,402 - 5,141 1,035
---------------------------------------------------------------- F-2 21 TIMBERLAND, the TREE DESIGN LOGO, 24-7 Comfort Suspension, ACT, Active Comfort Technology, Aero Balm, Balm Shelter, Bootness, B.S.F.P., Cream Buff, Euro Rec, Euro TecRec, Fastpacker, Gear For Outdoor Athletes, Grime Squad, Guaranteed Waterproof Construction, Hydro Balm, Jackson Mountain, Lockseam, Mill River, More Quality Than You May Ever Need, Mountain to River, Mountain Athletics, Path of Service, Pull On Your Boots, Pull On Your Boots and Make a Difference, TBL, The Boot Company, This is a trip, This is not baggage, This is your new best friend, Timberland Pro, Trail Grip, Treeline, Waximum, Weathergear, and Workboots For The Professional, are trademarks or registered trademarks of The Timberland Company. (C) The Timberland Company 1999 All Rights Reserved. EX-3.2 2 AMENDED BY-LAWS OF THE COMPANY 1 EXHIBIT 3.2 AMENDED BY-LAWS OF THE TIMBERLAND COMPANY Section 1. LAW, CERTIFICATE OF INCORPORATION AND BY-LAWS 1.1. These By-Laws are subject to the certificate of incorporation of the corporation. In these By-Laws, references to law, the certificate of incorporation and By-Laws mean the law, the provisions of the certificate of incorporation and the By-Laws as from time to time in effect. Section 2. STOCKHOLDERS 2.1. ANNUAL MEETING. The annual meeting of stockholders shall be held at 2:00 p.m. on the third Thursday in May in each year, unless that day be a legal holiday at the place where the meeting is to be held, in which case the meeting shall be held at the same hour on the next succeeding day not a legal holiday, or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which they shall elect a board of directors and transact such other business as may be required by law or these By-Laws or as may properly come before the meeting. 2.2. SPECIAL MEETING IN PLACE OF ANNUAL MEETING. If the election for directors shall not be held on the day designated by these By-Laws, the directors shall cause the election to be held as soon thereafter as convenient, and to that end, if the annual meeting is omitted on the day herein provided therefor or if the election of directors shall not be held thereat, a special meeting of the stockholders may be held in place of such omitted meeting or election, and any business transacted or election held at such special meeting shall have the same effect as if transacted or held at the annual meeting, and in such case all references in these By-Laws to the annual meeting of the stockholders, or to the annual election of directors, shall be deemed to refer to or include such special meeting. Any such special meeting shall be called, and the purposes thereof shall be specified in the call, as provided in Section 2.3. 2.3. SPECIAL MEETINGS. A special meeting of the stockholders may be called at any time by the chairman of the board, if any, the president or by the board of directors. A special meeting of the stockholders shall be called by the secretary, or in the case of the death, absence, incapacity or refusal of the secretary, by an assistant secretary or some other officer, upon application of a majority of the directors or one or more stockholders who are entitled to vote and who hold capital stock having the power to cast at least 10% of all votes able to be cast by the holders of all capital stock issued and outstanding. Any such application shall state the purpose or purposes of the proposed meeting. Any such call shall state the place, date, hour, and purposes of the meeting. 2.4. PLACE OF MEETING. All meetings of the stockholders for the election of directors or for any other purpose shall be held at such place within or without the State of Delaware as may be determined from time to time by the chairman of the board, if any, 2 the president or the board of directors. Any adjourned session of any meeting of the stockholders shall be held at the place designated in the vote of adjournment. 2.5. NOTICE OF MEETINGS. Except as otherwise provided by law, a written notice of each meeting of stockholders stating the place, day and hour thereof and, in the case of a special meeting, the purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the meeting, to each stockholder entitled to vote thereat, and to each stockholder who, by law, by the certificate of incorporation or by these By-Laws, is entitled to notice, by leaving such notice with him or at his residence or usual place of business, or by depositing it in the United States mail, postage prepaid, and addressed to such stockholder at his address as it appears in the records of the corporation. Such notice shall be given by the secretary, or by an officer or person designated by the board of directors, or in the case of a special meeting by the officer calling the meeting. As to any adjourned session of any meeting of stockholders, notice of the adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment was taken except that if the adjournment is for more than thirty days or if after the adjournment a new record date is set for the adjourned session, notice of any such adjourned session of the meeting shall be given in the manner heretofore described. No notice of any meeting of stockholders or any adjourned session thereof need be given to a stockholder if a written waiver of notice, executed before or after the meeting or such adjourned session by such stockholder, is filed with the records of the meeting or if the stockholder attends such meeting without objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the stockholders or any adjourned session thereof need be specified in any written waiver of notice. 2.6. QUORUM OF STOCKHOLDERS. At any meeting of the stockholders, whether the same be an original or an adjourned session, a quorum shall consist of a majority of the voting power of all stock issued and outstanding and entitled to vote at the meeting, except in any case where a larger quorum is required by law, by the certificate of incorporation or by these By-Laws. Any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present. 2.7. ACTION BY VOTE. When a quorum is present at any meeting, whether the same be an original or an adjourned session, a plurality of the votes properly cast for election to any office shall elect to such office and a majority of the votes properly cast upon any question other than an election to an office shall decide the question, except when a larger vote is required by law, by the certificate of incorporation or by these By-Laws. No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. 2.8. ACTION WITHOUT MEETINGS. Unless otherwise provided in the certificate of incorporation, any action required or permitted to be taken by stockholders for or in connection with any corporate action may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of 3 votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. If action is taken by unanimous consent of stockholders, the writing or writings comprising such unanimous consent shall be filed with the records of the meetings of stockholders. If action is taken by less than unanimous consent of stockholders and in accordance with the foregoing, there shall be filed with the records of the meetings of stockholders the writing or writings comprising such less than unanimous consent and a certificate signed and attested to by the secretary that prompt notice was given to all stockholders of the taking of such action without a meeting and by less than unanimous written consent. In the event that the action which is consented to is such as would have required the filing of a certificate under any of the provisions of the General Corporation Law of Delaware, if such action had been voted upon by the stockholders at a meeting thereof, the certificate filed under such provision shall state that written consent has been given under Section 228 of said General Corporation Law, in lieu of stating that the stockholders have voted upon the corporate action in question, if such last mentioned statement is required thereby. 2.9. PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, objecting to or voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. The authorization of a proxy may but need not be limited to specified action, provided, however, that if a proxy limits its authorization to a meeting or meetings of stockholders, unless otherwise specifically provided such proxy shall entitle the holder thereof to vote at any adjourned session but shall not be valid after the final adjournment thereof. 2.10. INSPECTORS. The directors or the person presiding at the meeting may, but need not, appoint one or more inspectors of election and any substitute inspectors to act at the meeting or any adjournment thereof. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such 4 acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. 2.11. LIST OF STOCKHOLDERS. The secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his name. The stock ledger shall be the only evidence as to who are stockholders entitled to examine such list or to vote in person or by proxy at such meeting. Section 3. BOARD OF DIRECTORS 3.1. NUMBER. The number of directors which shall constitute the whole board shall be not less than one nor more than fifteen. The first board shall consist of one director. Thereafter, within the foregoing limits, the stockholders at the annual meeting shall determine the number of directors and shall elect the number of directors as determined. Within the foregoing limits, the number of directors may be increased at any time or from time to time by the stockholders or by the directors by vote of a majority of the directors then in office. The number of directors may be decreased to any number permitted by the foregoing at any time either by the stockholders or by the directors by vote of a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation or removal of one or more directors. Directors need not be stockholders. 3.2. TENURE. Except as otherwise provided by law, by the certificate of incorporation or by these By-Laws, each director shall hold office until the next annual meeting and until his successor is elected and qualified, or until he sooner dies, resigns, is removed or becomes disqualified. 3.3. POWERS. The business of the corporation shall be managed by or under the direction of the board of directors who shall have and may exercise all the powers of the corporation and do all such lawful acts and things as are not by law, the certificate of incorporation or these By-Laws directed or required to be exercised or done by the stockholders. 3.4. VACANCIES. Vacancies and any newly created directorships resulting from any increase in the number of directors may be filled by vote of the stockholders at a meeting called for the purpose, or by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. When one or more directors shall resign from the board, effective at a future date, a majority of the directors then in office, including those who have resigned, shall have power to fill such vacancy or vacancies, the vote or action by writing thereon to take effect when such resignation or resignations shall become effective. The directors shall have and may exercise all their powers notwithstanding the existence of one or more vacancies in their number, subject to any 5 requirements of law or of the certificate of incorporation or of these By-Laws as to the number of directors required for a quorum or for any vote or other actions. 3.5. COMMITTEES. The board of directors may, by vote of a majority of the whole board, (a) designate, change the membership of or terminate the existence of any committee or committees, each committee to consist of one or more of the directors; (b) designate one or more directors as alternate members of any such committee who may replace any absent or disqualified member at any meeting of the committee; and (c) determine the extent to which each such committee shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, including the power to authorize the seal of the corporation to be affixed to all papers which require it and the power and authority to declare dividends or to authorize the issuance of stock; excepting, however, such powers which by law, by the certificate of incorporation or by these By-Laws they are prohibited from so delegating. In the absence or disqualification of any member of such committee and his alternate, if any, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Except as the board of directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the board or such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these By-Laws for the conduct of business by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors upon request. 3.6. REGULAR MEETINGS. Regular meetings of the board of directors may be held without call or notice at such places within or without the State of Delaware and at such times as the board may from time to time determine, provided that notice of the first regular meeting following any such determination shall be given to absent directors. A regular meeting of the directors may be held without call or notice immediately after and at the same place as the annual meeting of stockholders. 3.7. SPECIAL MEETINGS. Special meetings of the board of directors may be held at any time and at any place within or without the State of Delaware designated in the notice of the meeting, when called by the chairman of the board, if any, the president, or by one-third or more in number of the directors, reasonable notice thereof being given to each director by the secretary or by the chairman of the board, if any, the president or any one of the directors calling the meeting. 3.8. NOTICE. It shall be reasonable and sufficient notice to a director to send notice by mail at least forty-eight hours or by telegram at least twenty-four hours before the meeting addressed to him at his usual or last known business or residence address or to give notice to him in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. 6 3.9. QUORUM. Except as may be otherwise provided by law, by the certificate of incorporation or by these By-Laws, at any meeting of the directors a majority of the directors then in office shall constitute a quorum; a quorum shall not in any case be less than one-third of the total number of directors constituting the whole board. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. 3.10. ACTION BY VOTE. Except as may be otherwise provided by law, by the certificate of incorporation or by these By-Laws, when a quorum is present at any meeting the vote of a majority of the directors present shall be the act of the board of directors. 3.11. ACTION WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of the board of directors or a committee thereof may be taken without a meeting if all the members of the board or of such committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the records of the meetings of the board or of such committee. Such consent shall be treated for all purposes as the act of the board or of such committee, as the case may be. 3.12. