Back to GetFilings.com

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

For the fiscal year ended December 31, 2003

OR

For the transition period from                               to                              

Commission File Number 1-9548

The Timberland Company

(Exact Name of Registrant as Specified in Its Charter)

Registrant's telephone number, including area code: (603) 772-9500

Securities registered pursuant to Section 12(b) of the Act:

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 ý    No o

        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. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý    No o

        The aggregate market value of Class A Common Stock of the Company held by non-affiliates of the Company was approximately $988,613,464 on June 27, 2003, which was the last business day of the Company's second fiscal quarter in 2003. 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. 27,923,629 shares of Class A Common Stock and 6,942,834 shares of Class B Common Stock of the Company were outstanding on February 27, 2004.

DOCUMENTS INCORPORATED BY REFERENCE:

        Portions of the Company's definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14, of this Form 10-K.

PART I

ITEM 1. BUSINESS

Overview

        The Timberland Company was incorporated in Delaware on December 20, 1978. We are the successor to the Abington Shoe Company, which was incorporated in Massachusetts in 1933. We refer to The Timberland Company, together with its subsidiaries, as "we", "our", "us", "Timberland" or the "Company."

        We design, develop, engineer, market and distribute, under the Timberland® and Timberland PRO® brands, premium-quality footwear, apparel and accessories products for men, women and children. These products provide functional performance, classic styling and lasting protection from the elements. We believe that the combination of these features makes our products an outstanding value and distinguishes us from our competitors.

        Our products are sold primarily through independent retailers, better-grade department stores, athletic stores and other national retailers that reinforce the high level of quality, performance and service associated with Timberland. In addition, our products are sold through Timberland® specialty stores, Timberland® factory outlet stores, timberland.com and franchisees in Europe, which are all dedicated exclusively to selling Timberland® products. Our products are sold throughout the United States, Canada, Europe, Asia, Latin America and the Middle East.

        Our principal strategic goal is to become a leading global brand by offering an integrated product selection of footwear, apparel and accessories for men, women and children that is inspired by the outdoors. Our ongoing efforts to achieve this strategic goal include (i) enhancing our leadership position in our core footwear business globally through an increased focus on consumer segment development and technological innovation, (ii) expanding our global apparel business by leveraging the brand's rugged heritage and consumer trust, (iii) extending brand reach by entering into licensing arrangements and by developing sub-branded products with features unique to a consumer group such as the Timberland PRO® series of footwear and apparel, (iv) expanding the brand geographically, (v) driving operational excellence, and (vi) setting the standard for commitment to the community.

Products

        Our 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 our total product revenue (excluding royalties from third-party distributors and licensees) derived from our sales of footwear and of apparel and accessories for the past three years:

Footwear

        In 1973, we produced our first pair of waterproof leather boots under the Timberland® brand. We currently offer 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. Our key Timberland® brand footwear categories are boots, men's and women's casual, kids', and outdoor performance. The Timberland PRO® series for skilled tradespeople and working professionals is an additional footwear category developed by us to address a consumer group's distinct needs. The extension of the brand's reach through complementary sub-brands like the Timberland PRO® series and our development of our core footwear business is intended to advance our goal of becoming a

1

leading global brand. In 2002, we formed an advanced concepts team focused on developing the next innovations in footwear technologies, materials, constructions, and processes including cross-category technology developments. Technology incorporated in most of our footwear products is discussed below in Footwear Technology.

Boots

        Our key boots categories included Classic Boots, in basic, premium, chukka and oxford versions, as well as Field Boots, TBL® Campsites and Nellies. Another important boot category was our Classic Hiking Boots. A few of the key products in this category included the Euro Hiker and Euro Dub Hiker, which are light and flexible, built to be rugged and durable, while still allowing for enhanced agility. Some of the principal features of these boot products include premium waterproof leather, direct-attach and seam-sealed waterproof construction, rubber lug outsoles for superior traction and abrasion resistance, shock diffusion plates, durable laces, padded collars for comfortable fit, enhanced insulation, rustproof hardware for durability and moisture-wicking components for comfort and breathability. We focused on reducing the seasonality of our boots business, adding new products like the Roll-Top Boot to broaden the core range. In addition, we sought to expand our versatility by building more refined styles like the Splitrock. Women's boots also became a bigger focus with the introduction of women's specific collections like the Lady Field, Field Wedge and Women's Premium Series. To more closely align with retail and consumers purchasing styles, we began presenting product in a monthly launch format, allowing for greater point of sale impact, and enhanced product flow.

Men's Casual

        Our Timberland® men's casual footwear series included Boat, Casual, Rugged Casual, Work Casual, Sandals and Timberland® LTD. Featured footwear products in these categories included boat shoes, casual bucks, loafers, sandals, oxfords, chukkas, boots and slip-ons for use in the office, home or outdoors. Our focus in the development of this line of footwear is to combine the rugged heritage of Timberland with premium leathers and functional offerings. Many of our men's footwear products incorporate our innovative Smart Comfort™ system which provides superior comfort while preserving the shape and style of the footwear. We continued to offer select styles of men's casual footwear in wide widths in a full size run to size 15.

Women's Casual

        Timberland® women's casual footwear line included both Natural Casual and Sport footwear with a focus on providing versatile, refined and feminine styling. The Natural Casual category of the business included sandals, shoes and boots with the lead programs being Spokane, Chauffeur and Union Street. The Sport category grew as it allowed us to reach a new and younger consumer. The Metroslim series was the lead program in the Sport category along with the Athletitude and the Versa series. Footwear product in the Sport category included oxfords, clogs, maryjanes and several sandal silhouettes. The Smart Comfort™ system continues to be an integral part of our women's casual line and it crosses both the Natural Casual and Sport categories.

Kids'

        Timberland® kids' footwear products are take-down versions of our high-quality adult footwear products complemented by product designed and engineered for kids only. This line includes boots, outdoor sport, sandals and casual product categories. Featured products in the boots series included the Field Boot, 6" Premium, Euro Hiker and Euro Dub families that combine rugged durability, quality and craftsmanship, the Sapling series designed for toddlers' first steps, and the Crib Bootie series from which we continue to donate a portion of the sales proceeds to Share Our Strength, a not for profit,

2

anti-hunger and anti-poverty organization. Many of our kids' footwear products incorporate the Smart Comfort™ system.

Outdoor Performance

        We continued to leverage our heritage of craftsmanship and technical innovation for the outdoors in our outdoor performance footwear line. This line included technical and versatile offerings in day hiking, light hiking, water sports and after-sport convenience. We added a collection of lightweight winter boots designed for active outdoor pursuits like snowshoeing. Featured products in the outdoor performance footwear line included the Canard Series and the Trail Vision hiking series which marked our re-entry into the technical hiking category.

Timberland PRO® Series

        We expanded and broadened our offering of work boots and shoes specifically designed for skilled tradespeople and working professionals under the Timberland PRO® series sub-brand. We continued our innovation in this category with the introduction of our Wedge Sole products, designed for maximum surface contact and featuring a flat sole and Goodyear welt construction. All Timberland PRO® work boots include the Company's exclusive PRO 24/7™ comfort technology featuring a removable cushioned sock liner, contoured shock-diffusion plate, shock absorbing mid sole and lightweight construction. The Waterproof Workboots series and General Use Workboots series, some of which are designed specifically to fit a woman's foot, have some or all of the following features: waterproof leather and seam sealed construction, moisture resistant insulation, steel toe meeting ANSI safety standards, slip-resistance, abrasion-resistance, oil-resistance, and electrical hazard protection meeting ANSI safety standards. We also introduced the Timberland PRO® Sports Series—products aimed at avid outdoorsmen. Our line featured waterproof constructions, insulation, and multi-density, high traction outsoles.

