-----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, N2ptMm04eFLoYa5THtrVpoh0ZfVte8OnZnSLGxq2vTvX1EUh9uKTHxWdOIpBKnrQ qt7MyNX1EcattILektZDww== 0000770949-96-000002.txt : 19960401 0000770949-96-000002.hdr.sgml : 19960401 ACCESSION NUMBER: 0000770949-96-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REEBOK INTERNATIONAL LTD CENTRAL INDEX KEY: 0000770949 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 042678061 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09340 FILM NUMBER: 96540807 BUSINESS ADDRESS: STREET 1: 100 TECHNOLOGY CTR DR CITY: STOUGHTON STATE: MA ZIP: 02072 BUSINESS PHONE: 6173415000 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 Commission File Number 1-9340 REEBOK INTERNATIONAL LTD. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2678061 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 100 Technology Center Drive, Stoughton, Massachusetts 02072 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (617) 341-5000 Securities registered pursuant to Section 12(b) of the Act: Title of Name of each exchange each class on which registered Common Stock, par value, $.01 per share New York Stock Exchange Common Stock Purchase Rights 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 22 1996, the aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was approximately $1,850,602,839. As of March 22, 1996, 74,674,065 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Definitive Proxy Statement dated March 29, 1996 for the Annual Meeting of Shareholders to be held on May 7, 1996 (certain parts as indicated herein in Part III). PART I Item 1. Business. Reebok International Ltd., a Massachusetts corporation organized on July 26, 1979, is a global company engaged primarily in the design and marketing of sports and fitness products, including footwear and apparel, as well as the design and marketing of footwear and apparel for non-athletic "casual" use. The Company has two major business groups: the Reebok Division, which is primarily responsible for the Company's REEBOK(R) brand, and the Specialty Business Group, which is responsible for the Company's other major brands, including the GREG NORMAN(TM) brand, the Company's subsidiaries, AVIA Group International, Inc. ("Avia") and The Rockport Company, Inc. ("Rockport"), as well as Reebok's retail operations. (Reebok International Ltd. is referred to herein, together with its subsidiaries, as "Reebok" or the "Company" unless the context requires otherwise.) During calendar year 1995, net income for the Company (exclusive of the after-tax effect of certain special charges described below) decreased by 17.6% to $209.7 million, or $2.64 per share, from $254.5 million, or $3.02 per share, for the year ended December 31, 1994, while net sales increased by 6.1%, from $3.280 billion in 1994 to $3.482 billion in 1995. During 1995 the Company recorded special charges related to facilities consolidation, severance and other related costs associated with streamlining of certain segments of its operations (after-tax effect of $11,235,000 recorded in the second quarter) and the writedown of the carrying value of its Avia subsidiary to estimated fair value on sale (after-tax effect of $33,699,000 recorded in the fourth quarter). In connection with the special charge relating to the writedown of the carrying value of Avia, the Company announced that it intended to sell Avia in order to focus its resources on its core brands. Including the effect of these special charges, the Company reported net income of $164,798,000 or $2.07 per share for the 1995 calendar year. On October 19, 1995, the Company's Board of Directors authorized the repurchase of up to $200 million in Reebok common stock in open market or privately negotiated transactions. This authorization was in addition to the share repurchase programs of $200 million each announced in July, 1992, July, 1993 and October, 1994 pursuant to which the Company has repurchased 18,473,000 shares at an aggregate price of approximately $602 million as of December 31, 1995. As of December 31, 1995, the Company had approximately $198 million available for future purchases under these programs. The following is a discussion of the business of each of the Company's operating units. REEBOK DIVISION The Reebok Division is responsible for designing, producing and marketing sports and fitness footwear, apparel and accessories, as well as related sports and fitness products, that combine the attributes of athletic performance along with style. The Division's products include footwear for basketball, running, soccer, tennis, golf, track and field, volleyball, football, baseball, aerobics, cross training and walking activities, as well as athletic apparel and accessories. The Division also produces authentic outdoor performance footwear and apparel under the REEBOK brand to appeal to outdoor enthusiasts and the BOKS(R) line of alternative footwear which is focused on new and energizing trends in the non-athletic market and designed to appeal to the younger generation. In addition, the Division produces children's footwear sold under the REEBOK brand, a collection of footwear for infants and toddlers sold under the WEEBOK brand, and WEEBOK(R) apparel and accessories which are produced and sold through a licensee. The Division has expanded its product scope through the development and marketing of related sports and fitness products, such as sports and fitness videos, programming and equipment, and through its strategic licensing program pursuant to