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the board of directors, or any committee designated by such board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other or by any other means permitted by law. Such participation shall constitute presence in person at such meeting. 3.13. COMPENSATION. In the discretion of the board of directors, each director may be paid such fees for his services as director and be reimbursed for his reasonable expenses incurred in the performance of his duties as director as the board of directors from time to time may determine. Nothing contained in this section shall be construed to preclude any director from serving the corporation in any other capacity and receiving reasonable compensation therefor. 3.14. INDEMNIFICATION. The corporation shall indemnify each person who is an existing, former or prospective director, officer or fiduciary of: (a) this corporation; or (b) another organization (provided he serves such other organization in such capacity at the behest of this corporation) against expenses (including attorneys' fees and expenses), judgments, fines, penalties and amounts paid in settlement in connection with defending, investigating, preparing to defend or being or preparing to be a witness in any threatened, pending or completed action, suit, proceeding or claim (whether civil, criminal, administrative or investigative), to the maximum extent permitted from time to time under Delaware law. The foregoing right of indemnification shall be in addition to any rights which any such director, officer or fiduciary may otherwise be entitled and shall inure to the benefit of the heirs and legal representatives of such director, officer or fiduciary. The corporation may, subject to the approval of the board of directors, pay the expenses incurred by such director, officer or fiduciary in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit, or proceeding, upon receipt of an undertaking by the person indemnified to repay such 7 payment if he shall be adjudicated to be not entitled to indemnification as provided herein. 3.15. INTERESTED DIRECTORS AND OFFICERS. (a) No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the corporation's directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee thereof, or the stockholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction. Section 4. OFFICERS AND AGENTS 4.1. ENUMERATION; QUALIFICATION. The officers of the corporation shall be a president, a treasurer, a secretary and such other officers, if any, as the board of directors from time to time may in its discretion elect or appoint including without limitation a chairman of the board, one or more vice presidents and a controller. The corporation may also have such agents, if any, as the board of directors from time to time may in its discretion choose. Any officer may be but none need be a director or stockholder. Any two or more offices may be held by the same person. Any officer may be required by the board of directors to secure the faithful performance of his duties to the corporation by giving bond in such amount and with sureties or otherwise as the board of directors may determine. 4.2. POWERS. Subject to law, to the certificate of incorporation and to the other provisions of these By-Laws, each officer shall have, in addition to the duties and powers 8 herein set forth, such duties and powers as are commonly incident to his office and such additional duties and powers as the board of directors may from time to time designate. 4.3. ELECTION. The officers may be elected by the board of directors at their first meeting following the annual meeting of the stockholders or at any other time. At any time or from time to time the directors may delegate to any officer their power to elect or appoint any other officer or any agents. 4.4. TENURE. Each officer shall hold office until the first meeting of the board of directors following the next annual meeting of the stockholders and until his respective successor is chosen and qualified unless a shorter period shall have been specified by the terms of his election or appointment, or in each case until he sooner dies, resigns, is removed or becomes disqualified. Each agent shall retain his authority at the pleasure of the directors, or the officer by whom he was appointed or by the officer who then holds agent appointive power. 4.5. CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND VICE PRESIDENT. The chairman of the board, if any, shall have such duties and powers as shall be designated from time to time by the board of directors. If there is a chairman of the board, he shall preside at all meetings of the stockholders and of the board of directors at which he is present, except as otherwise voted by the board of directors. If there is no chairman of the board or in the absence of the chairman of the board, the president shall preside at all meetings of the stockholders and of the board of directors at which he is present, except as otherwise voted by the board of directors. Unless the board of directors otherwise specifies, the president shall be the chief executive officer and shall have direct charge of all business operations of the corporation and, subject to the control of the directors, shall have general supervision over the entire business of the corporation. Any vice president or senior vice president shall have such duties and powers as shall be set forth in these By-Laws and shall have such other duties as may be designated from time to time by the board of directors or by the president. The vice president or the senior vice president who is principally responsible for the financial matters of the corporation shall be designated by the board of directors as the chief financial officer of the corporation. 4.6. TREASURER AND ASSISTANT TREASURERS. The treasurer shall be in charge of the corporation's funds and valuable papers, and shall have such other duties and powers as shall be designated from time to time by the board of directors or by the president. Any assistant treasurers shall have such duties and powers as shall be designated from time to time by the board of directors, the president or the treasurer. 4.7. CONTROLLER AND ASSISTANT CONTROLLERS. If a controller is elected, he shall be in charge of its books of account and accounting records, and of its accounting procedures. He shall have such other duties and powers as may be designated from time to time by the board of directors, the president or the treasurer. The vice president of 9 finance or the corporate controller shall be appointed as chief accounting officer of the corporation as designated by the board of directors. Any assistant controller shall have such duties and powers as shall be designated from time to time by the board of directors, the president, the treasurer or the controller. 4.8. SECRETARY AND ASSISTANT SECRETARIES. The secretary shall record all proceedings of the stockholders, of the board of directors and of committees of the board of directors in a book or series of books to be kept therefor and shall file therein all actions by written consent of stockholders or directors. In the absence of the secretary from any meeting, as assistant secretary, or if there be none or he is absent, a temporary secretary chosen at the meeting, shall record the proceedings thereof. Unless a transfer agent has been appointed, the secretary shall keep or cause to be kept the stock and transfer records of the corporation, which shall contain the names and record addresses of all stockholders and the number of shares registered in the name of each stockholder. He shall have such other duties and powers as may from time to time be designated by the board of directors or the president. Any assistant secretaries shall have such duties and powers as shall be designated from time to time by the board of directors, the president or the secretary. Section 5. RESIGNATIONS AND REMOVALS 5.1. Any director or officer may resign at any time by delivering his resignation in writing to the chairman of the board, if any, the president, or the secretary or to a meeting of the board of directors. Such resignation shall be effective upon receipt unless specified to be effective at some other time, and without in either case the necessity of its being accepted unless the resignation shall so state. A director (including persons elected by directors to fill vacancies in the board) may be removed from office with or without cause by the vote of the holders of shares having a majority of the voting power of the shares issued and outstanding and entitled to vote in the election of directors. The board of directors may at any time remove any officer either with or without cause. The board of directors may at any time terminate or modify the authority of any agent. No director or officer resigning and (except where a right to receive compensation shall be expressly provided in a duly authorized written agreement with the corporation) no director or officer removed shall have any right to any compensation as such director or officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise; unless, in the case of a resignation, the directors, or, in the case of removal, the body acting on the removal, shall in their or its discretion provide for compensation. Section 6. VACANCIES 10 6.1. If the office of the president or the treasurer or the secretary becomes vacant, the directors may elect a successor by vote of a majority of the directors then in office. If the office of any other officer becomes vacant, any person or body empowered to elect or appoint that officer may choose a successor. Each such successor shall hold office for the unexpired term, and in the case of the president, the treasurer and the secretary until his successor is chosen and qualified or in each case until he sooner dies, resigns, is removed or becomes disqualified. Any vacancy of a directorship shall be filled as specified in Section 3.4 of these By-Laws. Section 7. CAPITAL STOCK 7.1. STOCK CERTIFICATES. Each stockholder shall be entitled to a certificate stating the number and the class and the designation of the series, if any, of the shares held by him, in such form as shall, in conformity to law, the certificate of incorporation and the By-Laws, be prescribed from time to time by the board of directors. Such certificate shall be signed by the chairman or vice chairman of the board, if any, or the president or a vice president and by the treasurer or an assistant treasurer or by the secretary or an assistant secretary. Any of or all the signatures on the certificate may be a facsimile. In case an officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be used by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the time of its issue. 7.2. LOSS OF CERTIFICATES. In the case of the alleged theft, loss, destruction or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms, including receipt of a bond sufficient to indemnify the corporation against any claim on account thereof, as the board of directors may prescribe. Section 8. TRANSFER OF SHARES OF STOCK 8.1. TRANSFER ON BOOKS. Subject to the restrictions, if any, (i) stated in the certificate of incorporation or (ii) stated or noted on the stock certificate, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with necessary transfer stamps affixed, and with such proof of the authenticity of signature as the board of directors or the transfer agent of the corporation may reasonably require. Except as may be otherwise required by law, by the certificate of incorporation or by these By-Laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to receive notice and to vote or to give any consent with respect thereto and to be held liable for 11 such calls and assessments, if any, as may lawfully be made thereon, regardless of any transfer, pledge or other disposition of such stock until the shares have been properly transferred on the books of the corporation. It shall be the duty of each stockholder to notify the corporation of his post office address. 8.2. RECORD DATE AND CLOSING TRANSFER Books. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days (or such longer period as may be required by law) before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (c) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. Section 9. CORPORATE SEAL 9.1. Subject to alteration by the directors, the seal of the corporation shall consist of a flat-faced circular die with the word "Delaware" and the name of the corporation cut or engraved thereon, together with such other words, dates or images as may be approved from time to time by the directors. 12 Section 10. EXECUTION OF PAPERS 10.1. Except as the board of directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts or other obligations made, accepted or endorsed by the corporation shall be signed by the chairman of the board, if any, the president, a vice president or the treasurer. Section 11. FISCAL YEAR 11.1. The fiscal year of the corporation shall end on December 3l of each year. Section 12. AMENDMENTS 12.1. These By-Laws may be adopted, amended or repealed by vote of a majority of the directors then in office or by vote of the holders of shares having a majority of the voting power of the shares outstanding and entitled to vote. Any by-law, whether adopted, amended or repealed by the stockholders or directors, may be amended or reinstated by the stockholders or the directors. EX-10.5 3 SHORT TERM INCENTIVE PLAN 1 EXHIBIT 10.5 PLAN SUMMARY 1999 SHORT TERM INCENTIVE PLAN (STIP) ELIGIBILITY SENIOR MANAGEMENT * Level One: CEO/COO * Level Two SVP (Grade 12) * Level Three: VPs (Grade 11) * Level Four: General Managers (Grade 10) * Level Five: Directors (Grades 8 and 9) * An employee may not be a participant in this plan if s/he is a participant in another cash based incentive plan of The Timberland Company, Timberland Retail, Inc. or any other subsidiary (e.g. Sales Incentive Plan or Manufacturing Incentive Plan). * Participants must be actively employed by Timberland on the date bonus payments, if any, are made in order to be eligible for payment. * For individuals who are hired after the Plan Year has begun, bonus eligibility for the current Plan Year is based on the individual's start date with the Company as follows: - January 1 to June 30: eligible for full bonus potential - July 1 to September 30: eligible for prorated bonus - On or after October 1: not eligible until the following Plan Year An employee who is promoted during the Plan Year into a higher senior management level for purposes of bonus target calculations under the STIP will be eligible for the bonus target of the management level into which they are promoted, as long as they are promoted into that position prior to October 1 of a Plan Year. BONUS TARGETS * An eligible employee's bonus potential will be allocated between business unit and corporate performance results as per