Footwear Technology

        We continued to incorporate our patent pending, technological innovation, the Smart Comfort™ system, in many of our men's, women's and kids' footwear categories. The Smart Comfort™ system allows the footwear to expand and contract with the changing shape of the foot during the walking motion, while preserving the essential style of the footwear. Footwear incorporating the Smart Comfort™ system provides superior comfort in a product that retains its shape. The Smart Comfort™ system includes an expandable sole that expands as the foot moves, a three-zone system to provide even pressure distribution underfoot, and stretchable uppers on the top of the shoe that stretch as the foot expands and retracts.

        Many Timberland® footwear products offer or will be designed to offer advanced technologies developed by us that combine some or all of the following features:

•

Footwear Modular System—our patent pending modular shoe technology which enables the user to customize the walking platform/footbed and shell of a shoe for multiple end use situations;



•

Endoskeleton™ internal suspension system—our patented technology designed to control heel impact deflection and provide arch support, forefoot flexibility and torsional stiffness for comfort and performance;



•

B.S.F.P.™ motion efficiency system—our patent pending design which delivers improved traction, energy-return and length of wear;



•

Independent Suspension Network™ system (ISN™)—our multi-density sole with independent lugs adapts to the terrain, keeping the foot level on uneven ground for superior stability, traction and comfort;

3

•

Advanced Combination Construction (ACC)—a construction method that delivers improved forefoot flexibility for maneuverability and rear foot stability on rugged terrain; and



•

Guaranteed waterproof construction.

Apparel and Accessories

        We believe that developing a global apparel business is important to our global brand aspirations. Timberland® apparel products consist primarily of a rugged casual line that includes outerwear, sweaters, fleeces, shirts, pants and shorts for men. The entire men's apparel line reflects the authentic outdoor heritage and rugged style for which we are recognized. The products are versatile in both function and style, and range from waterproof outerwear to breathable fabrics to classic plaids and khakis for casual weekend wear. These products feature, in certain models, premium waterproof leathers, waterproof and water resistant fabric, anti-microbial coatings, rust-proof hardware, canvas, denim, high-quality specialty cotton, wool and other quality performance materials. We also continue to develop a women's apparel line in Europe with focus on distinctive European styling and fit that is based on the Timberland heritage. In 2003, we enhanced our offering of Timberland PRO® apparel with the addition of such notable items as rugged denim work pants featuring performance fabric by Kevlar®, moisture-wicking Tech T-shirts designed as base-layers to keep working professionals dry and comfortable during long hours on the job, and continued expansion of our uniquely engineered waterproof outerwear. These styles are engineered for maximum comfort, durability, and protection. They incorporate ergonomic details typically found within our outdoor performance line but are constructed with the rugged hand and features appreciated by working professionals. Our accessories include leather care products and a limited collection of leather goods, including luggage, briefcases, handbags, wardrobe accessories and small leather goods.

        Third-party licensing enables us to expand our brand reach to appropriate and well-defined categories and to benefit from the expertise of the licensees, in a manner that reduces the risks to us associated with pursuing these opportunities. We receive a royalty on sales of our licensed products. In fall 2002, we introduced a new line of men's leather outerwear in the U.S. pursuant to a licensing arrangement and launched a boys' apparel line in the U.S. that is also pursuant to a license agreement. Girls' and infants' apparel will be introduced in the U.S. in coming seasons. We also launched a children's apparel line in Asia during 2003, for boys, girls and infants, pursuant to a licensing agreement. This line is complementary to Timberland® boys' and girls' apparel products in Europe that have been designed, manufactured and distributed pursuant to a license agreement. In 2003, we signed a world-wide agreement for sunglasses and optical frames that replaced our existing agreement, and a European agreement for leather goods, a business that we previously managed internally; both programs will launch in 2004. Our Timberland® accessories products for men, women and children include all products other than footwear and apparel products. Many of these products, including packs and travel gear, watches, men's belts, wallets, socks, gloves, sunglasses, eyewear and ophthalmic frames, and hats and caps, are designed, manufactured and distributed pursuant to licensing agreements with third parties.

Product Sales: Business Segments and Operations by Geographic Area

        Our products are sold in the United States and internationally primarily through independent retailers, better-grade department stores, athletic stores and other national retailers which reinforce the high level of quality, performance and service associated with Timberland. In addition, our products are sold in Timberland® specialty stores and Timberland® factory outlet stores dedicated exclusively to selling Timberland® products, as well as through franchised retail stores in Europe. We also sell our products in the U.S. online at timberland.com.

4

        We operate in an industry which includes the designing, engineering, marketing and distribution of footwear and apparel and accessories products for men, women and children. We manage our business in the following three reportable segments, each segment sharing similar product, distribution, marketing and economic conditions: U.S. Wholesale, U.S. Consumer Direct and International.

        The U.S. Wholesale segment is comprised of our worldwide product development 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 our worldwide licensing efforts. The U.S. Consumer Direct segment includes the Company-operated specialty and factory outlet stores in the United States as well as our e-commerce business. The International segment consists of the marketing, selling and distribution of footwear, apparel and accessories and licensed products outside of the United States. This includes our subsidiaries (which use wholesale and retail channels to sell footwear, apparel and accessories), independent distributors and licensees.

        The following table presents the percentage of our total revenue generated by each of these reporting segments for the past three years:

        More detailed information regarding these reportable segments, and each of the geographic areas in which we operate, is set forth in Note 13 to our consolidated financial statements, entitled "Business Segments and Geographic Information," included in Item 8 of this Form 10-K.

U.S. Wholesale

        Our wholesale customer accounts within the United States include independent retailers, better-grade department stores, outdoor specialty stores, national athletic accounts, general sporting goods retailers and other national accounts. Many of these wholesale accounts merchandise our products in selling areas dedicated exclusively to our products, or "concept shops." These accounts are serviced through a combination of field and corporate-based sales teams responsible for these distribution channels. We also service our wholesale accounts through our principal showroom in New York City and a regional showroom in Dallas, Texas. We have continued our efforts to expand the brand geographically by penetrating markets in areas traditionally underserved by us such as Los Angeles, New Orleans and Memphis.

U.S. Consumer Direct

        At December 31, 2003, we operated 26 specialty stores and 54 factory outlet stores in the United States and one factory outlet store in Puerto Rico. We also sell products through our internet store timberland.com.

        Timberland® Specialty Stores.    These stores carry current season, first quality merchandise and provide:

•

an environment to showcase our products as an integrated source of footwear and apparel and accessories;



•

sales and consumer-trend information which assists us in developing our marketing strategies, including point-of-purchase marketing materials; and



•

an opportunity to develop training and customer service programs, which also serve as models that may be adopted by our wholesale customers.

5

        Timberland® Factory Outlet Stores.    These stores serve as a primary channel for the sale of excess, damaged or discontinued products. We view these factory outlet stores as a way to preserve the integrity of the Timberland® brand, while maximizing the return associated with the sale of such products.