which the Company's technologies and/or trademarks are licensed to third parties for sporting goods and related products. The Reebok Division has targeted as its primary customer base athletes and others who believe that technical and other performance features are the critical attributes of athletic footwear and apparel. Although much of the Company's historical growth has been due to its strength in athletic footwear and other products for the fitness market, in recent years the Company has taken various strategic actions towards increasing Reebok's presence in the sports market, gaining increased visibility on playing fields and sports arenas worldwide through endorsement arrangements with such prominent athletes as Shaquille O'Neal of the Orlando Magic, Emmitt Smith of the Dallas Cowboys and Frank Thomas of the Chicago White Sox and various sports and event sponsorships. As part of its commitment to offer leading athletic footwear technologies, the Division engages in product research, development and design activities in the Company's Stoughton, Massachusetts headquarters and in its various Far East offices. The Company recently opened a new state-of-the-art 50,000 square foot product development facility at the Company's corporate headquarters which is dedicated to the design and development of technologically-advanced athletic and fitness footwear. Technology Reebok places a strong emphasis on technology in its products, and has continued to incorporate performance technologies in its products such as HEXALITE(R) technology, which provides lightweight cushioning, and DYNAMIC CUSHIONING(R) technology, which utilizes compressible rearfoot and forefoot chambers in the outer sole to provide cushioning. Reebok plans to introduce VizHex(TM) in late 1996, an upgrade of its HEXALITE technology which will give consumers visible proof of cushioning effectiveness. In addition, the Company recently introduced a new evolution of the DYNAMIC CUSHIONING technology called DMX(TM), which utilizes a dynamic air flow system in the midsole to provide heel and forefoot cushioning and comfort; walking shoes incorporating this technology are currently being offered at retail. It is anticipated that the DMX technology will be expanded into other footwear categories. The Company has also continued to utilize in certain of its performance products its INSTAPUMP(TM) technology, which provides custom fit and support to lightweight performance shoes through use of an INSTAPUMP inflator containing a carbon dioxide cartridge used to inflate the chambers instantly. Marketing and Promotional Activities The Reebok Division devotes substantial resources to advertising its products to a variety of audiences through television, radio and print media and utilizes its relationships with major sports figures in a variety of sports to gain visibility for the REEBOK brand. A substantial advertising program was pursued in 1995 with advertisements directed toward both the trade and the ultimate consumer of REEBOK products. The major advertising campaigns in 1995 included the "Under the Stars" campaign which ran internationally and featured numerous Reebok endorsers such as Shaquille O'Neal, Shawn Kemp, Emmitt Smith and Jurgen Klinsmann, the "Shaq v. Shaq" campaign featuring National Basketball Association ("NBA") star Shaquille O'Neal, the "Moms" series featuring the mothers of various premier NBA players telling nostalgic stories about their sons, a National Football League ("NFL") campaign featuring Reebok NFL endorsers such as Emmitt Smith, Ken Norton and Thurman Thomas to promote Reebok's NFL Pro Line merchandise and REEBOK PRESEASON(R) footwear and apparel, and a women's campaign featuring women athletes such as Julie Foudy, Nancy Feagin and Manon Rheaume. Substantial resources were devoted to promotional activities in 1995, including endorsement agreements with athletes, teams, leagues and sports federations, event sponsorships, in-store promotions and point-of-sale materials. The Division continued its strategic push into the sports market, gaining increased visibility on playing fields and sports arenas worldwide through endorsement arrangements with such athletes as Shaquille O'Neal, with whom Reebok markets a major signature line of footwear, apparel and accessories featuring his distinctive logo. Other endorsements in basketball come from professional players such as Muggsy Bogues, Kenny Anderson, Shawn Kemp, Clyde Drexler, Nick Van Exel and Sam Cassell. Reebok also signed an endorsement agreement with Glenn Robinson in 1995. In addition, in October 1995, Reebok entered into a multi-year license agreement with NBA Properties which permits it to design and produce officially licensed NBA apparel featuring NBA team logos. To promote the sale of its cross training footwear, Reebok used endorsements by prominent athletes such as NFL players Emmitt Smith, John Elway, Ken Norton and Thurman Thomas, as well as Major League Baseball ("MLB") players Frank Thomas and Carlos Baerga. To promote its cleated football and baseball shoes, the Company also signed endorsement contracts with several hundred MLB and NFL players, including numerous all-stars and players in both the 1995 and 1996 Super Bowl games and the World Series. The Company also has a multi-year agreement with NFL Properties under which Reebok has been designated a "Pro Line" licensee for the U.S. and international markets with the right to produce and market sideline apparel bearing NFL team logos. REEBOK NFL Pro Line apparel