the table below: ========================================================================= Unit Allocation - ------------------------------------------------------------------------- Level Target Corporate Business Unit (% of salary) Results Results - ------------------------------------------------------------------------- One 60% 100% 0% - ------------------------------------------------------------------------- Two 50% 100% 0% - ------------------------------------------------------------------------- Three 35% 40% 60% - ------------------------------------------------------------------------- Four 30% 35% 65% - ------------------------------------------------------------------------- Five 20% 30% 70% ========================================================================= 2 The criteria and respective weights for business unit and corporate performance results are as follows: CRITERIA WEIGHT ================================================================================ Corp Business Unit Licensing Retail/Intl Distrib - -------------------------------------------------------------------------------- EPS/Op Contr 50% 50% 50% 50% - -------------------------------------------------------------------------------- Cash Flow 50% 50% 50% 50% ================================================================================ * For employees of the Footwear and Apparel lines of business (with the exception of Footwear and Apparel North American Wholesale), performance against Margin and Sales/Revenue components will be measured against worldwide results. * Bonus eligibility for eligible employees in positions in corporate staff areas which support multiple business functions will be measured entirely on corporate results. INDIVIDUAL PERFORMANCE AGAINST SBOs/PERFORMANCE RATING * Individual employee performance against Strategic Business Objectives (SBO) are factored into the final bonus calculation by multiplying the Assigned Factor (as set forth in the table below) by the calculated bonus (which is determined by the weighted targets and criteria discussed above). * Employees who are rated "NI" (Needs Improvement) during the Plan Year will be eligible to receive a partial bonus as set forth below; employees rated "DNM" (Does Not Meet) during the Plan Year will not be eligible to receive a bonus, regardless of corporate or business unit performance. ============================================= Approved Performance Assigned Rating Factor - --------------------------------------------- EE (Exceeds Expectations) 1.1 - --------------------------------------------- ME (Meets Expectations) 1.0 - --------------------------------------------- NI (Needs Improvement) .65 - --------------------------------------------- DNM (Does Not Meet) 0 ============================================= DETERMINATION OF BONUS PAYMENT ================================================================= Performance Percent of Payout Range Against Plan Plan (factor applied to bonus target) - ----------------------------------------------------------------- Meets 90 - 99% 80 - 98% Threshold - ----------------------------------------------------------------- 3 - ----------------------------------------------------------------- Meets Plan 100% 100% - ----------------------------------------------------------------- Exceeds Plan 100 - 120-% 100% + 1.5% for each incremental percent achieved above plan - ----------------------------------------------------------------- Superior 120% 130% + 2.0% for each incremental percent achieved above 120% ================================================================= THRESHOLD * The company will pay eligible employees a partial bonus for attainment of at least 90% of budgeted target (for corporate and business unit) for each criteria, as indicated below: ======================================= % Attainment of Factor Budgeted Target - --------------------------------------- 90% .80 - --------------------------------------- 91% .82 - --------------------------------------- 92% .84 - --------------------------------------- 93% .86 - --------------------------------------- and so on... - --------------------------------------- 99% .98 - --------------------------------------- 100% 1.0 ======================================= 4 Bonus Plan Provisions * Minimum corporate performance results criteria must be met in order for any STIP bonus payment to be made to eligible employees. * Bonus plan targets are based on the annual operating plan as approved by the Timberland Board of Directors. * The Threshold (90% of target) for corporate results for BOTH EPS and Cash Flow MUST BE MET in order for a bonus payment to be made to eligible employees. If a business unit (including European subsidiaries) meets its objectives, but the corporation fails to meet its Threshold for corporate results for both EPS and Cash Flow, NO BONUS will be paid. * If the corporate Threshold is met, but a business unit threshold is not met, eligible employees tied to said business unit will receive a partial payment based on the allocable corporate portion only. * In order for a bonus payment to be made to eligible employees, actual EPS and Cash Flow results must be greater than or equal to the Threshold after the impact of the bonus. * Prior to the beginning of each Plan Year, senior management will assign the weighting to be given to the various performance factors as well as amounts and percentages of budget performance at which targets and thresholds (if any) will be set. * Senior management and the Compensation Committee of the Board of Directors retain sole discretion to amend, revise, replace or rescind the STIP at any time. * Nothing in this STIP plan summary shall in any way limit the ability of senior management and the Compensation Committee of the Board of Directors, in their sole discretion, to pay to any individual or group of individuals a discretionary bonus award in addition to any bonus payment made under the STIP. EX-13 4 PORTIONS OF THE 1998 ANNUAL REPORT 1 EXHIBIT 13 FINANCIAL REVIEW - -------------------------------------------------------------------------------- FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
SELECTED STATEMENT OF INCOME DATA (Dollars in Thousands, Except Per Share Data) - ---------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 1995(1) 1994 - ---------------------------------------------------------------------------------------------------------------- Revenue $862,168 $796,458 $689,973 $655,138 $638,097 Net income (loss) 59,156 47,321 20,419 (11,635) 17,710 Basic earnings (loss) per share 5.18 4.20 1.84 (1.06) 1.63 Diluted earnings (loss) per share 5.03 4.03 1.81 (1.06) 1.58 - ---------------------------------------------------------------------------------------------------------------- SELECTED BALANCE SHEET DATA (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------- December 31, 1998 1997 1996 19951 1994 - ---------------------------------------------------------------------------------------------------------------- Cash and equivalents $151,889 $ 98,771 $ 93,336 $ 38,389 $ 6,381 Working capital 291,835 242,911 269,603 268,115 266,529 Total assets 469,467 420,003 449,586 421,408 473,264 Notes payable - - - - 22,513 Total long-term debt 100,000 100,000 189,454 207,187 214,815 Stockholders' equity 266,193 214,895 165,360 142,221 149,090 - ----------------------------------------------------------------------------------------------------------------
(1) Includes a $16.0 million pre-tax restructuring charge which reduced earnings and earnings per share by $9.9 million and $.90, respectively, and a $12.1 million non-recurring pre-tax gain which increased earnings and earnings per share by $7.5 million and $.68, respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discusses the Company's results of operations and liquidity and capital resources. The discussion should be read in conjunction with "The Year in Review" and the consolidated financial statements and related notes.
RESULTS OF OPERATIONS (Amounts in Thousands, Except Per Share Data) - ---------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Revenue $862,168 100.0% $796,458 100.0% $689,973 100.0% Gross profit 342,839 39.8 311,921 39.2 251,909 36.5 Total operating expense 248,249 28.8 228,068 28.6 201,020 29.1 Operating income 94,590 11.0 83,853 10.5 50,889 7.4 Interest expense 9,538 1.1 14,833 1.9 20,582 3.0 Net income 59,156 6.9 47,321 5.9 20,419 3.0 Basic earnings per share $ 5.18 $ 4.20 $ 1.84 Weighted-average shares outstanding 11,424 11,280 11,092 Diluted earnings per share $ 5.03 $ 4.03 $ 1.81 Weighted-average shares outstanding 11,759 11,737 11,255 - ----------------------------------------------------------------------------------------------------------------
Revenue increased to $862.2 million in 1998 from $796.5 million in 1997 and $690.0 million in 1996. This represents an increase of 8.3% in 1998 and a 15.4% increase in 1997, each compared with the prior year. The increases in 1998 and 1997 were primarily the result of unit volume growth in footwear. Footwear revenue was $651.8 million in 1998, $593.0 million in 1997 and $511.3 million in 1996. This represents an increase of 9.9% in 1998 and an increase of 16.0% in 1997, each compared with the prior year. Revenue attributable to apparel and accessories was $195.8 million in 1998, $193.8 million in 1997 and $172.4 million in 1996. This represents an increase of 1.0% in 1998 and an increase of 12.5% in 1997, each compared with the prior year. Domestic revenue amounted to $610.3 million in 1998, $578.4 million in 1997 and $485.4 million in 1996 or 70.8%, 72.6% and 70.4% of total revenue for each of the three years, respectively. - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 13 2 - -------------------------------------------------------------------------------- The Company has three reportable business segments: U.S. Wholesale, U.S. Retail and International (for a more detailed description and additional financial information regarding segments, see the "Business Segments and Geographic Information" note (Note 10) to the Company's consolidated financial statements). Revenue in the U.S. Wholesale segment increased by 5.3% in 1998 compared with 1997 and by 23.6% in 1997 compared with 1996. Both increases were primarily driven by higher unit volumes of footwear sales. Revenue in the U.S. Retail segment increased by 6.1% in 1998 compared with 1997 and 8.2% in 1997 compared with 1996. The increases in both years reflect comparable store sales increases of 4.3% in 1998 versus 1997 and 2.1% in 1997 versus 1996. Revenue in the International segment increased by 15.5% in 1998 compared with 1997 and 6.6% in 1997 compared with 1996. The growth in revenue in both years was attributable to the Company's European operations. The gross profit margin was 39.8% in 1998, 39.2% in 1997 and 36.5% in 1996. The increases in margin percentages in 1998 and 1997 were due primarily to the introduction of higher margin products and lower unit costs in footwear manufacturing and sourcing. Operating expense was $248.2 million or 28.8% of revenue in 1998, $228.1 million or 28.6% of revenue in 1997 and $201.0 million or 29.1% of revenue in 1996. The increases in operating expense in each of 1998 and 1997 compared with the prior years were principally due to higher sales volume and increased marketing expenditures. Operating income, which is pre-tax earnings before interest and other expense, was $94.6 million in 1998, $83.9 million in 1997 and $50.9 million in 1996. As a percentage of revenue, operating income was 11.0% in 1998, 10.5% in 1997 and 7.4% in 1996. Segment operating income improved in the U.S. segments in 1998 and 1997 compared with the respective prior years. That improvement was due to a combination of increased revenue and higher gross margin rates in each segment year over year partially offset by expense increases that were primarily sales volume and marketing related. Within the International segment, the improvement in operating income from 11.8% of revenue in 1997 to 14.4% of revenue in 1998 reflects revenue growth, improved gross margin rates and reduced operating expense as a percentage of revenue. The slight decrease from 12.9% of revenue in 1996 to 1997 was primarily due to slower revenue growth and investment in infrastructure. Unallocated Corporate expenses are primarily finance, information systems, legal and administrative expenses incurred in the support of company-wide activities and United States. marketing and distribution expenses. The increases in Unallocated Corporate expenses in 1998 and 1997, compared with the respective prior years, were primarily due to expanded marketing efforts. Interest expense was $9.5 million in 1998 compared with $14.8 million in 1997 and $20.6 million in 1996. The decreases in successive years were due to lower levels of borrowings. The effective income tax rate was 32.0% in 1998, 30.0% in 1997 and 34.0% in 1996. For an analysis of the changes in the effective tax rate, see the "Income Taxes" note (Note 6) to the Company's consolidated financial statements. The Company believes that inflation has not had a significant impact on the Company's operations over the past three years. LIQUIDITY AND CAPITAL RESOURCES Cash generated by operations amounted to $84.2 million in 1998, $113.8 million in 1997 and $85.7 million in 1996. The Company's earnings and continued improvements in working capital management were the principal sources of cash generation. The reduction in inventory levels experienced in 1998 and 1997 was achieved by improving forecasting accuracy, working to reduce lead times and focusing on the reduction of excess and obsolete product in our business system. Inventory turns were 3.2 times in 1998 compare d with 2.9 times in 1997 and 2.3 times in 1996. Days sales outstanding at December 31, 1998 were 27 days compared with 29 days at December 31, 1997 and 41 days at December 31, 1996. Domestic wholesale days sales outstanding were 34 days, 36 days and 52 days at the end of 1998, 1997 and 1996, respectively. Net cash used by investing activities amounted to $21.8 million in 1998, $25.2 million in 1997 and $15.4 million in 1996. Of the net cash used by investing activities, capital expenditures were $20.7 million in 1998, $25.7 million in 1997 and $15.1 million in 1996. A significant portion of capital expenditures during the three years ended December 31, 1998 was for manufacturing machinery and equipment, distribution and transportation equipment, retail store improvements and information system improvements. - -------------------------------------------------------------------------------- 14 THE TIMBERLAND COMPANY 3 - -------------------------------------------------------------------------------- During 1998, 1997 and 1996, net cash used in financing activities amounted to $10.1 million, $82.7 million and $15.6 million, respectively. In 1998, $16.2 million was used to repurchase outstanding shares of the Company's Class A Common Stock. In 1997, $89.5 