        Timberland.com.    Our online store commenced operations in May 2001 for U.S. consumers to purchase current season, first quality merchandise over the internet. This internet site also provides information about us, including the reports we file with or furnish to the Securities and Exchange Commission, investor relations, corporate governance and employment opportunity information. The site also serves to reinforce our marketing efforts.

International

        We sell our products internationally through operating divisions in the United Kingdom, Italy, France, Germany, Spain, Japan, Hong Kong, Singapore, Taiwan and Malaysia. These operating divisions provide support for the sale of our products to wholesale customers and operate Timberland® specialty stores and factory outlet stores in their respective countries. We intend to continue expanding the brand geographically to support our goal of becoming a top global brand. In early 2003 we established a new subsidiary in Canada to directly offer footwear to wholesale accounts that were formerly serviced under a distribution arrangement. At December 31, 2003, we operated 107 specialty stores and shops and 25 factory outlet stores in Europe and Asia.

        Timberland® products are sold elsewhere in Europe and in the Middle East, Africa, Central America, South America, South Korea, Australia and New Zealand by distributors, franchisees and commissioned agents, some of which also may operate Timberland® specialty and factory outlet stores located in their respective countries.

Distribution

        We distribute our products through three Company-managed distribution facilities which are located in Danville, Kentucky, Ontario, California, and Enschede, Holland, and through third-party managed distribution facilities which are located in Asia.

Advertising and Marketing

        We design our marketing programs and advertising campaigns to increase consumer awareness of and preference for Timberland as a premium global brand equipping consumers with purposeful footwear, apparel and accessories. The programs and campaigns emphasize the attributes that distinguish the Timberland® brand from competing brands and that make our products an outstanding value. These national, regional and customer-specific programs and advertising campaigns are increasingly delivered throughout the year, rather than only during select seasons as has historically been the case. During 2003, our international, U.S. and regional advertising campaigns were coordinated on a worldwide basis with the launch of our Don't Wear It. Use It.™ campaign. This campaign included print, outdoor ads in selected markets and co-operative advertising. Advertising appeared in the following media: active-lifestyle, fashion, business and sports-oriented consumer periodicals, trade press, and outdoor billboards in key markets. Our distributors and licensees also fund marketing campaigns, over which we maintain approval rights to ensure consistent and effective brand presentation.

        We reinforce these advertising efforts with a variety of marketing and merchandising campaigns including retail promotions, fixturing, point-of-purchase displays and materials, public relations efforts, product seeding and cooperative advertising programs with our retailers, as well as with retail sales associate training and other sales incentive programs. We launched the Community Builders Tour with six events in New York and Baltimore during 2003. The Tour unites local residents, community

6

organizations and select retailers around the ethic of community service through service projects tailored to each specific community's needs. The Tour engaged consumers through service participation and increased awareness for local community service organizations.

        At key retail partners, we further reinforced the Timberland® brand message through enhanced concept shops and improved visual presence. In 2003, we continued our point of sale, in-store demonstration theater to enable consumers and retailers to see and experience the benefits of Timberland® footwear that incorporates the unique Smart Comfort™ system. Our Smart Comfort™ theater enabled consumers to see and experience the benefits of Timberland's Smart Comfort™ system by testing our footwear. The Timberland PRO™ mobile, a specially outfitted vehicle, continued to tour the U.S., enabling consumers to try on Timberland PRO® series of work boots, hunting boots and apparel at job sites, factories, and sports events targeting skilled tradespeople and professional workers. In addition, our internet site reinforces our marketing efforts through various promotions and targeted mail campaigns. We also promote our products at various industry trade shows in the United States and internationally.

Seasonality

        In 2003, as has been historically the case, our 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 our operations represented a larger percentage of revenue in the first two quarters of 2003 than in the last two quarters of 2003. We expect this seasonality to continue in 2004.

Backlog

        At December 31, 2003, our backlog of orders from our customers was approximately $332 million, compared with $286 million at December 31, 2002 and $218 million at December 31, 2001. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in 2004. We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year because backlog only relates to the next season, excludes sales to our retail stores and is affected by the timing of customers' orders and product availability.

Manufacturing

        We operate manufacturing facilities located in Puerto Rico and the Dominican Republic. During 2003, we manufactured approximately 10% of our footwear unit volume, compared to approximately 11% during 2002 and 13% during 2001. The remainder of our footwear products and all of our apparel and accessories products were produced by independent manufacturers and licensees in Asia, Europe, Mexico, South and Central America. Approximately 90% of the Company's 2003 footwear unit volume was produced in Asia by independent manufacturers in China, Vietnam and Thailand. Three of these manufacturers produced approximately 17% to 22% each of the Company's 2003 footwear volume. We renewed our lease for our manufacturing facility in Puerto Rico in 2003. We believe we benefit from our internal manufacturing capability which provides us with sourcing for fashion and core assortment, planning efficiencies and lead time reduction, refined production techniques, and favorable duty rates and tax benefits. However, tax benefits related to Puerto Rico are scheduled to expire at the end of 2005, which may prompt a re-evaluation of our longer term sourcing approach in that location.

        We maintain a product quality management group which develops, reviews and updates our quality and production standards. To help ensure such standards are met, the group also conducts product quality audits at our factories and distribution centers and our independent manufacturers' factories and distribution centers. We have offices in Bangkok, Thailand; Zhu Hai, China; Hong Kong; Istanbul, Turkey; and Ho Chi Minh City, Vietnam to supervise our sourcing activities conducted in the Asia-Pacific region.

7

Materials

        In 2003, ten suppliers provided, in the aggregate, approximately 80% of our leather purchases. Two of these suppliers together provided approximately 32% of our leather purchases in 2003. We historically have not experienced significant difficulties in obtaining leather or other materials in quantities sufficient for our operations. However, our gross profit margins are adversely affected to the extent that the selling prices of our products do not increase proportionately with increases in the costs of leather and other materials. Any significant, unanticipated increase or decrease in the prices of these commodities could materially affect our results of operations. We attempt to manage this risk, as we do with all other footwear and non-footwear materials, on an ongoing basis by monitoring related market prices, working with our suppliers to achieve the maximum level of stability in their costs and related pricing, seeking alternative supply sources when necessary, and passing increases in commodity costs to our customers, to the maximum extent possible, when they occur. No assurances can be given that such factors will protect us from future changes in the prices for such materials.

        In addition, we have established a central network of suppliers through which our manufacturing facilities and independent manufacturers can purchase materials. We seek sources of materials local to manufacturers, in an effort to reduce lead times while maintaining our high quality standards. We believe that key strategic alliances with leading materials vendors help reduce the cost and provide greater consistency of materials procured to produce Timberland® products and improve compliance with our production standards. In 2003, we renewed contracts with global vendors for such materials as packaging and leather laces. Global contracts remained in effect for thread, boxtoes and counters, cellulose and Ströbel® construction insole materials, soling components, synthetic laces and packaging labels.