is currently available at retail stores. In addition, pursuant to this agreement, the coaching staff and players of the San Francisco 49ers, Detroit Lions, Seattle Seahawks, and New Orleans Saints wear REEBOK(R) sideline apparel and Reebok produces uniforms for the Detroit Lions. In August 1995, Reebok expanded its roster of NFL teams to include the New York Giants and the Carolina Panthers, two additional teams for which Reebok supplied uniforms and sideline apparel. This agreement was recently amended so that in 1996 Reebok will supply uniforms and sideline apparel for the 49ers, Lions, Giants and Panthers and sideline apparel for the Seahawks and Saints and, in 1997 the roster of NFL teams will be expanded to include two additional teams, the Kansas City Chiefs and the Houston Oilers, and Reebok will supply uniforms and sideline apparel to all eight of these NFL teams. Reebok's Pro Line license with NFL Properties complements the other agreements which Reebok has with the NFL and NFL Properties, including its agreement with the NFL under which Reebok is an official athletic footwear licensee, and its agreement with NFL Properties under which Reebok is one of three league-wide sponsors of, and the exclusive supplier of footwear and uniforms to, the NFL's World League of American Football and supplies the sideline apparel to three of the six teams in the League. In soccer, Reebok has endorsement contracts with Gabriel Batistuta of Fiorenta and the Argentinean national team, Ryan Giggs of Manchester United and Wales, Dennis Bergkamp of Arsenal and the Netherlands, Jurgen Klinsmann of Bayern Munich and Germany, and Guiseppe Signori of Lazio and Italy. Reebok has also entered into sponsorship agreements with such soccer teams as Fiorentina of Italy, Aston Villa and Bolton Wanderers of England, Borussia Moenchengladbach of Germany, Bastia of France and Fluminese of Brazil. The Company also recently signed a major sponsorship agreement with the Liverpool Football Club, one of the world's best known club soccer teams. Tennis promotions included endorsement contracts with well-known professionals including Michael Chang, Venus Williams, Todd Martin, Pat Rafter, Arantxa Sanchez-Vicario and Malivai Washington. Promotional efforts in running included endorsement contracts with such well-known runners as Moses Kiptanui, Elana Meyer, Sonia O'Sullivan, Arturo Barrios, Kim Batten and Marie Jose Perec. To promote its women's sports and fitness products, Reebok sponsored athletes such as Rebecca Lobo, women's national basketball team member and 1995 Women's Athlete of the Year, Julie Foudy, of the U.S. national soccer team, Liz Masakayan, pro beach volleyball player, Manon Rheaume, pro hockey goalie and Nancy Feagin, world-class rock climber. Reebok also recently signed an endorsement arrangement with Michelle Akers of the U.S. National Soccer Team. The Division also continued its promotional efforts in the fitness area. Reebok fitness products and programming are featured on Fit TV, a new 24-hour cable network, pursuant to a programming agreement. Aerobic promotional activities in 1995 focused on the STEP REEBOK(R) Program, a step training workout that is performed on an adjustable platform, and endorsements by aerobics experts, such as Gin Miller. In addition, in 1995 Reebok continued to promote the SLIDE REEBOK(TM) lateral motion training device, which provides a lateral motion training workout, through endorsements by decathlete Dave Johnson and figure skater Nancy Kerrigan. In the walking category, the Company promoted its BODYWALK(SM) and WALK REEBOK(SM) fitness programs. Reebok also recently introduced its VERSA TRAINING program designed to help consumers meet their varied fitness goals with aerobic, strength and flexibility workouts. These programs were complemented by the marketing and sale of a line of REEBOK fitness videos. To gain further visibility for the REEBOK brand, Reebok has also entered into several key sport sponsorships including an arrangement under which Reebok has been designated the official footwear and apparel sponsor of the Russian Olympic Committee and the approximately 25 individual associated Russian sports federations through the 1996 Atlanta Summer Olympic games. In addition, the Company has entered into sponsorship agreements with the International Amateur Athletic Federation, the International Triathlon Union and the U.S. Gymnastics Federation, as well as sponsorships of the soccer federations of Brazil and Uruguay. Reebok will have a major presence at the 1996 Atlanta Summer Olympic games through sponsorship agreements with the National Olympic Committees of Russia, Poland, Ireland, Brazil, Jamaica, New Zealand and South Africa, and the track and field federations of China, Belgium, The Netherlands, Portugal, Spain and Sweden. Reebok is also outfitting the Olympic delegations of a number of smaller countries through its developing nations program and is supplying footwear to U.S. Olympic Team coaches and delegation officials. In addition, Reebok is a supplier to the 1996 Centennial Olympic games supplying footwear to employees and volunteers of the Atlanta Committee for the Olympic Games and an official licensee for footwear and videos, and will be an official sponsor of NBC's broadcast of the 1996 Summer Olympic games. U.S. Operations The Reebok Division's U.S. operations unit is responsible for all footwear and apparel products sold in the United States by the Division. Sales of footwear in the United States (including the Company's