million was used to repay long-term debt, including prepayments totaling $82.0 million. The 1996 amount reflects the repayment of $17.7 million in long-term debt, including a prepayment of $10.0 million. The Company uses funds from operations and unsecured revolving and committed lines of credit as the primary sources of financing for its seasonal and other working capital requirements. On April 30, 1998, the Company entered into a revolving credit agreement to provide for up to $80.0 million in letters of credit under an overall $100.0 million committed facility. The agreement expires on June 19, 2001. The Company's debt to capital ratio was 27.3% at December 31, 1998, 31.8% at December 31, 1997 and 53.4% at December 31, 1996. Management believes that the Company's capital needs for 1999 will be met through its existing credit facilities and cash flow from operations without the need for additional permanent financing. However, the Company's ability to obtain any replacement credit facilities will depend upon prevailing market conditions and the terms and conditions of such replacement facilities. NEW ACCOUNTING PRONOUNCEMENTS A discussion of new accounting pronouncements is included in the "Summary of Significant Accounting Policies" note (Note 1) to the Company's consolidated financial statements. YEAR 2000 The Year 2000 issue is primarily the result of computer programs using two digits rather than four to refer to a year. These programs may not properly recognize a year that begins with "20" instead of "19." This could cause an inability of computer programs to process transactions or engage in normal business activities. STATE OF READINESS In the fourth quarter of 1996, the Company made a preliminary assessment of the capabilities of its systems to recognize and process dates properly in the year 2000 and beyond. Based on the findings of this assessment, the Company established a centralized project office and formed a multi-disciplinary project team responsible for the development, management and coordination of a global Year 2000 compliance strategy and for building awareness and understanding of Year 2000 issues throughout the Company. The Company's Year 2000 compliance strategy includes several overlapping phases: * INVENTORY involves identifying all hardware, software and external business partners (including customers, suppliers and service providers) that could have a date-related impact on the following functional systems and/or business operations: (i) enterprise business systems, which encompass order processing, inventory and financial systems; (ii) technical systems, including desktops, networks, voice and mid-range computers; (iii) department hardware and software applications used by individual business units; and (iv) facilities and other non-informational technology systems. * ANALYSIS involves, for each of the above inventory categories, identifying the relevant date on which the inventory would first encounter the requirement to use a year 2000 date, determining Year 2000 compliance and assessing the level and likelihood of potential risk and exposure to the Company of non-compliance. * CONVERSION involves developing and executing a plan to bring inventory into compliance. * TESTING involves executing test routines on each inventory item for compliance, both by itself and on an integrated basis with every other system with which it shares information. * IMPLEMENTATION involves putting compliant inventory back into the production environment. - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 15 4 - -------------------------------------------------------------------------------- The Company has completed the inventory, analysis and conversion phases for its enterprise business systems. The Company has completed the testing and implementation phases for all of its enterprise business systems, except for its corporate supply chain, factory inventory control systems and European financial transactions systems. The Company expects to complete the testing and implementation of these systems in the first half of 1999. The Company has also completed the inventory and analysis phases for all other systems. Conversion, testing and implementation of all such systems are underway, with attention being dedicated first to the most critical inventory. Completion of testing and implementation is planned for the second quarter of 1999 for technical systems and throughout 1999 for departmental applications, facilities and non-informational technology systems. In addition to requesting warranty compliance from its external business partners, the Company has requested information on its business partners' Year 2000 compliance and contingency plans to assess the potential risks of non-compliance and the resulting impact on the Company. This process will continue throughout 1999. The Company is requesting that new external business partners certify, in writing, that they are Year 2000 compliant. However, the Company will not be able to independently verify that such external business partners are, in fact, Year 2000 compliant. COSTS Total expenditures related to the Company's Year 2000 compliance efforts are currently estimated to be approximately $4.2 million from 1997 through 2000. This estimate does not include the compensation of Company employees and other similar internal costs, the time and costs that may be incurred by the Company as a result of the failure of any third parties to become Year 2000 compliant, or internal costs related to contingency plans. Year 2000 expenditures are being funded through operating cash flows and are expected to be immaterial to the Company's operating results. This estimate is based on the Company's current assessment of its Year 2000 compliance needs and is subject to change as the Company proceeds with its compliance efforts. As of December 31, 1998, the Company has incurred approximately $1.1 million relating to its Year 2000 initiatives. RISKS The Company does not now anticipate that a material business disruption will occur as a result of Year 2000 issues. However, to the extent the Company is unable to resolve Year 2000 issues, the Company's business, financial position and results of operations could be materially adversely affected. The Company believes that the greatest potential risk is the failure of its external business partners to achieve Year 2000 compliance in a timely manner. Among other things, the Company's principal leather suppliers, footwear and apparel manufacturers and transportation providers could be unable to manufacture or deliver materials and products in a timely manner. The Company's Year 2000 compliance efforts are subject to additional risks, including, among others: unexpected problems identified in testing results; delays in system conversion or implementation; the Company's failure to identify fully all Year 2000 dependencies in its systems and in the systems of its external business partners; and the failure of parts of the global infrastructure, including national banking systems, power, transportation facilities, communications and governmental activities, to be fully functional after 1999. As the Company's testing and implementation of its enterprise business systems and assessment of its technical systems and departmental applications are underway, and as responses from many of its external business partners are pending, the Company cannot fully and accurately quantify the impact of its most reasonably likely worst case Year 2000 scenario at the present time. CONTINGENCY PLAN The Company is in the process of developing Year 2000 contingency plans to address the risk and exposure relative to the Company's supply chain, from the purchase of raw materials through the delivery of finished products to the customer. These efforts will be supplemented by the Year 2000 contingency plans for certain issues at the individual inventory level, previously developed and continually updated by the Company. The Company is also communicating with its external business partners to determine their Year 2000 contingency plans and to coordinate, to the extent possible, with such plans. The Company expects to more completely define these issues and to quantify their potential impact by the close of the first quarter of 1999. With this information, the Company expects to complete the Company-level contingency plans - -------------------------------------------------------------------------------- 16 THE TIMBERLAND COMPANY 5 - -------------------------------------------------------------------------------- by the close of the first half of 1999. However, the necessity, timing and cost of any contingency plans must be evaluated on a case-by-case basis and may vary considerably, and testing results and external business partners' responses may require changes in or additions to such plans. Furthermore, there may be no practical alternative course of action available to the Company for some issues, such as infrastructure failures. The Company's statements of its expectations regarding the current status, date of completion and costs of its Year 2000 compliance programs are forward-looking statements. These statements are management's best estimates based on information currently available. Therefore, they are inherently subject to risks and uncertainties, including those described above, which could cause actual results to differ and which may have a material adverse effect on the Company's business, financial position, results of operations or capital or liquidity needs. EURO Effective January 1, 1999, the European Monetary Union ("EMU") created a single currency, the euro, for its member countries. A transition period, from January 1, 1999 through December 31, 2001, will allow the member countries to methodically eliminate their local currencies and to convert to the euro. During this transition period, either the euro or a member country's present currency will be accepted as legal tender. In 1998, the Company formed a task force to study the requirements of conversion to the euro and the related impact to the Company (four of the five European subsidiaries of the Company operate in countries that are members of the EMU). The task force reviewed technology requirements, pricing and competitive implications, banking, the impact on hedging programs and the timing and costs related to each of these. From this review, a conversion program was developed and implemented in 1998. The Company believes that the adoption of the euro will not have a material impact on the Company's consolidated financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the financial position and results of operations of the Company are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and investments and currency rate movements on non-U.S. dollar denominated assets and liabilities. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effect of these and other potential exposures. The Company utilizes cash from operations and U.S. dollar denominated borrowings to fund its working capital and investment needs. Short-term debt, if required, is used to meet working capital requirements and long-term debt generally is used to finance long-term investments. In addition, derivative instruments are used by the Company in its hedging of foreign currency transactions. These debt instruments and derivative instruments are viewed as risk management tools and are not used for trading or speculative purposes. Cash balances are normally invested in high grade securities with terms under two months. The Company has available unsecured committed and uncommitted lines of credit as sources of financing for its working capital requirements. Borrowings under these credit agreements bear interest at variable rates based on the London Interbank Offering Rate. At December 31, 1998 and 1997, the Company had no short-term financing outstanding. At December 31, 1998 and 1997, the Company had one long-term debt instrument outstanding at a fixed interest rate of 8.94% with a maturity in December 2001. The Company's foreign currency exposure is generated primarily from its European operating subsidiaries. The Company seeks to minimize the impact of these foreign currency fluctuations by hedging transactions of exposure with foreign currency forward contracts. These contracts are short-term and expire in twelve months or less. As of December 31, 1998, there were no material foreign currency transaction or cash exposures that were not hedged. Based upon sensitivity analysis as of December 31, 1998, a 10% favorable change in foreign currency exchange rates would cause the fair value of the Company's financial instruments to increase by $4.6 million. A 10% unfavorable change would cause the fair value of the Company's financial instruments to decrease by $3.9 million. - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 17 6 - -------------------------------------------------------------------------------- FORWARD-LOOKING INFORMATION Management is unaware of any current trends or conditions that could have a material adverse effect on the Company's consolidated financial position, future results of operations or capital or liquidity needs. However, as discussed in an exhibit to the Company's Form 10-K for the year ended December 31, 1998, entitled "Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995," investors should be aware of factors that could affect the Company's actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of the Company. These factors include; political, economic or other factors such as currency exchange rates, conversion to the euro, Year 2000 conversions, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the business in each of the Company's markets; competitive product, advertising, promotional and pricing activity; dependence on the rate of development and degree of acceptance of new product introductions in the marketplace; and the difficulty of forecasting sales at certain times in certain markets. QUARTERLY MARKET INFORMATION AND RELATED MATTERS The Company's Class A Common Stock is traded on the New York Stock Exchange under the symbol TBL. There is no market for shares of the Company's Class B Common Stock; however, shares of Class B Common Stock may be converted into shares of Class A Common Stock on a one-for-one basis and will automatically be converted upon any transfer (except for estate planning transfers and transfers approved by the Board of Directors). The following table presents the high and low closing sales prices of the Company's Class A Common Stock for the past two years as reported by the New York Stock Exchange. - -------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------- High Low High Low First Quarter $75 7/16 $53 1/4 $47 $37 3/4 Second Quarter 86 7/8 69 67 1/8 43 1/8 Third Quarter 72 1/16 37 1/4 79 61 Fourth Quarter 49 3/4 28 15/16 82 7/8 51 3/4 - -------------------------------------------------------------------------- As of February 19, 1999, the number of record holders of the