Trademarks and Trade Names; Patents; Research & Development

        Our principal trade name is The Timberland Company and our principal trademarks are TIMBERLAND and the TREE DESIGN LOGO, which have been registered in the United States and many foreign countries. Some of our other trademarks or registered trademarks are: 24-7 Comfort Suspension, Blackridge Mountain, B.S.F.P., Don't Wear It. Use It., Endoskeleton, Flip N' Switch, ISN, Independent Suspension Network, Jackson Mountain, Made To Work, Path of Service, PRO 24/7, PRO 24/7 Plus, PRO 24/7 Comfort Suspension, PRO 24/7 Plus Comfort Suspension, Pull On Your Boots, Pull On Your Boots and Make a Difference, Rock Skin, Safe Grip, Seek Out, Smart Comfort, Splash Blaster, TBL, Timberland PRO, Timber Trail, Trail Grip, Weathergear and Workboots For The Professional.

8

        We regard our trade name and trademarks as valuable assets and believe that they are important factors in marketing our products. We seek to protect and vigorously defend our trade name and trademarks against infringement under the laws of the United States and other countries. In addition, we seek to protect and vigorously defend our patents, designs, copyrights and all other proprietary rights under applicable laws.

        We conduct research, design and development efforts for our products, including field testing of a number of our products to evaluate and improve product performance. Our Invention Factory, an advance concepts footwear team created during 2002, continued its efforts in 2003 to develop future technologies for our footwear products. We also dedicated resources to an international design and development team based in Europe. Our expenses relating to research, design and development have not represented a material expenditure relative to our other expenses.

Competition

        Our footwear, apparel and accessories products are marketed in highly competitive environments that are subject to changes in consumer preference. Although the footwear industry is fragmented to a great degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our products. In addition, we face competition from retailers that are establishing products under private labels and from direct mail companies in the United States. The competition from some of these competitors is particularly strong where such competitor's business is focused on one or a few product categories or geographic regions in which we also compete. However, we do not believe that any of our principal competitors offers a complete line of products that provide the same quality and performance as the complete line of Timberland® footwear and apparel and accessories products.

        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 us. Although changing fashion trends generally affect demand for particular products, we believe that, because of the functional performance, classic styling and high quality of Timberland® 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.

Environmental Matters

        Compliance with federal, state and local environmental regulations has not had, nor is it expected to have, any material effect on our capital expenditures, earnings or competitive position based on information and circumstances known to us at this time.

Employees

        At December 31, 2003, we had approximately 5,500 employees worldwide. Our management considers our employee relations to be good. None of our employees is represented by a labor union, and we have never suffered a material interruption of business caused by labor disputes involving our own employees.

Available Information

        Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports that are filed with or furnished to the Securities and Exchange Commission are made available free of charge through our website www.timberland.com, as soon as reasonably practicable after we electronically file them with, or furnish them to, the Securities and

9

Exchange Commission. The charters for the Audit, Governance and Nominating, and Management Development and Compensation committees of our Board of Directors as well as our Corporate Governance Principles and Code of Ethics are available free of charge through our website www.timberland.com. You may request a copy of any of the above documents by writing to the Secretary, The Timberland Company, 200 Domain Drive, Stratham, New Hampshire 03885.

Executive Officers of the Registrant

        The following table lists the names, ages and principal occupations during the past five years of our executive officers. All executive officers serve at the discretion of our Company's Board of Directors.

10

ITEM 2. PROPERTIES

        Since April 1994, we have leased our worldwide headquarters located in Stratham, New Hampshire. Our current lease for this property expires in September 2010, with the option to extend the term for two additional five-year periods. We consider our headquarters facilities adequate and suitable for our current needs.

        We lease our manufacturing facilities located in Isabela, Puerto Rico, and Santiago, Dominican Republic, under leasing arrangements, which expire on various dates through 2005. We own our distribution facility in Danville, Kentucky, and we lease our facilities in Ontario, California, and Enschede, Holland. The Company and its subsidiaries lease all of their specialty and factory outlet stores. Our subsidiaries also lease office and warehouse space to meet their individual requirements.

ITEM 3. LEGAL PROCEEDINGS

        We are involved in various litigation and legal matters that have arisen in the ordinary course of business. We believe that the ultimate resolution of any existing matter will not have a material adverse effect on our 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, 2003, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Our Class A Common Stock is traded on the New York Stock Exchange under the symbol TBL. There is no market for shares of our 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 our Class A Common Stock for the past two years, as reported by the New York Stock Exchange.

        As of February 27, 2004, the number of record holders of our Class A Common Stock was approximately 926 and the number of record holders of our Class B Common Stock was 7. The closing sales price of our Class A Common Stock on February 27, 2004 was $61.74 per share.

        We have never declared a dividend on either the Company's Class A or Class B Common Stock. In addition, our ability to pay cash dividends is limited pursuant to loan agreements (see notes to the Company's consolidated financial statements).

11

ITEM 6. SELECTED FINANCIAL DATA

Selected Statement of Income Data
(Dollars in Thousands, Except Per Share Data)

¹

In 2002, we recorded a $4,913 after-tax gain from the cumulative effect of change in accounting principle.

Selected Balance Sheet Data
(Dollars in Thousands)

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discusses The Timberland Company's ("we", "our", "us", "Timberland" or the "Company") results of operations and liquidity and capital resources. The discussion, including known trends and uncertainties identified by management, should be read in conjunction with the consolidated financial statements and related notes. Included is a discussion and reconciliation of total Company and International revenue growth to constant dollar revenue growth. Constant dollar revenue growth, which excludes the impact of changes in foreign exchange rates, is not a Generally Accepted Accounting Principle ("GAAP") performance measure. It is used by the Company in its analysis of its financial condition and results of operations.

Overview

        Our strategy centers on expanding the penetration of the Timberland® brand among the growing number of consumers who choose to pursue an outdoor-inspired lifestyle. To achieve this objective we offer an integrated product selection of footwear, apparel and accessories that reinforces the functional performance, benefits and classic styling that consumers have come to expect from the Timberland® brand. We sell these products through high quality distribution channels including our own retail stores.

        To deliver against our long-term goals we are focused on driving progress on key strategic fronts. These include enhancing our leadership position in footwear, capturing growth opportunities in outdoor-inspired apparel, extending brand reach through development of the Timberland PRO® series and brand building licensing arrangements, expanding geographically and driving operational and financial excellence while setting the standard for commitment to the community.

        Highlights of our 2003 financial performance include the following:

•

Revenues increased 12.7% to $1,342.1 million, driven by 5.1% growth in our U.S. business and 27.4% growth in our international operations.



•

Operating profits increased 32.8% to $184.3 million.



•

Operating margins increased from 11.7% to 13.7% driven by strong gross margin gains which more than offset increases in operating expenses as a percent of sales, reflecting investments against strategic growth priorities.



•

Net income before change in accounting principle increased 30.7% to $117.9 million.



•

Diluted earnings per share increased by 36.9% from $2.36 to $3.23.



•

Net cash provided by operating activities increased 44.3% to $199.0 million.



•

Repurchased 2,291,468 shares of our Class A Common Stock during the year.

Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to sales returns and allowances, realizability of outstanding accounts receivable, the carrying value of inventories, derivatives, other contingencies, impairment of assets and the provision for income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily

13

apparent from other sources. Historically, actual results have not been materially different from our estimates. Because of the uncertainty inherent in these matters, actual results could differ from the estimates used in applying these critical accounting policies. Currently, the Company is not aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. Our significant accounting policies are described in Note 1 to the Company's consolidated financial statements.