retail operations) totalled approximately $1.405 billion in 1995, compared to $1.410 billion in 1994. REEBOK brand apparel sales (including GREG NORMAN(TM) apparel) in the U.S. in 1995 totalled approximately $183.6 million, compared to approximately $144.5 million in 1994. In the U.S., the Reebok Division generally uses an employee sales force for its principal product lines, although it utilizes independent sales representatives for some of its specialty products, such as its REEBOK golf products, its Boks(R) footwear line, and its equipment and other sports and fitness products. Reebok's U.S. national sales staff and locally based sales employees are supported by field service representatives employed by Reebok who travel to assist in retail merchandising efforts and provide information to consumers and retailers regarding the features of the Company's products. There are also a number of promotional personnel who coordinate events and promotions at a "grass roots" level to help enhance the image of the REEBOK brand. The Division's U.S. distribution strategy emphasizes high-quality retailers and seeks to avoid lower-margin mass merchandisers and discount outlets. REEBOK(R) footwear is distributed primarily through specialty athletic retailers, sporting goods stores and department stores, with specialty products, such as Boks footwear, golf products and equipment, also being distributed in certain specialty channels. Distribution of the Company's apparel line is predominantly through pro shops, health clubs and department, sporting goods and specialty stores. (A) The 1994 sales of the Company were adjusted on a pro forma basis to reflect Tinley apparel sales in Avia sales. The Tinley division was transferred to the Avia group from the Reebok Division during 1995. In order to present amounts on a comparable basis, Tinley's apparel sales for 1994 have been reclassified to Avia. International Operations In 1995, the Company moved the headquarters for its international operations from London to the Company's corporate headquarters in Stoughton, Massachusetts. The Reebok Division's international sales are now coordinated from Stoughton, Massachusetts, which is also where the Division's regional operations responsible for Latin America are located. There are also regional offices in Lancaster, England which is responsible for Northern Europe, in Munich, Germany which is responsible for Central Europe, in Paris, France which is responsible for Southern Europe, in Denham Lock, England which is responsible for the Middle East and Africa, and in Tokyo, Japan which is responsible for Far East operations and India and is also supported by a marketing team located Hong Kong. The Canadian operations of the Division are managed through a wholly owned subsidiary headquartered outside of Toronto, Canada. The Division markets REEBOK products internationally through wholly owned subsidiaries in Austria, Belgium, Canada, France, Germany, The Netherlands, Italy, Poland, Russia, Switzerland and the United Kingdom and majority owned subsidiaries in Japan, China, India, South Korea, Spain and South Africa. In 1995, Reebok established a majority owned subsidiary in India to distribute its products in that country. In January, 1995, the Company sold its interest in its Chile distributor, although the Company continues to distribute its products through this distributor. REEBOK products are also marketed internationally through 32 independent distributors and minority owned joint ventures. The Company or its wholly owned U.K. subsidiary holds partial ownership interests in 8 of these international distributors, with its percentage of ownership ranging from 25 to 35 percent. Through this international distribution network products bearing the REEBOK brand are actively marketed internationally in approximately 140 countries and territories. The Division's International operations unit also has small design staffs which assist in the design of REEBOK footwear and apparel. During 1995 the contribution of the Division's International operations unit to overall sales of REEBOK(R) products (including GREG NORMAN(TM) apparel and the Company's retail operations) increased to $1.395 billion from $1.253 billion in 1994 due to Reebok's increased market share in a growing world market for athletic and casual footwear and apparel. These sales figures do not, however, reflect the full wholesale value of all REEBOK products sold outside the United States in 1995 because some of the Division's distributors are not subsidiaries and thus their sales to retailers are not included in the calculation of the Division's international sales. If the full wholesale value of all international sales of REEBOK products are included, total sales of REEBOK products outside the United States represent approximately $1.665 billion in wholesale value, consisting of approximately 36 million pairs of shoes totalling approximately $1.227 billion in wholesale value of footwear sold outside the United States in 1995 (compared with approximately 37 million pairs totalling approximately $1.196 billion in 1994) and approximately $438 million in wholesale value of REEBOK apparel (including GREG NORMAN apparel) sold outside the United States in 1995 (compared with approximately $340 million in 1994). LICENSING AND EQUIPMENT The Company has continued to expand its strategic trademark and technology licensing program begun in 1991. This program is designed to pursue opportunities for licensing the Company's trademarks, patents