Company's Class A Common Stock was approximately 771 and the number of record holders of the Company's Class B Common Stock was 8. The closing sales price of the Company's Class A Common Stock on February 19, 1999 was $59 3/4 per share. The Company has never declared a dividend on either the Company's Class A or Class B Common Stock and does not contemplate doing so in the foreseeable future. In addition, the Company's ability to pay cash dividends is limited pursuant to various loan agreements (see notes to the Company's consolidated financial statements). - -------------------------------------------------------------------------------- 18 THE TIMBERLAND COMPANY 7 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997 - ----------------------------------------------------------------------------------------------------------------- (Dollars in Thousands, Except Per Share Data) 1998 1997 - ----------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and equivalents $151,889 $ 98,771 Accounts receivable, net of allowance for doubtful accounts of $4,769 in 1998 and $3,742 in 1997 79,024 75,793 Inventory 131,218 142,613 Prepaid expense 11,897 12,856 Deferred income taxes 13,538 11,973 - ----------------------------------------------------------------------------------------------------------------- Total current assets 387,566 342,006 - ----------------------------------------------------------------------------------------------------------------- Property, plant and equipment 131,237 116,503 Less accumulated depreciation and amortization (74,316) (63,593) - ----------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 56,921 52,910 - ----------------------------------------------------------------------------------------------------------------- Excess of cost over fair value of net assets acquired, net 19,217 20,902 Other assets, net 5,763 4,185 - ----------------------------------------------------------------------------------------------------------------- Total assets $469,467 $420,003 - ----------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 25,890 $ 20,390 Accrued expense Payroll and related 22,090 28,233 Interest and other 29,528 32,786 Income taxes payable 18,223 17,686 - ----------------------------------------------------------------------------------------------------------------- Total current liabilities 95,731 99,095 - ----------------------------------------------------------------------------------------------------------------- Long-term debt 100,000 100,000 Deferred income taxes 7,543 6,013 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; 9,177,383 shares issued at December 31, 1998 and 8,765,013 shares issued at December 31, 1997 92 88 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; 2,338,162 shares issued at December 31, 1998 and 2,605,432 shares issued at December 31, 1997 23 26 Additional paid-in capital 74,711 68,568 Retained earnings 207,077 147,921 Accumulated other comprehensive income (loss) 626 (1,595) Less treasury stock at cost; 417,368 shares at December 31, 1998 and 17,369 shares at December 31, 1997 (16,336) (113) - ----------------------------------------------------------------------------------------------------------------- Total stockholders' equity 266,193 214,895 - ----------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $469,467 $420,003 - -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 19 8 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996 - ------------------------------------------------------------------------------------------------ (Amounts in Thousands, Except Per Share Data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------ Revenue $862,168 $796,458 $689,973 Cost of goods sold 519,329 484,537 438,064 - ------------------------------------------------------------------------------------------------ Gross profit 342,839 311,921 251,909 - ------------------------------------------------------------------------------------------------ Operating expense Selling 195,688 174,729 152,834 General and administrative 50,876 51,654 46,502 Amortization of goodwill 1,685 1,685 1,684 - ------------------------------------------------------------------------------------------------ Total operating expense 248,249 228,068 201,020 - ------------------------------------------------------------------------------------------------ Operating income 94,590 83,853 50,889 - ------------------------------------------------------------------------------------------------ Other expense (income) Interest expense 9,538 14,833 20,582 Other, net (1,942) 1,419 (631) - ------------------------------------------------------------------------------------------------ Total other expense 7,596 16,252 19,951 - ------------------------------------------------------------------------------------------------ Income before income taxes 86,994 67,601 30,938 Provision for income taxes 27,838 20,280 10,519 - ------------------------------------------------------------------------------------------------ Net income $ 59,156 $ 47,321 $ 20,419 - ------------------------------------------------------------------------------------------------ Basic earnings per share $ 5.18 $ 4.20 $ 1.84 Weighted-average shares outstanding 11,424 11,280 11,092 - ------------------------------------------------------------------------------------------------ Diluted earnings per share $ 5.03 $ 4.03 $ 1.81 Weighted-average shares outstanding 11,759 11,737 11,255 - ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- 20 THE TIMBERLAND COMPANY 9 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Class A Class B Additional Other Consolidated Common Common Paid-in Retained Comprehensive Treasury Comprehensive Stockholders' (Dollars in Thousands) Stock Stock Capital Earnings Income (Loss) Stock Income Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 1996 $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 Comprehensive income: Net income - - - 20,419 - - $20,419 20,419 Translation adjustment - - - - 629 - 629 629 ------- Comprehensive income - - - - - - $21,048 - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 84 27 61,806 100,600 2,963 (120) 165,360 Issuance of shares under employee stock option and stock purchase plans and other transactions 4 (1) 4,362 - - 7 4,372 Tax benefit from stock option plans - - 2,400 - - - 2,400 Comprehensive income: Net income - - - 47,321 - - $47,321 47,321 Translation adjustment - - - - (4,558) - (4,558) (4,558) ------- Comprehensive income - - - - - - $42,763 - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 88 26 68,568 147,921 (1,595) (113) 214,895 Issuance of shares under employee stock option and stock purchase plans and other transactions 4 (3) 3,843 - - - 3,844 Repurchase of common stock - - - - - (16,223) (16,223) Tax benefit from stock option plans - - 2,300 - - - 2,300 Comprehensive income: Net income - - - 59,156 - - $59,156 59,156 Translation adjustment - - - - 2,221 - 2,221 2,221 ------- Comprehensive income - - - - - - $61,377 - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 $92 $23 $74,711 $207,077 $ 626 $(16,336) - $266,193 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 21 10 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996 - ------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 59,156 $ 47,321 $ 20,419 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (35) (7,478) 905 Depreciation and amortization 18,199 20,292 21,370 Loss on disposal of property, plant and equipment 1,303 1,564 - Increase (decrease) in cash from changes in working capital: Accounts receivable (2,781) 24,799 (5,541) Inventory 11,637 14,270 22,475 Prepaid expense 1,112 (3,707) 3,747 Accounts payable 5,083 (454) (4,000) Accrued expense (9,975) 11,165 14,692 Income taxes 459 6,001 11,608 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 84,158 113,773 85,675 - ------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from sale of property, plant and equipment 97 3,772 1,268 Additions to property, plant and equipment (20,683) (25,704) (15,090) Other, net (1,245) (3,250) (1,605) - ------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (21,831) (25,182) (15,427) - ------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Common stock repurchases (16,223) - - Payments on long-term debt and capital lease obligations - (89,454) (17,733) Issuance of common stock 3,844 4,372 1,588 Tax benefit from stock option plans 2,300 2,400 503 - ------------------------------------------------------------------------------------------------------------------ Net cash used by financing activities (10,079) (82,682) (15,642) - ------------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash 870 (474) 341 - ------------------------------------------------------------------------------------------------------------------ Net increase in cash and equivalents 53,118 5,435 54,947 Cash and equivalents at beginning of year 98,771 93,336 38,389 - ------------------------------------------------------------------------------------------------------------------ Cash and equivalents at end of year $151,889 $ 98,771 $ 93,336 - ------------------------------------------------------------------------------------------------------------------ Supplemental disclosures of cash flow information: Interest paid $ 9,378 $ 15,650 $ 18,916 Income taxes paid (refunded) 27,336 21,885 (2,671) - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- 22 THE TIMBERLAND COMPANY 11 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of The Timberland Company and its subsidiaries (the "Company"). All material intercompany transactions have been eliminated in consolidation. RECOGNITION OF REVENUE Revenue consists of sales to customers, license fees and royalties. Sales are recognized upon shipment of product to customers. License fees and royalties are recognized when earned. TRANSLATION OF FOREIGN CURRENCIES The Company translates financial statements denominated in foreign currencies by translating balance sheet accounts at the end of period exchange rate and statement of income accounts at the average exchange rate for the period. Translation gains and losses are recorded in stockholders' equity and reflected in other comprehensive income, and transaction gains and losses are reflected in net income. DERIVATIVES The Company is exposed to foreign exchange risk when it sells goods in local currencies through its foreign subsidiaries. It is the Company's policy to hedge a portion of this risk through forward sales of foreign currencies, thereby locking in the future exchange rates. Gains and losses on the underlying contracts are accounted for using hedge accounting. Accordingly, the change in the fair value of the contracts that hedge firm commitments is deferred and recognized as part of the related foreign currency transaction upon occurrence. CASH AND EQUIVALENTS Cash and equivalents consist of short-term, highly liquid investments which normally have original maturities to the Company of two months or less. INVENTORY Inventory is stated at the lower of cost (first-in, first-out) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets or over the terms of the related leases, if such periods are shorter. The principal estimated useful lives are: building and improvements, 4 to 30 years; machinery and equipment, 3 to 12 years; lasts, patterns and dies, 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 $12,557 and $10,872 at December 31, 1998 and 1997, respectively. ACCRUED INSURANCE COSTS The Company is self-insured for workers' compensation, healthcare, dental and short-term disability up to certain specified limits. Expenses associated with such self-insurance programs are accrued based upon estimates of the amounts required to cover incurred incidents. INCOME TAXES Income taxes are determined based on the income reported in the Company's financial statements, regardless of when such taxes are payable. In addition, tax assets and liabilities are adjusted to reflect changes in U.S. and applicable foreign income tax laws when enacted. Future tax benefits, such as net operating loss carryforwards, are recognized to the extent realization of such benefits is more likely to occur than not. - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 23 12 - -------------------------------------------------------------------------------- ACCOUNTING FOR ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make assumptions that affect the estimates reported in these consolidated financial statements. Actual results may differ from these estimates. EARNINGS PER SHARE Basic Earnings Per Share ("EPS") excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the periods presented. Diluted EPS reflects the potential dilution that would occur if securities such as stock options were exercised. Dilutive securities (Note 12) included in the calculation of diluted weighted-average shares were 334,323 in 1998 and 457,050 in 1997. LONG-LIVED ASSETS The Company continually evaluates the carrying values and estimated useful lives of its long-lived assets, primarily property, plant and equipment and intangible assets. When factors indicate that such assets should be evaluated for possible impairment, the Company uses estimates of future operating results and cash flows to determine whether the assets are economically recoverable. STOCK-BASED COMPENSATION The Company accounts for stock options using the method prescribed by Accounting Principles Board Opinion No. 25 and related interpretations. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in 1998. SFAS No. 130 requires the reporting of comprehensive income which, in the case of the Company, is the combination of reported net income and other comprehensive income which is comprised of foreign currency translation adjustments. SFAS No. 130 has no impact on the Company's reported net income. Comprehensive income is included in the consolidated statements of changes in stockholders' equity. NEW ACCOUNTING PRONOUNCEMENTS During 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is not required to be implemented until fiscal 2000. Since its requirements are complex and its scope far reaching, the Company has not completed its evaluation of the impact of this standard on its consolidated financial statements. - -------------------------------------------------------------------------------- 24 THE TIMBERLAND COMPANY 13 - -------------------------------------------------------------------------------- 2. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The following table illustrates the U.S. dollar equivalent of foreign exchange contracts at December 31, 1998 and 1997 along with maturity dates, net unrealized gain (loss) and net unrealized gain (loss) deferred. Unrealized gains or losses are determined based on the difference between the settlement and year-end foreign exchange rates. The contract amount represents the net amount of all purchase and sale contracts of a foreign currency. A negative amount represents a net purchase position of a foreign currency.