        We have identified the following as critical accounting policies, based on the significant judgments and estimates used in determining the amounts reported in our consolidated financial statements:

Sales Returns and Allowances

        Our revenue consists of sales to wholesale customers, retail store revenues, license fees and royalties. We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer depending on the country of sale and the agreement with the customer. Retail store revenues are recorded at the time of the sale. License fees and royalties are recognized as earned per the terms of our licensing and royalty agreements. We record reductions to revenue for estimated wholesale and retail customer returns and allowances. We base our estimates on historical rates of customer returns and allowances, as well as the specific identification of outstanding returns and allowances, which are known to us but which have not yet been received. Our total reserves for sales returns and allowances were $30.7 million at December 31, 2003 and $31.0 million at December 31, 2002. The actual amount of customer returns or allowances, which are inherently uncertain, may differ from our estimates. If we determine that increases or decreases to sales returns and allowances are appropriate, we record either a reduction or an increase to net sales in the period in which we make such a determination.

Allowance for Doubtful Accounts

        We make ongoing estimates for losses relating to our allowance for uncollectible accounts receivable resulting from the inability of our customers to make required payments. We estimate potential losses primarily based upon our historical rate of credit losses and our knowledge of the financial condition of our customers. Our allowances for doubtful accounts totaled $7.7 million and $7.5 million at December 31, 2003 and 2002. Historically, losses have been within our expectations. If the financial condition of our customers were to change, adjustments may be required to these estimates. Furthermore, we provide for estimated losses resulting from disputes which arise with respect to the gross carrying value of our receivables and the amounts which customers owe to us. The settlement or resolution of these differences could result in future changes to these estimates. If we determine that increases or decreases to the allowance for doubtful accounts are appropriate, we record either an increase or decrease to selling expense in the period we make such a determination.

Inventory Valuation

        We value our inventory at the lower of cost (first-in, first-out) or market. Market value is estimated based upon assumptions made about future demand and retail market conditions. If we determine that the estimated market value of our inventory is less than the carrying value of such inventory, we provide a reserve for such difference as a charge to cost of sales. Our reserves related to inventory valuation totaled $9.3 million at December 31, 2003 and $11.3 million at December 31, 2002. If actual market conditions are more or less favorable than our estimates, adjustments to our inventory reserves may be required. The adjustments would decrease or increase our cost of sales and net income in the period in which they are recognized.

14

Derivatives

        We are routinely subject to currency rate movements on non-U.S. dollar denominated assets, liabilities and income as we purchase and sell goods in foreign markets in their local currencies. We use derivative instruments, specifically forward contracts, to hedge a portion of our forecasted foreign currency transactions. We use our operating budget and periodic forecasts to estimate future economic exposure and to determine the appropriate levels and timing of related hedging transactions. We closely monitor our foreign currency exposure and adjust our hedge positions accordingly. Our estimates of anticipated transactions may fluctuate over time and may vary from the ultimate transactions (see Note 2 to our consolidated financial statements in Item 8 of this Form 10-K). Future operating results may be impacted by adjustments to these estimates.

Long-lived Assets

        When events or circumstances indicate that the carrying value of a long-lived asset may be impaired, we estimate the future undiscounted cash flows to be derived from the asset to determine whether or not a potential impairment exists. If the carrying value exceeds the estimate of future undiscounted cash flows, an impairment is calculated as the excess of the carrying value of the asset over the estimate of its fair market value. We estimate future undiscounted cash flows using assumptions about expected future operating performance. Those estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, or changes to business operations. For fiscal 2003 and 2002, other than immaterial retail store-closing charges, no significant impairment related to the carrying value of our long-lived assets has been recorded.

Income Taxes

        We record deferred tax assets and liabilities based upon book to tax differences. The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the value of these assets. If we were unable to generate sufficient future taxable income in these jurisdictions, an adjustment may be required in the net carrying value of the deferred tax assets, which would result in additional income tax expense in our consolidated statements of income. Management evaluates the realizability of the deferred tax assets and assesses the need for any valuation adjustment quarterly.

        We estimate what the effective tax rate will be for the full fiscal year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, the estimate is continually refined based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to the expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate.

15

Results of Operations
(Amounts in Thousands, Except Per Share Data)

2003 Compared to 2002

Revenue

        Consolidated revenue growth of 12.7% in 2003 reflected strong growth in our international regions, benefits from foreign currency exchange rate changes and solid gains in our U.S. business. Revenue from the U.S. business totaled $825.8 million in 2003, up 5.1% over the prior year. International revenues were $516.3 million, 27.4% ahead of 2002, 13.6% in constant dollars. Overall, changes in currency exchange rates, primarily the euro, were responsible for 4.7% of the consolidated revenue growth.

Segments Review

        We have three reportable business segments (see Note 13 to the consolidated financial statements in Item 8 of this Form 10-K): U.S. Wholesale, U.S. Consumer Direct and International.

        Revenues for our U.S. Wholesale business increased by 5.1% to $625.8 million. Growth in our boots, women's casual footwear, apparel, and Timberland PRO® footwear categories were partially offset by declines in our outdoor performance footwear, accessories and other categories. The U.S. wholesale business growth reflected the successful expansion of our business with national athletic and other national footwear retailers and gains in independent accounts, offsetting modest declines in department stores and less profitable discount channels.

        The U.S. Consumer Direct business, comprised of Company owned and operated specialty, factory outlet and e-commerce stores in the U.S., recorded $200.0 million in sales, up $9.6 million or 5.0%. Overall, comparable store sales excluding our e-commerce business were up 1.6%. Gains were driven

16

by increases in boots, kids, and outdoor performance footwear offsetting modest declines in men's and women's casual footwear and apparel.

        International revenues increased 27.4% to $516.3 million benefiting from the execution of our growth strategies in Europe and Asia as well as the successful launch of our Canadian subsidiary. Overall, international revenues increased to 38.5% of total consolidated revenues. The European business produced $402.2 million of revenue, growing 26.7% including the benefit of favorable exchange rate fluctuations, 10.6% on a constant dollar basis. Growth was driven by strong gains in Spain, Italy and Germany and in both wholesale and retail channels. Our footwear business posted strong growth across Europe driven by gains in boots, men's and women's casual, kids and outdoor performance. The apparel and accessories businesses declined slightly reflecting warmer weather trends and mixed reaction to product offerings. Timberland opened a new international design center in London in 2003 which will enhance our capability to design product for international markets in future seasons.

        In Asia, revenues grew to $99.2 million, up 22.4%, 16.6% excluding foreign exchange. Our businesses in Japan, Hong Kong, Singapore, Taiwan and Malaysia all experienced strong growth rates despite the negative effect of SARS on the Asian marketplace during the year. This growth was supported by efforts to strengthen our wholesale distribution channels in Asia and continued expansion of our Asian retail business. Our footwear business in Asia expanded significantly reflecting strong growth in boots, men's and women's casual and kids, offsetting declines in our outdoor performance business. Our apparel business also posted solid gains. Our Canadian subsidiary finished its first full year, contributing approximately 2% to our international growth rate.

Products

        Worldwide footwear revenue was $1,018.4 million in 2003, up $129.7 million or 14.6% from 2002, 10.5% excluding the benefit of foreign exchange. Growth was driven by strong global gains in boots, women's and men's casual, kids, and the Timberland PRO® series. These gains offset moderate declines in outdoor performance footwear. Worldwide footwear unit sales were up 8.4% while the average price increased by 5.8% primarily reflecting favorable foreign exchange and business mix impacts.