and other intellectual property to third parties for sporting goods and related products. The licensing program is focused on expanding the REEBOK brand into new sports and fitness markets and enhancing the reputation of the Company's brands and technologies. The Company has pursued strategic alliances with licensees who Reebok believes are leaders and innovators in their product categories and who share Reebok's commitment to offering superior, innovative products. The Company believes that its licensing program reinforces Reebok's reputation as a market leader. The Company's licensing program includes such products as a full line of athletic gloves, including baseball batting gloves, football gloves, running gloves, court/racquetball gloves, fitness/weightlifting gloves, cycling gloves, and soccer goalkeeper gloves, all featuring the REEBOK trademark and Reebok's Performance Logo, a collection of REEBOK(R) performance sports sunglasses, REEBOK basketballs, volleyballs and soccer balls, REEBOK weight belts, both with and without Reebok's INSTAPUMP(TM) technology, CCM ice hockey skates with INSTAPUMP(TM) technology, ski gloves with the INSTAPUMP(TM) technology and a line of gymnastic apparel including replicas of the U.S. Gymnastic Team uniforms. In 1995, Reebok also entered into a license agreement with Callanen International to develop and market the Watch Reebok collection of sport watches and an agreement with Power Bottle for REEBOK water bottles. In addition, as part of the Company's licensing program, infant and toddler apparel and accessories are sold by the Haddad Organization under the WEEBOK(R) trademark and a line of WEEBOK infant and toddler sunglasses is sold by Baby Optics. During 1995, Reebok and its video partner and licensee, Polygram International produced, marketed and sold a line of REEBOK(R) fitness videos. Through a licensee, Reebok also sells REEBOK(R) fitness audio tapes. In the equipment area, the Company continued sales of its STEP REEBOK(R) platform and SLIDE REEBOK(TM) lateral motion training device. In addition, in 1995 Reebok entered into an arrangement with Sport Specific International to market the Reebok(R) Sky Walker(TM) exercise product, a revolutionary cross-training exercise machine. The Reebok Sky Walker product was introduced to health clubs and fitness facilities in 1995. Reebok is in the process of developing an in-home version of the product. SPECIALTY BUSINESS GROUP The Company's Specialty Business Group provides a focus for the Company's other major brands and pursues markets outside Reebok's primary focus. The Specialty Business Group includes the ROCKPORT brand, the GREG NORMAN brand, as well as the Company's Avia subsidiary. The Group is also responsible for the Company's retail operations. GREG NORMAN(TM) Brand The Company produces a collection of apparel marketed under the GREG NORMAN(TM) name and logo. The GREG NORMAN Collection has grown from a golf apparel line to a broader line of men's casual sportswear. The Company intends to expand the GREG NORMAN brand further by offering a variety of lifestyle products and expanding into international markets. The GREG NORMAN brand is marketed through its endorsement by pro golfer Greg Norman, and a marketing and advertising campaign designed to emphasize his aggressive, bold, charismatic and "winning" style. GREG NORMAN products are distributed principally at on-course pro- shops, golf specialty stores and certain department and men's specialty stores and are sold by a combination of independent and employee sales representatives. Rockport The Company's Rockport subsidiary, headquartered in Marlboro, Massachusetts, designs, manufactures and distributes specially engineered comfort footwear for men and women worldwide. Designed to fully address the different aspects of customers' lives, Rockport's product line includes casual, dress, outdoor performance, golf and fitness walking shoes. Net sales of ROCKPORT(R) products increased by approximately $53.6 million in 1995, to $368.1 million from $314.5 million in 1994. In 1995 Rockport focused on brand-building activities with the introduction of The Rockport {Proof} campaign. The Rockport {Proof} campaign is an integrated marketing campaign that draws upon Rockport consumers' loyalty and involvement with the brand to bring to life the authenticity and performance of ROCKPORT shoes. This marketing program is based upon real consumer experiences, ranging from the ordinary to the extraordinary, wearing ROCKPORT(R) shoes. The Rockport {Proof} campaign is being used as the major marketing platform for the entire brand in marketing activities ranging from print advertising to public relations and retail promotions. Rockport markets its products to authorized retailers throughout the United States primarily through a locally based employee sales staff, although Rockport utilizes independent sales agencies for certain products. Internationally, Rockport markets its products through approximately 30 locally based distributors in approximately 48 foreign countries and territories. A majority of the international distributors are either subsidiaries of the Company or joint venture partners or independent distributors which also sell REEBOK brand products. Rockport distributes its products predominantly through selected higher- quality national and local shoe store chains, department stores, independent shoe stores, specialty clothing stores and outdoor outfitters, emphasizing retailers that provide substantial point-of-sale