- ----------------------------------------------------------------------------------------------------------------------- Contract Net Unrealized Amount Maturity Unrealized Unrealized Net Unrealized Gain (Loss) (U.S. $ Equivalent) Date Gross Gain Gross (Loss) Gain (Loss) Deferred - ----------------------------------------------------------------------------------------------------------------------- December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------- Pounds Sterling $12,957 1999 $ - $ (394) $ (394) $ (360) Deutsche Marks 7,821 1999 - (509) (509) (509) French Francs (1,121) 1999 - (398) (398) (373) Italian Lire 8,461 1999 - (452) (452) (452) Spanish Pesetas 6,431 1999 4 (229) (225) (219) Swedish Krone 6,121 1999 141 - 141 141 - ----------------------------------------------------------------------------------------------------------------------- Total $40,670 $145 $(1,982) $(1,837) $(1,772) - ----------------------------------------------------------------------------------------------------------------------- December 31, 1997 Pounds Sterling $ 2,527 1998 $ 1 $ (197) $ (196) $ (122) Deutsche Marks 4,285 1998 254 (15) 239 254 French Francs 3,039 1998 253 (48) 205 253 Italian Lire 10,814 1998 322 - 322 278 - ----------------------------------------------------------------------------------------------------------------------- Total $20,665 $830 $ (260) $ 570 $ 663 - -----------------------------------------------------------------------------------------------------------------------
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions, thereby minimizing exposure to concentrations of credit risk. Credit risk with respect to trade receivables is limited, due to the large number of customers included in the Company's customer base. The Company had an allowance for doubtful accounts receivable of $4,769 and $3,742 at December 31, 1998 and 1997, respectively. 3. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
- ----------------------------------------------------------------------------------------------------------------------- December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Carrying Carrying or Contract Fair or Contract Fair Amount Value Amount Value - ----------------------------------------------------------------------------------------------------------------------- Cash and equivalents(1) $151,889 $151,889 $ 98,771 $ 98,771 Long-term debt(2) 100,000 108,553 100,000 108,610 Foreign currency contracts(3) 40,670 42,507 20,665 20,095 - -----------------------------------------------------------------------------------------------------------------------
(1) The carrying amounts of cash and equivalents approximate their fair values. (2) The fair value of the Company's long-term debt is estimated based on current rates available to the Company as of December 31, 1998 and 1997 for debt of the same remaining maturities. (3) The fair value of foreign currency contracts is estimated by obtaining the appropriate year-end rates as of December 31, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 25 14 - -------------------------------------------------------------------------------- 4. INVENTORY Inventory consists of the following: - ----------------------------------------------------------------------- December 31, 1998 1997 - ----------------------------------------------------------------------- Raw materials $ 6,253 $ 8,010 Work-in-process 3,913 4,103 Finished goods 121,052 130,500 - ----------------------------------------------------------------------- Total $131,218 $142,613 - ----------------------------------------------------------------------- 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: - ----------------------------------------------------------------------- December 31, 1998 1997 - ----------------------------------------------------------------------- Land and improvements $ 501 $ 501 Building and improvements 30,605 29,089 Machinery and equipment 87,991 76,655 Lasts, patterns and dies 12,140 10,258 - ----------------------------------------------------------------------- Total $131,237 $116,503 - ----------------------------------------------------------------------- 6. INCOME TAXES The components of the provision for income taxes are as follows:
- ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 Current Deferred Current Deferred Current Deferred - ------------------------------------------------------------------------------------------------------------------- Federal $18,588 $ 26 $21,368 $(5,956) $5,357 $637 State 5,003 (78) 3,958 (2,078) 1,411 36 Puerto Rico 317 17 828 556 468 232 Foreign 3,965 - 1,604 - 2,378 - - ------------------------------------------------------------------------------------------------------------------- Total $27,873 $(35) $27,758 $(7,478) $9,614 $905 - -------------------------------------------------------------------------------------------------------------------
The provision for income taxes differs from the amount computed using the statutory federal income tax rate of 35% due to the following:
- ------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Federal income tax at statutory rate $30,448 35.0% $23,660 35.0% $10,828 35.0% Federal tax exempt operations in Puerto Rico (4,688) (5.4) (5,261) (7.8) (2,973) (9.6) State taxes, net of applicable federal benefit 3,324 3.8 2,294 3.4 1,232 4.0 Other, net (1,246) (1.4) (413) (0.6) 1,432 4.6 - ------------------------------------------------------------------------------------------------------------------- Total $27,838 32.0% $20,280 30.0% $10,519 34.0% - -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 26 THE TIMBERLAND COMPANY 15 - -------------------------------------------------------------------------------- The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities at December 31, 1998 and 1997 consist of the following:
- -------------------------------------------------------------------------------------------------------- 1998 1997 Assets Liabilities Assets Liabilities - -------------------------------------------------------------------------------------------------------- Current: Inventory $ 6,158 $ - $ 5,111 $ - Receivable allowances 6,441 - 5,069 - Intercompany profit elimination 230 - 163 - Other 709 - 1,630 - - -------------------------------------------------------------------------------------------------------- Total $13,538 $ - $11,973 $ - - -------------------------------------------------------------------------------------------------------- Non-current: Accelerated depreciation and amortization $ 3,784 $ - $ 3,853 $ - Puerto Rico tollgate taxes - (2,470) - (2,453) Undistributed foreign earnings - (9,189) - (8,308) Other 332 - 895 - Net operating loss carryforwards 330 - 1,095 - Less-valuation allowance (330) - (1,095) - - -------------------------------------------------------------------------------------------------------- Total $ 4,116 $(11,659) $ 4,748 $(10,761) - --------------------------------------------------------------------------------------------------------
The valuation allowance at December 31, 1998 of $330 includes $16 which arose during 1998. The valuation allowance relates to foreign net operating loss carryforwards that may not be realized. The Company's consolidated income 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. The Company is currently negotiating an extension to 2012 with Puerto Rico. 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. International pre-tax losses for income tax purposes were $(51), $(1,190) and $(100) for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, the Company had $1,032 of foreign operating loss carryforwards available to offset future foreign taxable income. Of these operating loss carryforwards, $543 will expire in 1999, $299 will expire in 2000 and $190 thereafter. 7. NOTES PAYABLE On April 30, 1998, the Company entered into a new unsecured committed revolving credit agreement (the "Agreement") with a group of banks. The Agreement, which replaced the Company's existing revolving credit facility, expires on June 19, 2001 and provides for $100,000 of committed borrowings of which up to $80,000 may be used for letters of credit. Under the terms of the Agreement, the Company may borrow at interest rates (5.46% at December 31, 1998) based upon the lenders' cost of funds plus an applicable spread. The Agreement provides for a facility fee of 0.20% per annum on the full commitment, places limitations on the incurrence of additional debt and on the amount of dividends the Company may pay and also contains certain other financial and operating covenants. Additionally, the Company had uncommitted lines of credit available from certain banks totaling $30,000 at December 31, 1998. Borrowings under these lines are at prevailing money market rates (5.50% at December 31, 1998). These arrangements may be terminated at any time at the option of the banks or the Company. 8. LONG-TERM DEBT As of December 31, 1998 and 1997, the Company's long-term debt consisted of $100,000 of 8.94% notes which mature on December 15, 2001. The 8.94% notes place limitations on the incurrence of additional debt and on the amount of dividends the Company may pay and also require maintenance of certain operational and financial covenants. - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 27 16 - -------------------------------------------------------------------------------- 9. LEASE COMMITMENTS The Company leases its corporate headquarters facility, manufacturing facilities, retail stores, showrooms, two distribution facilities and certain equipment under non-cancelable operating leases expiring at various dates through 2014. The approximate minimum rental commitments under all non-cancelable leases as of December 31, 1998 are as follows: - ---------------------------------------------------------- 1999 $ 17,458 2000 17,029 2001 15,012 2002 13,312 2003 11,320 Thereafter 30,037 - ---------------------------------------------------------- Total $104,168 - ---------------------------------------------------------- Most of the leases for retail space provide for renewal options, contain normal escalation clauses and require the Company to pay real estate taxes, maintenance and other expenses. The aggregate base rent obligation for a lease is expensed on a straight-line basis over the term of the lease. Rental expense for all operating leases was $18,483, $18,487 and $17,189 for the years ended December 31, 1998, 1997 and 1996, respectively. 10. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes new standards for defining and disclosing information about a company's business segments. SFAS No. 131 requires a company to define its segments along its internal structure and reporting methodology. The Company has five revenue generating business units with separate management teams and financial reporting accountability. These units have been aggregated into three reportable segments, each sharing similar product, distribution, marketing and economic conditions. The reportable segments are U.S. Wholesale, U.S. Retail and International. The U.S. Wholesale segment is comprised of the worldwide product development and manufacturing/sourcing for footwear and apparel and accessories and the sale of such products to wholesale customers in the United States. This segment also includes royalties from licensed products sold in the United States and the management costs and expenses associated with the Company's worldwide licensing efforts. The U.S. Retail segment includes the Company operated specialty and factory outlet stores in the United States. The International segment consists of the marketing, selling and distribution of footwear, apparel and accessories and licensed products outside of the United States. Products are sold outside of the United States through the Company's European subsidiaries (which use wholesale and retail channels to sell footwear and apparel and accessories), independent distributors and licensees. The Unallocated Corporate component of segment reporting consists primarily of the corporate finance, legal, information services and administrative expenses incurred in support of company-wide activities and United States marketing and distribution expenses. Such expenses are not allocated among the reported business segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Cost of goods sold are reported at cost by the U.S. Wholesale segment and at standard cost, which approximates cost, by the other segments. The Company evaluates segment performances based on operating contribution, which represents pre-tax income before unallocated corporate expenses, interest and other expenses, net, and on operating cash flow measurements. Total assets are disaggregated to the extent that assets apply specifically to a single segment. Unallocated Corporate assets primarily consist of cash and equivalents, manufacturing/sourcing assets, computers and related equipment and United States transportation and distribution equipment. - -------------------------------------------------------------------------------- 28 THE TIMBERLAND COMPANY 17 - --------------------------------------------------------------------------------
U.S. U.S. Unallocated Wholesale Retail International Corporate Consolidated - ------------------------------------------------------------------------------------------------------------------- 1998 - ------------------------------------------------------------------------------------------------------------------- Revenue $450,543 $159,732 $251,893 $ - $862,168 Depreciation and amortization 4,026 3,243 4,399 6,531 18,199 Operating income (loss) 132,173 17,728 36,363 (91,674) 94,590 Interest expense - - - 9,538 9,538 Other, net - - - (1,942) (1,942) Income (loss) before income taxes 132,173 17,728 36,363 (99,270) 86,994 - ------------------------------------------------------------------------------------------------------------------- Total assets 150,282 32,846 92,846 193,493 469,467 Expenditures for capital additions 5,120 1,660 3,578 10,325 20,683 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- 1997 - ------------------------------------------------------------------------------------------------------------------- Revenue $427,837 $150,551 $218,070 $ - $796,458 Depreciation and amortization 4,282 3,532 4,800 7,678 20,292 Operating income (loss) 122,831 12,742 25,678 (77,398) 83,853 Interest expense - - - 14,833 14,833 Other, net - - - 1,419 1,419 Income (loss) before income taxes 122,831 12,742 25,678 (93,650) 67,601 - ------------------------------------------------------------------------------------------------------------------- Total assets 151,020 34,647 91,615 142,721 420,003 Expenditures for capital additions 4,450 3,028 5,907 12,319 25,704 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- 1996 - ------------------------------------------------------------------------------------------------------------------- Revenue $346,218 $139,202 $204,553 $ - $689,973 Depreciation and amortization 4,588 3,792 4,787 8,203 21,370 Operating income (loss) 80,925 8,865 26,346 (65,247) 50,889 Interest expense - - - 20,582 20,582 Other, net - - - (631) (631) Income (loss) before income taxes 80,925 8,865 26,346 (85,198) 30,938 - ------------------------------------------------------------------------------------------------------------------- Total assets 171,463 39,173 102,686 136,264 449,586 Expenditures for capital additions 2,686 3,730 3,199 5,475 15,090 - -------------------------------------------------------------------------------------------------------------------
The following summarizes the Company's operations in different geographic areas for the years ended December 31, 1998, 1997 and 1996, respectively.