        Worldwide apparel and accessories revenue grew by 7.8% to $309.8 million. Without the benefit of foreign exchange, the growth was a more modest 0.5%, reflecting 2.0% growth from apparel offset by a modest decline in our accessories business. Apparel and accessories unit sales increased by 3.0%, with average selling prices up 4.7%, due to favorable foreign exchange and product mix changes.

Channels

        Revenue growth reflected strong global gains across both our wholesale and consumer direct channels. Globally, our wholesale business recorded $1,001.8 million of revenue in 2003, a 13% increase. Consumer Direct revenues which include our specialty retail stores, our factory outlet stores and our e-commerce business, were up 11.9% to $340.4 million. Worldwide, we opened 27 stores and closed 16 in 2003.

Gross Profit

        Our gross profit as a percentage of sales, or gross margin, for 2003 was 46.5% as compared to 43.5% for 2002, an improvement of 300 basis points. We experienced benefits from lower product related costs of approximately 140 basis points driven primarily by efficiencies in our supply chain operations. The elimination of significant expense incurred in 2002 related to the west coast dockworker's stoppage provided year over year improvement in our gross margin of approximately 50 basis points. Lower impacts from off-price sales contributed approximately 50 basis points of benefit

17

and foreign exchange rate changes, net of hedging impacts, added approximately 60 basis points to gross margin. We continue to target improvements in gross margins to support our goal of strong profit growth.

        The Company includes the costs of procuring inventory (sourcing costs, inbound freight and duty, overhead and other similar costs) in cost of goods sold. These costs amounted to $95.7 million and $104.8 million for 2003 and 2002, respectively.

Operating Expense

        Operating expense was $440.2 million in 2003, or 32.8% of revenues, as compared to $379.5 million, or 31.9% of revenues in 2002, an increase of $60.7 million or 90 basis points as a percentage of sales. Foreign exchange rate changes accounted for $16.9 million, or 4.5% of the 16% operating expenses increase. Increased sales and marketing efforts were responsible for $10.0 million of the change; $6.8 million was due to international retail expansion and $6.3 million was due to higher incentive compensation. The balance of the increase was driven by distribution costs and other expenses related to company-wide activities. Going forward, the company expects that its support of the company's global brand initiatives and continued investments in initiatives supporting long-term growth in various segments of our business will likely drive expense increases faster than the rate of revenue growth.

        Our selling expense was $356.4 million, an increase of $49.5 million, or 16.1% compared with the prior year. Within this category of expense, approximately $15.0 million of the increase was due to foreign exchange, approximately $10.9 million was related to increased payroll and incentive compensation costs and $8.8 million was related to distribution costs, particularly freight on increased year over year shipments. Additionally, we experienced a $7.1 million increase in store rents and support costs, particularly in our international region and a $5.3 million increase in marketing and advertising expenses. The balance of the increase encompassed costs related to company-wide operations.

        We include the costs of housing inventory (warehousing and handling costs) in selling expense. These costs amounted to $28.5 million, $26.9 million and $26.5 million in 2003, 2002 and 2001, respectively.

        Advertising expense which is also included in selling expense, was $33.9 million, $29.8 million and $32.4 million in 2003, 2002 and 2001, respectively. Advertising costs are expensed at the time the advertising is used, which is predominantly in the season that the advertising costs are incurred. As of December 31, 2003 and December 31, 2002, we had $1.1 million and $0.6 million of prepaid advertising recorded on our consolidated balance sheets, respectively.

        General and administrative expense was $83.7 million, an increase of $11.2 million, or 15.5% compared with last year. As a percentage of revenue, general and administrative expense remained relatively flat to the prior year. The dollar increase was driven by a $7.3 million increase in costs associated with the Company's payroll and incentive compensation programs. The remainder of the increase was associated with a variety of costs to support company-wide activities.

Operating Income

        Operating income was $184.3 million in 2003 and $138.8 million in 2002. As a percentage of revenue, operating income was 13.7% in 2003 and 11.7% in 2002.

        Operating income for our U.S. Wholesale segment increased by 10.4% in 2003 to $196.5 million. The 5.1% revenue growth was complemented by a 150 basis point improvement in gross margin while operating expense as a percentage of sales remained flat. The margin improvement was driven by

18

strong global supply chain execution and improved product mix including benefits from stronger boot sales.

        Our U.S. Consumer Direct segment's operating income increased by 10.3% to $30.0 million. This resulted from the combination of 5.0% revenue growth, margin improvement of 20 basis points and the disciplined control of costs which produced a decline in the operating expense rate of 50 basis points.

        Operating Income for our International segment grew by 27.3% to $80.5 million. Revenue growth of 27.4% and gross margin improvements of 70 basis points, both benefiting from foreign exchange, drove the improvement. Foreign exchange rate benefits were partially offset by year over year impacts from our foreign exchange hedging activities. The margin improvement was supported by our strong supply chain execution and more favorable product mix. Operating expense rates for our International segment also increased by 70 basis points reflecting continued increased investment in retail, new international product development capability and marketing.

        Our Corporate Unallocated expenses, which include central support and administrative costs not allocated to our business segments, declined to $122.7 million or 9.1% of total revenue, a 180 basis point improvement. Improvements in the efficient execution of our supply chain operations produced favorable cost variances compared to our standard costs, which were partially offset by increases in incentive compensation across our support functions.

Interest, Other, net and Taxes

        Interest expense, which is comprised of fees related to the establishment and maintenance of our revolving credit facility plus interest paid on short-term borrowings and interest on short-term debt, was $1.0 million in 2003, compared with $0.9 million in 2002.

        Other, net includes interest income of $0.9 million in 2003 and $1.0 million in 2002. Interest income in 2003 reflects lower interest rates but higher average investments than in 2002.

        The effective income tax rate was 35.5% in 2003, 35.0% in 2002 and 34.0% in 2001. Our effective tax rate has increased gradually as the relative benefit from our tax exempt manufacturing operations in Puerto Rico has diminished (see Note 10 to the consolidated financial statements included in Item 8 of this Form 10-K).

2002 Compared to 2001

Revenue

        Consolidated revenue increased 0.6% to $1,190.9 million in 2002. Domestic revenue, which comprised 66.0% of our business, declined 5.8%. This decline, which occurred primarily in our wholesale boot business, reflects the steps we took to control supply in order to position this business for future growth. The mix impact of the boot decline adversely impacted our average selling prices. Additionally, U.S. Consumer Direct revenue declined 6.5%, in part due to aggressive promotions by competitors and the overall weakness in the U.S. retail climate. Offsetting these declines domestically, the U.S. wholesale apparel business increased by 9.2%. International revenue increased 16.0%, primarily due to growth in Europe across major product categories, channels and markets. Additionally, the increased strength of the euro, in relation to the dollar, resulted in revenue improvement related to foreign exchange. Asia had mid single-digit growth for the year.

Segments Review

        Our U.S. wholesale business revenues decreased 5.6% to $595.2 million. Declines in boots – impacted by proactive efforts to control product supply – and outdoor performance and men's casual footwear were partially offset by gains in the Timberland PRO® series, kids, women's casual footwear

19

and apparel. We experienced sales declines in independent accounts and athletic retailers offsetting gains in discount channels and departments stores.