assistance and carry a full product line. Rockport also sells its products through independently owned Rockport-dedicated retail shops, as well as Rockport concept or company stores. See discussion under "Retail Stores" below. Rockport has not pursued mass merchandisers or discount outlets for the distribution of its products. Avia Avia designs, develops and markets athletic footwear and apparel under the AVIA(R) and TINLEY(R) brands. Net sales for Avia decreased from $158.2 million in 1994 to $129.6 million in 1995. In 1995 Avia refocused its marketing efforts domestically to emphasize its core categories of women's fitness (aerobics and cross training), running and walking. Avia markets and sells activewear, technical apparel and bodywear for women under the AVIA brand and technical apparel for men under the TINLEY brand. Avia continues to use its FOM(R) technology, introduced in 1992, which is designed to provide cushioning and increase comfort, and its Advanced Cantilever System (ACS), designed to improve cushioning and stability, which was developed as a significant update on Avia's patented CANTILEVER(R) sole. Avia conducts ongoing research activities at its research, design and development facility in Beaverton, Oregon, the site of Avia's corporate headquarters. Internationally, Avia distributes its products through wholly owned subsidiaries of the Company in the U.K. and Germany and a joint venture in Spain, and through a network of independent distributors which cover approximately 50 foreign countries and territories. Avia's principal retail accounts are specialty athletic footwear stores, general sporting goods stores, shoe stores and department stores. Avia generally seeks to ensure that its products are distributed to those retailers that reflect the high quality and performance image of its footwear. Avia also operates a number of factory direct retail stores. See discussion under "Retail Stores" below. Avia's marketing efforts include advertising in print and other media, national and local retail and event promotions and product endorsements by fitness professionals. On January 17, 1996, the Company announced its intention to sell Avia in order to focus on its core brands. During the fourth quarter of 1995, the Company recorded a special charge of $33,699,000 (after-tax) to adjust the carrying value of Avia to its estimated fair value on sale. Retail Stores and Other Properties The Company operates approximately 100 factory direct stores that include Reebok, Rockport and Avia stores which sell a variety of footwear, apparel and accessories marketed under the Company's various brands. The Company intends to continue to open additional factory direct stores, although its policy is to locate and operate these retail outlets in such a way as to minimize disruption to its normal channels of distribution. (A) The 1994 sales of the Company were adjusted on a pro forma basis to reflect Tinley apparel sales in Avia sales. The Tinley division was transferred to the Avia group from the Reebok Division during 1995. In order to present amounts on a comparable basis, Tinley's apparel sales for 1994 have been reclassified to Avia. The Company also has REEBOK(R) or Planet Reebok "concept" or company retail stores located in Boston, Massachusetts, New York City and King of Prussia, Pennsylvania. The Company envisions its concept stores as a model for innovative retailing of its products and as a potential proving ground for testing new products and marketing/merchandising techniques. The stores sell a wide selection of current, in-line REEBOK(R), Boks(R) and GREG NORMAN(TM) footwear and apparel. Internationally, there are a number of REEBOK retail stores owned by the Company, its subsidiaries or its independent distributors. The Company continues to open retail stores either directly or through its distributors in numerous international markets. Reebok retail shops are expected to be an important means of launching the brand in new markets such as China, India and Russia and in other international markets. Rockport also has concept or company retail stores at Quincy Market in Boston, Massachusetts, Newport, Rhode Island, King of Prussia, Pennsylvania and New York City. In 1992, Reebok entered into a partnership to develop and build a REEBOK(SM) sports and fitness complex in New York City which opened in 1995. The club is a premier sports and fitness club featuring a wide array of fitness equipment, facilities and services in a luxurious atmosphere. The club utilizes approximately 125,000 square feet and occupies 5 floors of the new Lincoln Square project. A REEBOK(R) concept store is also located in the building, as well as ROCKPORT and GREG NORMAN concept stores. MANUFACTURING Virtually all of the Company's products are produced by independent manufacturers, almost all of which are outside the United States, except that some of the Company's apparel and some of the component parts used in the Company's footwear are sourced in the United States. Each of the Company's operating units generally contracts with its manufacturers on a purchase order basis, subject in most cases to the terms of a formal manufacturing agreement between the Company and such manufacturers. All contract manufacturing is performed in accordance with detailed specifications furnished by the operating unit, subject to strict quality control standards, with a right to reject products that do not meet specifications. To date, the Company has not encountered any significant problem