United Other States Europe Foreign Consolidated - ------------------------------------------------------------------------------------------------------------------- 1998 - ------------------------------------------------------------------------------------------------------------------- Revenue $610,275 $216,587 $35,306 $862,168 Long-lived assets 58,414 16,911 6,576 81,901 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- 1997 - ------------------------------------------------------------------------------------------------------------------- Revenue $578,388 $184,010 $34,060 $796,458 Long-lived assets 53,885 17,294 6,818 77,997 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- 1996 - ------------------------------------------------------------------------------------------------------------------- Revenue $485,420 $169,750 $34,803 $689,973 Long-lived assets 52,477 17,884 7,757 78,118 - -------------------------------------------------------------------------------------------------------------------
The U.S. Wholesale and Retail segments and Unallocated Corporate comprise the United States geographic area. The International segment is divided into two geographic areas, Europe and Other Foreign. Other Foreign assets primarily consist of the Company's owned manufacturing facilities in the Caribbean and assets related to the Company's sourcing operations. - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 29 18 - -------------------------------------------------------------------------------- 11. STOCKHOLDERS' EQUITY The Company's Class A Common Stock and Class B Common Stock are identical in all respects, except that shares of Class A Common Stock carry one vote per share, while 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. In February 1998, 267,270 shares of Class B Common Stock were converted to Class A Common Stock. On October 15, 1998, the Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's Class A Common Stock, from time to time, at the discretion of management, and as market and business conditions may warrant. The Company may use repurchased shares to offset shares which may be issued under the Company's stock-based employee incentive plans. During 1998, the Company repurchased 400,000 shares of Class A Common Stock. 12. STOCK AND EMPLOYEE BENEFIT PLANS Under the 1997 Incentive Plan (the "1997 Plan"), 1,000,000 shares of Class A Common Stock have been reserved for issuance. In addition to stock options, any of the following incentives may be awarded to participants under the 1997 Plan: stock appreciation rights ("SARs"), restricted stock, unrestricted stock, awards entitling the recipient to delivery in the future of Class A Common Stock or other securities, securities which are convertible into or exchangeable for shares of Class A Common Stock and cash bonuses. The option price per share and vesting periods of stock options are determined by the Compensation Committee of the Board of Directors. All outstanding stock options granted under the 1997 Plan have been granted at fair market value, become exercisable in equal installments over four years, beginning one year after the grant date, and expire ten years after the date of grant. In addition to the 1997 Plan, the Company has, on occasion, granted "non-qualified" stock options at fair market value to non-employees to purchase Class A Common Stock. Under its 1991 Stock Option Plan for Non-Employee Directors (the "1991 Plan"), the Company has reserved 100,000 shares of Class A Common Stock for the granting of stock options to eligible non-employee directors of the Company. Under the terms of the 1991 Plan, stock option grants are awarded on a predetermined formula basis and no grant can be made after November 15, 2001. The exercise price of options granted under the 1991 Plan is the fair market value of the stock on the date of grant. Stock options granted under the 1991 Plan become exercisable in equal installments over four years, beginning one year after the grant date and expire ten years after the grant date. Options to purchase an aggregate of 307,767, 283,072 and 297,202 shares were exercisable under all option arrangements at December 31, 1998, 1997 and 1996, respectively. Under the existing stock option plans, there were 700,964 and 927,314 shares available for future grants at December 31, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- 30 THE TIMBERLAND COMPANY 19 - -------------------------------------------------------------------------------- The following summarizes transactions under all stock option arrangements for the years ended December 31, 1998, 1997 and 1996:
- --------------------------------------------------------------------------------------------------------------- Number of Range of Weighted-Average Shares Exercise Prices Exercise Price - --------------------------------------------------------------------------------------------------------------- January 1, 1996 901,436 $ 6.38-83.25 $21.86 - --------------------------------------------------------------------------------------------------------------- Granted 194,900 17.38-39.00 22.43 Exercised (89,557) 6.38-26.00 11.39 Canceled (254,152) 6.38-83.25 30.76 - --------------------------------------------------------------------------------------------------------------- December 31, 1996 752,627 6.38-83.25 20.25 - --------------------------------------------------------------------------------------------------------------- Granted 314,500 40.63-77.63 50.26 Exercised (190,130) 6.38-40.63 19.39 Canceled (68,312) 15.00-50.13 30.92 - --------------------------------------------------------------------------------------------------------------- December 31, 1997 808,685 6.38-83.25 31.24 - --------------------------------------------------------------------------------------------------------------- Granted 288,350 35.00-82.94 67.07 Exercised (126,200) 6.38-50.13 22.70 Canceled (125,230) 17.38-83.25 36.05 - --------------------------------------------------------------------------------------------------------------- December 31, 1998 845,605 6.38-83.25 44.04 - ---------------------------------------------------------------------------------------------------------------
The following summarizes information about all stock options outstanding at December 31, 1998:
- --------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ----------------------------------------------- ----------------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - --------------------------------------------------------------------------------------------------------------- $ 6.38-17.38 103,386 4.29Years $13.00 84,730 $12.04 17.50-19.50 25,428 6.80 17.87 13,407 18.15 20.50 106,313 5.42 20.50 80,135 20.50 21.00-32.25 85,189 6.19 22.87 64,186 23.35 32.50-40.63 142,939 8.52 38.96 27,000 38.76 42.13-43.94 17,750 9.71 42.25 - - 50.13 87,250 8.37 50.13 21,249 50.13 50.38-71.25 45,000 8.79 67.61 9,748 68.67 72.13 140,500 9.15 72.13 - - 76.50-83.25 91,850 9.17 81.04 7,312 78.92 - --------------------------------------------------------------------------------------------------------------- 6.38-83.25 845,605 7.53 44.04 307,767 25.22 - ---------------------------------------------------------------------------------------------------------------
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 18,900 shares in 1998, 15,016 shares in 1997 and 23,807 shares in 1996 at prices ranging from $17.11 to $51.06 per share. At December 31, 1998, a total of 27,730 shares was available for future purchases. Compensation cost is recognized for the fair value of the employee's purchase rights. The weighted-average fair values of those purchase rights granted in 1998, 1997 and 1996 were $18.63, $12.87 and $6.08, respectively. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock plans and provides certain proforma disclosures regarding the Company plans as required by SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for stock option grants issued under any of the Company's stock option plans. Had compensation cost for stock option grants issued been determined under the provisions of SFAS No. 123, the Company's net income and diluted earnings per share in 1998, 1997 and 1996 would have been: $55,901 and $4.75, $45,078 and $3.84 and $19,378 and $1.72, respectively. The proforma effect on net income and earnings per share for 1998, 1997 and 1996 is not representative of the proforma effect on net income in future years because the provisions of SFAS No. 123 do not take into consideration proforma compensation expense related to grants made prior to 1995. - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 31 20 - -------------------------------------------------------------------------------- The fair value of each stock option granted in 1998, 1997 and 1996 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 1998, 1997 and 1996, respectively: expected volatility of 39.9%, 43.9% and 55.9%; risk-free interest rates of 5.5%, 6.2% and 6.1%; expected lives of 5.5, 4.9 and 4.4 years; and no dividend payments. The weighted-average fair values per share of stock options granted during 1998, 1997 and 1996 were $29.34, $22.46 and $11.04, respectively. The Company maintains a contributory 401(k) Retirement Earnings Plan (the "401(k) Plan") for eligible salaried and hourly employees who are at least 18 years of age with six or more months of service. Under the provisions of the 401(k) Plan, employees may contribute between 2% and 16% of their base salary up to certain limits. The 401(k) Plan provides for Company matching contributions not to exceed 3% of the employee's compensation or, if less, 50% of the employee's contribution. Vesting of the Company contribution begins at 25% after one year of service and increases by 25% each year until full vesting occurs. The Company maintains two contributory 165(e) Retirement Earnings Plans (the "165(e) Plans") for eligible salaried and hourly employees of its manufacturing facilities and a non-contributory profit sharing plan for eligible hourly employees not covered by the 401(k) or 165(e) Plans. The Company's contribution expense under all retirement plans was $1,081 in 1998, $773 in 1997 and $827 in 1996. 13. 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. 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the quarterly results of operations for the years ended December 31, 1998, 1997 and 1996, respectively:
- -------------------------------------------------------------------------------------------------- 1998 Quarter Ended March 27 June 26 September 25 December 31 - -------------------------------------------------------------------------------------------------- Revenue $163,058 $144,741 $291,857 $262,513 Gross profit 66,945 57,431 116,309 102,153 Net income 7,365 1,901 29,095 20,795 Basic earnings per share .65 .17 2.53 1.83 Diluted earnings per share .62 .16 2.47 1.80 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- 1997 Quarter Ended March 28 June 27 September 26 December 31 - -------------------------------------------------------------------------------------------------- Revenue $150,684 $132,180 $274,699 $238,895 Gross profit 61,614 51,855 106,641 91,811 Net income 4,296 557 24,957 17,511 Basic earnings per share .38 .05 2.20 1.54 Diluted earnings per share .37 .05 2.11 1.48 - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- 1996 Quarter Ended March 29 June 28 September 27 December 31 - -------------------------------------------------------------------------------------------------- Revenue $127,684 $113,648 $227,547 $221,094 Gross profit 46,025 40,081 83,301 82,502 Net income (loss) (975) (6,880) 16,901 11,373 Basic earnings (loss) per share (.09) (.62) 1.52 1.02 Diluted earnings (loss) per share (.09) (.62) 1.51 .99 - --------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 32 THE TIMBERLAND COMPANY 21 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of The Timberland Company: We have audited the accompanying consolidated balance sheets of The Timberland Company and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts February 3, 1999 - -------------------------------------------------------------------------------- THE TIMBERLAND COMPANY 33 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 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 THE TIMBERLAND COMPANY Y COMPANIA LIMITADA CHILE EX-23 6 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-35223, 33-60459, 33-67128, 33-56913, 33-17552, 33-41660, 33-19183, and 33-50998 of The Timberland Company on Forms S-8 and Registration Statement No. 33-56921 on Form S-3 of our reports dated February 3, 1999, appearing in and incorporated by reference in this Annual Report on Form 10-K of The Timberland Company for the year ended December 31, 1998. Deloitte & Touche LLP Boston, Massachusetts March 25, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 151,889 0 83,793 4,769 131,218 387,566 131,237 74,316 469,467 95,731 100,000 0 0 115 266,078 469,467 862,168 862,168 519,329 519,329 1,685 2,383 9,538 86,994 27,838 59,156 0 0 0 59,156 5.18 5.03