        The U.S. Consumer Direct business recorded revenues of $190.4 million, a 6.5% decline versus 2001. Comparable store sales declined 5.1%. Sales results reflected declines in apparel and accessory unit sales, in part due to aggressive promotions by competitors and overall weakness in the U.S. climate. Footwear sales also declined moderately. Given the economic conditions in the U.S., we controlled store growth in the U.S. retail business and focused on enhancing returns at existing locations.

        International revenues increased 16.0% to $405.2 million. Excluding the impact of foreign exchange, international revenues increased 12.3%. Europe revenues increased 20.0% to $317.4 million, reflecting growth across key markets and in both footwear and apparel product categories. Foreign exchange rate changes contributed 5.4% to Europe's growth. Asia revenues increased 4.3% to $81.0 million—as gains in boots, men's and women's casual footwear and apparel were partially offset by unfavorable comparisons to prior year sales of Timberland Mountain Athletics® footwear, a product line that was discontinued by the Company.

Products

        Worldwide footwear revenue was $888.6 million in 2002, down 1.1% versus the prior year. Global gains in women's casual, kids, Timberland PRO® series and men's casual footwear were offset by declines in boots—reflecting US market performance and strategies to control product supply—and outdoor performance footwear. Worldwide footwear unit sales increased 4.3% while the average price decreased by 5.2%, reflecting business mix impacts, including lower levels of boot sales.

        Worldwide apparel and accessories revenue increased 5.7% to $287.4 million, primarily reflecting sales growth in Europe. Apparel and accessories unit sales increased 1.7% while average selling prices were up 3.9%, reflecting business mix impacts and benefits from foreign exchange rate changes.

Channels

        Global wholesale revenue increased 0.9% to $886.8 million as international gains and growth in US wholesale apparel were offset by declines in U.S. footwear, driven principally by U.S. boot sales. Worldwide consumer direct sales were down 0.1% to $304.1 million as U.S. retail sales declines, impacted by competitive market conditions, offset international gains. Worldwide retail revenues represented 25.5% and 25.7% of total revenue in 2002 and 2001, respectively. Globally, we opened 27 stores and closed 9 stores in 2002 and opened 22 stores and closed 7 stores in 2001.

Gross Profit

        Gross profit as a percentage of revenue was 43.5% in 2002 and 44.0% in 2001. The decrease was primarily due to a 0.8 percentage point year over year impact of foreign currency hedging, a 0.7 percentage point impact of increased U.S. Wholesale footwear off-price sales and a 0.5 percentage point impact of incremental transportation costs related to the U.S. west coast port work stoppage during the fourth quarter of 2002. These were partially offset by a 0.5 percentage point impact from leather cost decreases and other cost reductions.

Operating Expense

        Operating expense was $379.5 million, or 31.9% of revenue in 2002 and $357.7 million, or 30.2% of revenue in 2001. The 6.1% increase in operating expense in 2002, compared with 2001, was primarily due to incentive compensation related charges, investment in the Company's International business, the impact of foreign exchange and other costs related to company-wide activities.

Operating Income

        Operating income was $138.8 million in 2002 and $163.1 million in 2001. As a percentage of revenue, operating income was 11.7% in 2002 and 13.8% in 2001.

20

        U.S. Wholesale segment operating income decreased in 2002, compared with 2001. The decrease was primarily driven by a 6.5% decrease in footwear revenue, as discussed previously, on a 0.7 percentage point decrease in gross margin rates, primarily due to increased off-price sales, and an increase in operating expense rates. This decrease was partially offset by improved performance in apparel revenue, gross margin rates and operating expense rates. In our U.S. Consumer Direct segment, although revenue decreased 6.5%, improved gross margin rates generated an 8.2% increase in operating income. These improvements reflect benefits from proactive strategies to improve margins through reduced discounting and lower product costs. In our International segment, a 12.3% constant dollar revenue increase, primarily attributable to European performance, along with improved gross margin and expense rates, drove the 26.1% improvement in operating income. International operating profits also benefited from favorable changes in foreign exchange rates, partially offset by the year-over-year impact of foreign currency hedging. The increase in our unallocated corporate operating loss was primarily due to incentive compensation related charges and other costs incurred in support of company-wide activities.

Interest, Other, net and Taxes

        Interest expense, which is comprised of fees related to the establishment and maintenance of the Company's revolving credit facility plus interest paid on short-term borrowings and interest on short-term debt, was $0.9 million in 2002, and $1.6 million in 2001. The decrease in interest expense was due to lower average borrowings at lower interest rates.

        Other, net includes interest income of $1.0 million in 2002 and $1.2 million in 2001. Interest income in 2002 reflects lower interest rates but higher average investments than in 2001.

Reconciliation of Total and International Revenue Increases To Constant Dollar Revenue Increases

Total Company Revenue Reconciliation:

International Revenue Reconciliation:

        Management provides constant dollar revenue growth for total Company and International results because we use the measure to understand revenue growth excluding any impact from foreign exchange rate changes.

21

Liquidity and Capital Resources

Accounts Receivable and Inventory

        Accounts receivable decreased 5.3% to $125.1 million at December 31, 2003, compared with $132.1 million reported at December 31, 2002 and $132.8 million at December 31, 2001. The decrease in 2003 compared to 2002 was due to a larger portion of our fourth quarter revenue being shipped, billed and collected earlier than in the prior year. The decrease in 2002 compared to 2001 was due to improved collection performance. Days sales outstanding improved to 27 days at December 31, 2003 compared with 33 days at December 31, 2002 and 35 days at December 31, 2001. Wholesale days outstanding were 34 days, 43 days and 44 days at the end of 2003, 2002 and 2001, respectively

        Inventory decreased 2.3% to $119.6 million at December 31, 2003 from $122.4 million at December 31, 2002 and $127.2 million at December 31, 2001, reflecting further improvement in our inventory control efforts. Inventory turns were 4.9 times in 2003, compared with 4.6 times in 2002 and 4.2 times in 2001.

Cash From Operations

        Net cash provided by operations for 2003 was $199.0 million, compared with $137.9 million in 2002. The increase in cash generated in 2003, compared with 2002 was primarily due to higher earnings and improved working capital management. Net income was $117.9 million in 2003, compared with $95.1 million in 2002. Accounts receivable declined at the end of 2003, compared with 2002, reflecting earlier timing of revenue in the fourth quarter. Additionally, we experienced reduction in the use of cash in accounts payable primarily due to the timing of the receipt and payment for inventory.

        Net cash used for investing activities amounted to $20.5 million in 2003, compared with $17.6 million in 2002. Capital expenditures in 2003 were $24.9 million versus $17.9 million in 2002. The increase in capital expenditures in 2003, compared with 2002, was driven by retail store improvements and additions as well as investments in transportation and distribution equipment.

        Net cash used for financing activities was $84.8 million in 2003, compared with $88.7 million in 2002. Cash flows from financing activities reflected share repurchases of $103.8 million in 2003, compared with $101.2 million in 2002. The Company received cash inflows of $19.0 million in 2003 from the issuance of common stock related to the exercise of employee stock options, compared with $12.5 million in 2002.

        Net cash provided by operations for 2002 was $137.9 million, compared with $88.9 million in 2001. The increase in cash generated in 2002, compared with 2001 was primarily due to a reduction in accounts receivable and increased expense accruals offsetting reduced profitability. The reduction in accounts receivable was due to strong collection performance. The increase in accruals at the end of 2002, compared with 2001, was primarily due to higher compensation accruals, and to a lesser degree, accrued hedging contract losses in 2002 whose trades had not settled at year end, compared with contract gains in 2001.