with product rejection or customer returns. The Company generally considers its relationships with its contract manufacturers to be good. Footwear and Apparel Indonesia, China, Thailand and the Philippines were the Company's primary sources for footwear, accounting for approximately 35%, 31%, 15%, and 12%, respectively, of the Company's total footwear production during 1995. The Company's largest manufacturer, which has several factory locations, accounted for approximately 10% of the Company's total footwear production in 1995. Reebok's wholly owned Hong Kong subsidiary, and a network of related parties in China, Indonesia, Thailand, Taiwan, South Korea and the Philippines, provide quality assurance, quality control, and inspection services with respect to footwear purchased by the Reebok Division's U.S. and International operations. In addition, this network of related parties inspect certain components and materials purchased by unrelated manufacturers for use in footwear production. The network of related parties also facilitates the shipment of footwear from the shipping point to point of destination, as well as arranging for the issuance to the unrelated footwear manufacturers of letters of credit, which are the primary means used to pay manufacturers for finished products. The Company's apparel group utilizes the services of independent third parties, as well as the Company's Hong Kong subsidiary and its network of related parties in the Far East, to assist in the placement, inspection and shipment of apparel and accessories orders internationally. Production of apparel in the United States is through independent contractors which are retained and managed by the Company's apparel group. Avia's products are also produced by independent contractors which are retained and supervised by its employees. ROCKPORT products are produced by independent contractors which are retained and managed through country managers employed by Rockport. The remainder of the Company's order placement, quality control and inspection work abroad is handled by a combination of employees and independent contractors in the various countries in which its products are made. The principal materials used in the Company's footwear products are leather, nylon, rubber, ethylvinyl acetate and polyurethane. Most of these materials can be obtained from a number of sources, although a loss of supply could temporarily disrupt production. Some of the component parts for the Company's THE PUMP(TM) and INSTAPUMP(TM) technologies are obtained from a single source, at the Company's election, in order to protect the confidentiality of such technologies. The Company believes that such component parts could be obtained from other sources, if necessary. If, however, the source of supply for such component parts were changed, a temporary disruption to production could result. The principal materials used in the Company's apparel products are nylon, cotton, fleece and spandex. These materials can be obtained from a number of sources. The footwear products of the Company that are manufactured overseas and shipped to the United States for sale are subject to U.S. Customs duties. Duties on the footwear products imported by the Company range from 6% to 37.5% (plus a unit charge in some cases of 90 cents), depending on whether the principal component is leather or some other material and on the construction. The Company and its subsidiaries are in discussions with the U.S. Customs Service and certain foreign customs services about customs duty for certain past importations. However, the Company does not expect to incur any material additional liability as a consequence of any such discussions. As with its international sales operations, the Company's footwear and apparel production operations are subject to the usual risks of doing business abroad, such as import duties, quotas and other threats to free trade, foreign currency fluctuations and restrictions, labor unrest and political instability. See "TRADE POLICY" below. The Company believes that it has the ability to develop, over time, adequate substitute sources of supply for the products obtained from present foreign suppliers. If, however, events should prevent the Company from acquiring products from its suppliers in Indonesia, China or Thailand, or significantly increase the cost to the Company of such products, the Company's operations could be seriously disrupted until alternative suppliers were found, with a significant negative financial impact. TRADE POLICY For several years, imports from China to the U.S., including footwear, have been threatened with higher or prohibitive tariff rates, either through statutory action or intervention by the Executive Branch, due to concern over China's trade policies, human rights, foreign weapons sales practices and its foreign policy. Further debate on these issues is continuing in 1996. If adverse action is taken with respect to imports from China, it could have an adverse effect on some or all of the Company's product lines, which could result in a negative financial impact. The Company has put in place contingency plans which should allow it to diversify some of its sourcing to countries other than China if any such adverse action occurred. In addition, the Company does not believe that it would be more adversely impacted by any such adverse action than its major competitors. The European Union ("EU") imposed import quotas on certain footwear from China in 1994. The effect of such quota scheme on