EX-99 8 CAUTIONARY STATEMENTS 1 EXHIBIT 99 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 bases, in part, its investments in infrastructure and product on sales forecasts which are necessarily made in advance of actual sales. The Company does business in highly competitive markets, and the Company's business is affected by a variety of factors, including: - brand awareness - changing consumer preferences - product innovations - fashion trends - retail market conditions - weather conditions - economic and other factors One of management's principal challenges is to improve its ability to predict these factors, in order to enable the Company to better match production of its products with demand. In addition, the Company's growth over the years has created the need to increase these investments in infrastructure and product and to enhance the Company's operational systems. To the extent sales forecasts are not achieved, these investments would represent a higher percentage of revenue, and the Company would experience higher inventory levels and associated carrying costs, all of which would adversely affect the Company's financial performance. CONSUMER ACCEPTANCE OF PRODUCTS. The success of the Company's products and marketing strategy will depend on a favorable reception by the Company's wholesale customers and consumers at retail. The Company believes that its more fashion-focused women's footwear product line and men's collection apparel products are also more susceptible to changing fashion trends and consumer preferences than are the Company's other products. In addition, any delays in production or delivery of such new products could affect the sales of such products. CONSUMER TRENDS AND RETAIL MARKET CONDITIONS. Sales of the Company's products are subject to consumer trends and economic and other factors affecting the retail market. For example, decreased consumer spending, a shift towards discount retailers, softness in the retail market and weakened financial condition of wholesale 2 customers 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 boot products. Such conditions could adversely affect the Company's financial performance in the future, especially if a greater proportion of the Company's revenue were to be made up of "at-once" orders. YEAR 2000. The year 2000 issue is primarily the result of computer programs using two digits rather than four to refer to a year. These programs may not properly recognize a year that begins with "20" instead of "19", which could cause an inability of computer programs to process transactions or engage in normal business activities. The Company utilizes and is dependent upon its financial, operational and planning information systems in all phases of its business functions. In the fourth quarter of 1996, the Company made a preliminary assessment of the capabilities of its systems to recognize and process dates properly in the year 2000 and beyond. The Company has developed and is implementing a compliance strategy to address these issues, including the impact on the Company of the year 2000 readiness of third parties with which the Company transacts business. The Company's Year 2000 Readiness Disclosure describes the Company's Year 2000 compliance strategy and efforts in greater detail. The Company's Year 2000 Readiness Disclosure is contained in the "Management's Discussion and Analysis" section of the Company's 1998 Annual Report. The Company will update this disclosure in its Quarterly Reports on Form 10-Q with the Securities and Exchange Commission and as circumstances may require. RAW MATERIALS. The Company depends on a few key sources for leather, its principal raw material, and other proprietary materials used in its products. In 1998, four suppliers provided an aggregate of more than 60% of the Company's leather purchases. One of these suppliers provided approximately 30% of the Company's leather purchases in 1998. The Company believes that leather will continue to be available from these or alternative sources. However, the Company would be adversely affected by unanticipated price increases or shortages of such materials. DEPENDENCE UPON INDEPENDENT MANUFACTURERS. In 1998, independent manufacturers in Asia, Europe, Mexico and South America produced approximately 80% of the unit volume of the Company's footwear products and all of its apparel and accessories. (See the "International" paragraph below for a discussion of the risks of doing business abroad to which the Company may be subject.) Approximately 56% of the Company's 1998 footwear unit volume was produced by independent manufacturers in China and Taiwan. One of these manufacturers produced approximately 30% of the Company's 1998 footwear volume. The Company believes that the shift towards sourcing product from independent manufacturers will continue to reduce manufacturing overhead and product costs, increase product quality and increase the Company's flexibility to meet changing consumer demand for particular product lines. However, the success of these measures depends on the ability of the Company's independent manufacturers to provide high quality product at lower cost and to do so with rapid turn-around times. There can 3 be no assurance that the Company will be able to maintain current relationships or locate additional manufacturers who can meet the Company's requirements. RETAIL ORGANIZATION. In 1986, the Company opened the first Timberland(R) store dedicated exclusively to Timberland(R) products. At the end of 1998, the Company operated 30 Timberland(R) specialty stores and 44 Timberland(R) factory outlet stores worldwide. Revenue from retail stores operated by the Company in the U.S. represented 18.5% of the Company's revenue for 1998. The Company has made significant capital investments in opening these stores and incurs significant expenditures in operating these stores. The higher level of fixed costs related to the Company's retail organization adversely affects profitability, particularly in the first half of the year, as the Company's revenue historically has been more heavily weighted to the second half of the year. The same market conditions affecting the Company's wholesale customers described above also affect the performance of the Company's retail organization. The Company's ability to recover the investment in and expenditures of its retail organization, particularly its specialty stores, would be adversely affected if sales at its retail stores are lower than anticipated. Although the Company believes its factory outlet stores enable the Company to preserve the integrity of the sale of excess, damaged or discontinued, and maximize the return associated with such sales, the Company's gross margin could be adversely affected if off-price sales increase as a percentage of revenue. COMPETITION. The Company markets its products in highly competitive environments. Many of the Company's competitors are larger and have substantially greater resources than the Company for marketing, research and development, and other purposes. These competitors include athletic footwear companies, branded apparel companies and private labels established by retailers. Furthermore, efforts by the Company's footwear competitors to dispose of their excess inventory could put downward pressure on retail prices and could cause the Company's wholesale customers to redirect some of their purchases away from the Company's products. INTERNATIONAL. The Company manufactures and sources a majority of its products outside the United States. Timberland products are sold in the U.S. and internationally through its stores, operating divisions, distributors, commission agents, franchisees and licensees. Accordingly, the Company is subject to the risks of doing business abroad, including, among other risks, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. In addition, although the Company pays for the purchase and manufacture of its products primarily in U.S. dollars, it does sell its products in markets where the local currency is not the U.S. dollar. Therefore, the Company is subject to fluctuations in foreign currency exchange rates. The recent downturn in the economic conditions in the Asia/Pacific region has received much public attention. The revenue the Company received in 1998 from its 4 authorized distributor in that region did not decrease materially. However, the Company has been advised that sales through Timberland(R) specialty stores operated by that distributor, particularly in Japan, have been adversely impacted by these economic conditions. While revenue from this distributor comprised less than 1% of the Company's total revenue for 1998, a prolonged downturn could adversely impact such distributor's future sales and, hence, the Company's revenue. In addition, while the Company believes it has chosen third party manufacturers with sufficient financial strength to weather the economic downturn, there is a risk that the Company's suppliers could fail to make and ship orders placed by the Company. The Company could utilize its own factories and sourced manufacturers in other countries in such an event to cover any resulting shortfall; however, delivery of these products would be delayed from the original production schedule. MANUFACTURING. The Company currently plans to retain its internal manufacturing capability in order to continue benefiting from reduced lead times, favorable duty rates and tax benefits. The Company continues to evaluate its manufacturing facilities and independent manufacturing alternatives in order to determine the appropriate size and scope of its manufacturing facilities. There can be no assurance that the costs of products that continue to be manufactured by the Company can remain competitive with sourced products. LICENSING. Since late 1994, the Company has entered into several licensing agreements which enable the Company to expand the Timberland(R) brand to product categories and geographic territories in which the Company has not had an appreciable presence. The rights granted under these agreements are typically exclusive, and the Company may not terminate these agreements at will, although the Company has reserved its right to terminate these agreements for cause. The success of the Timberland brand in these products or territories will, therefore, largely depend on the efforts and financial condition of its licensees. In addition, although the Company is pursuing additional licensing opportunities, there can be no assurance that the Company will be able to locate licensees and negotiate acceptable terms with licensees for additional products and territories. PRICING OF PRODUCTS. The prices the Company is able to obtain for its new and expanded product offerings, and the Company's ability to increase prices of its other products, will depend upon consumer acceptance of such prices, as well as competitive and other market factors. MANAGEMENT AND CONTROL. Sidney W. Swartz, the Company's Chairman, and various trusts established for the benefit of his family or for charitable purposes, hold approximately 80% of the combined voting power of the Company's capital stock in the aggregate, enabling him to control the Company's affairs and to influence the election of the two directors entitled to be elected by the holders of Class A Common Stock voting separately as a class. Jeffrey B. Swartz, the Company's President and Chief Executive 5 Officer, is the son of Sidney Swartz. The loss or retirement of these or other key executives could adversely affect the Company. LIQUIDITY AND CAPITAL RESOURCES. Management believes that the Company's capital needs for 1999 can be met through its existing credit facilities and cash flow from operations, without the need for additional long-term financing. However, the Company may need to raise additional capital in the future in order to finance its anticipated growth and capital requirements beyond 1999. The terms and availability of any such additional or replacement financing will be subject to prevailing market conditions and other factors at that time. In addition, the Company's revolving credit facility and senior notes place limitations on the payment of cash dividends and contain other financial and operational covenants with which the Company must comply. If the Company does not comply with such covenants, the Company's ability to use such credit facilities or to obtain other financing could be adversely affected. INTELLECTUAL PROPERTY. The Company has spent, and may be required in the future to spend, significant amounts to protect and defend its trade name, trademarks, patents, designs and other proprietary rights. The Company is also susceptible to injury from parallel trade and counterfeiting of its products. LITIGATION. The Company is involved in various litigation and legal matters 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. 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. -----END PRIVACY-ENHANCED MESSAGE-----