        Net cash used for investing activities amounted to $17.6 million in 2002, compared with $24.6 million in 2001 (depreciation expense was $19.6 million, compared with $18.8 million in 2001). Capital expenditures in 2002 were $17.9 million versus $22.4 million in 2002. The decrease in capital expenditures in 2002 was primarily due to building improvements on the corporate headquarters completed in 2001 and a reduction in new retail store openings in 2002, compared to 2001.

        Net cash used for financing activities was $88.7 million in 2002, compared with $71.9 million in 2001. Cash flows from financing activities reflected share repurchases of $101.2 million in 2002, compared with $80.4 million in 2002. The Company received cash inflows of $12.5 million in 2002 from

22

the issuance of common stock related to the exercising of company stock options, compared with $9.4 million in 2001.

        We have available unsecured revolving, committed and uncommitted lines of credit as sources of financing for our seasonal and other working capital requirements. The unsecured committed revolving credit agreement (the "Agreement") is effective until May 3, 2004. It is our intent to enter into a new agreement at or before that time. The Agreement requires us to comply with certain financial and non-financial covenants. The primary financial covenants relate to maintaining minimum fixed charge coverage of 3:1 and leverage ratios of 1.5:1 and a maximum consolidated total funded debt percentage of 40%-50%, depending upon the fiscal quarter. The primary non-financial covenants place certain limitations on additional debt, stock repurchases, acquisitions and the amount of dividends we may pay. We measure compliance with the financial and non-financial covenants and ratios as required by the terms of the Agreement on a fiscal quarter basis. We had no debt outstanding at December 31, 2003, 2002 and 2001.

        Our management believes that our capital needs for 2004 will be met through our current cash balances, our existing credit facilities and cash from operations, without the need for additional permanent financing. However, as discussed in the exhibit to our Form 10-K entitled "Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995," several risks and uncertainties could cause the Company to need to raise additional capital through equity and/or debt financing. From time to time, the Company considers acquisition opportunities which, if pursued, could also result in the need for additional financing. The availability and terms of any such financing would be subject to prevailing market conditions and other factors at that time.

Aggregate Contractual Obligations

        Our deferred compensation plan liability was $5.4 million as of December 31, 2003, compared with $3.1 million at December 31, 2002 and $3.2 million at December 31, 2001. The liability increased primarily due to contributions to the plan. We also have a deferred compensation liability related to restricted stock awards of $8.2 million at December 31, 2003 and $3.1 million at December 31, 2002.

        We have the following contractual obligations due by period:

(Dollars in Millions)

¹

Purchase obligations consist of open production purchase orders for sourced footwear and apparel, materials used to manufacture footwear and apparel and open purchase orders for U.S. operating expense purchases relating to goods or services ordered in the normal course of business. In addition, we have less than $10.0 million of open purchase orders for international operating expense purchases relating to goods or services ordered in the normal course of business which are not included in the table. We expect these international commitments to come due in 2004.

23

Off Balance Sheet Arrangements

        As of December 31, 2003, 2002 and 2001, we had letters of credit outstanding of $27.0 million, $23.0 million and $39.0 million, respectively. All were issued for the purchase of inventory. As of December 31, 2003, the Company had $166.7 million in hedging contracts outstanding, all of which are due to settle within the next 15 months (see Note 6 to the consolidated financial statements included in Item 8 to this Form 10-K).

        We have the following off-balance sheet arrangements:

(Dollars in Millions)

        We use funds from operations and unsecured revolving and committed lines of credit as the primary sources of financing for our seasonal and other working capital requirements. Long-term debt, if required, is generally used to finance long-term investments. Our principal risks to these sources of financing are the impact on our financial condition from economic downturns, a decrease in the demand for our products, increases in the prices of materials and a variety of other factors. We anticipate that capital requirements for 2004 will be met through the use of our current cash balances, through our existing credit facility (which places certain limitations on additional debt, stock repurchases, acquisitions and on the amount of dividends we may pay, and also contains certain other financial and operating covenants) and through cash flow from operations, without the need for additional permanent financing. However, if the need arises, our ability to obtain any additional credit facilities will depend upon prevailing market conditions, our financial condition and the terms and conditions of such additional facilities.

New Accounting Pronouncements

        A discussion of new accounting pronouncements is included in the "Summary of Significant Accounting Policies" note (see Note 1 to the consolidated financial statements included in Item 8 to this Form 10-K).

Forward-looking Information

        As discussed in Exhibit 99.1 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 our actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of us. These factors include, but are not limited to:

•

Our ability to successfully market and sell our products in a highly competitive industry and in view of changing consumer trends, consumer acceptance of products, and other factors affecting retail market conditions, including the current U.S. economic environment and the global economic and political uncertainties resulting from the continuing war on terrorism;



•

Our ability to locate and retain independent manufacturers to produce lower cost, high-quality products with rapid turnaround times;

24

•

Our ability to manage our foreign exchange rate risks;



•

Our reliance on a limited number of key suppliers;



•

Our ability to obtain adequate raw materials at competitive prices;



•

Our ability to successfully invest in our infrastructure and product based upon advance sales forecasts;



•

Our ability to recover our investment in, and expenditures of, our retail organization through adequate sales at such retail locations; and



•

Our ability to respond to actions of our competitors, some of whom have substantially greater resources than ours.

        We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        In the normal course of business, our financial position and results of operations 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, liabilities and income. We regularly assess these risks and have established policies and business practices that should result in an appropriate level of protection against the adverse effect of these and other potential exposures.

        We utilize cash from operations and U.S. dollar denominated borrowings to fund our working capital and investment needs. Short-term debt, if required, is used to meet working capital requirements and long-term debt, if required, is generally used to finance long-term investments. In addition, we use derivative instruments in our 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 invested in high-grade securities with terms under 3 months.

        We have available unsecured committed and uncommitted lines of credit as sources of financing for our working capital requirements. Borrowings under these credit agreements bear interest at variable rates based on either lenders' cost of funds, plus an applicable spread, or prevailing money market rates. At December 31, 2003, December 31, 2002 and December 31, 2001, we had no short-term or long-term debt outstanding.

        Our foreign currency exposure is generated primarily from our European operating subsidiaries and, to a lesser degree, our Asian and Canadian operating subsidiaries. We seek to minimize the impact of these foreign currency fluctuations by hedging the related transactions with foreign currency forward contracts. Currently, these foreign currency forward contracts will expire in 15 months or less. Based upon sensitivity analysis as of December 31, 2003, a 10% change in foreign exchange rates would cause the fair value of our financial instruments to increase/decrease by approximately $18.4 million, compared with $16.6 million at December 31, 2002. The increase at December 31, 2003 is primarily due to the amount of foreign currency contracts held at December 31, 2003, compared with December 31, 2002.

25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS
As of December 31, 2003 and 2002
(Amounts in Thousands, Except Share and Per Share Data)

The accompanying notes are an integral part of these consolidated financial statements.

26

CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2003, 2002 and 2001
(Amounts in Thousands, Except Per Share Data)

The accompanying notes are an integral part of these consolidated financial statements.

27

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)

28

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2003, 2002 and 2001 (Continued)
(Dollars in Thousands)

The accompanying notes are an integral part of these consolidated financial statements.

29

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)