Reebok has not been significant because the quota scheme provides an exemption for certain higher- priced special technology athletic footwear, which exemption is available for most REEBOK and AVIA products. This quota scheme continued in 1995 with an expanded exemption which lowers the price threshold for footwear covered by the exemption and is expected to continue with such expanded exemption in 1996, and thus should permit continued supply of the European market. The EU initiated a dumping case during 1995 against footwear from China, Indonesia and Thailand. However, a broad exception for athletic footwear covering most REEBOK and AVIA footwear has been incorporated in such action, significantly reducing the potential exposure to the Company. Nevertheless, if dumping duties are imposed, certain of the Company's product lines could be affected adversely, although the Company does not believe that its products will be more severely restricted than those of its major competitors. Various other countries have taken steps to restrict footwear imports or impose additional customs duties, which actions affect the Company as well as other footwear importers. The Company, in conjunction with other footwear importers, is aggressively challenging such restrictions. Such restrictions have in some cases had a significant adverse effect on the Company's sales in some of such countries, although they have not had a material adverse effect on the Company as a whole. PRINCIPAL PRODUCTS Sales of the following categories of products contributed more than 10% to the Company's total consolidated revenue in the years indicated: 1995, footwear (approximately 81%) and apparel (approximately 18%); 1994, footwear (approximately 88%) and apparel (approximately 12%); 1993, footwear (approximately 88%) and apparel (approximately 11%). TRADEMARKS AND OTHER PROPRIETARY RIGHTS The Company believes that its trademarks, especially the REEBOK and ROCKPORT trademarks, are of great value, and the Company is vigilant in protecting them from counterfeiting or infringement. Loss of the REEBOK or ROCKPORT trademark rights could have a serious impact on the Company's business. The Company also believes that its technologies and designs are of great value and the Company is vigilant in procuring patents and enforcing its patents and other proprietary rights in the United States and in other countries. WORKING CAPITAL ARRANGEMENTS The Company has various arrangements with numerous banks which provide an aggregate of approximately $838 million of uncommitted facilities, substantially all of which are available to the Company's foreign subsidiaries. Of this amount, $245 million is available for short-term borrowings and bank overdrafts, with the remainder available for letters of credit for inventory purchases. At December 31, 1995, approximately $212 million was outstanding for open letters of credit for inventory purchases, in addition to approximately $67 million in notes payable to banks. On October 31, 1995, the Company amended its existing $200 million credit agreement by extending its term for an additional year until October 30, 1996 and decreasing the amount committed to $150 million, and also amended its existing $100 million loan agreement to extend the term an additional year until November 1, 2000 and to increase the amount committed to $150 million. The Company can also issue up to $200 million of commercial paper which is supported to the extent available by its revolving credit and loan agreements, referred to above. As of December 31, 1995, the Company had no commercial paper obligations outstanding. Under its medium-term note program, in 1995 the Company issued an aggregate principal amount of $130 million in medium term notes under an Indenture dated September 15, 1988, as amended and restated by a First Supplemental Indenture dated January 22, 1993. In September 1995, the Company redeemed its $100 million 9 3/4% Debentures due September 15, 1998 and replaced them with $100 million 6 3/4% Debentures due September 15, 2005. SEASONALITY Sales by the Company of athletic and casual footwear tend to be seasonal in nature, with the strongest sales occurring in the third quarter. Apparel sales also generally vary during the course of the year, with the greatest demand occurring during the spring and fall seasons. SINGLE CUSTOMER There was no single customer of the Company that accounted for 10% or more of the Company's net sales in 1995. BACKLOG The Company's backlog of orders at December 31, 1995 (many of which are cancelable by the purchaser), totalled approximately $1.068 billion, compared to $1.125 billion as of December 31, 1994. The Company expects that substantially all of these orders will be shipped in 1996, although, as noted above, many of these orders are cancelable. The backlog position is not necessarily indicative of future sales because the ratio of future orders to "at once" shipments and sales by Company owned retail stores may vary from year to year. COMPETITION AND COMPETITORS Competition in sports and fitness footwear and apparel sales is intense. Competitors include a number of sports and fitness footwear and apparel companies, such as Nike, Adidas and others. Competition is very strong in each of the sports and fitness footwear and apparel market segments, with new entrants and established companies providing challenges in every category. The casual footwear market into which the ROCKPORT(R) product lines fall is also highly competitive. Some competitors are highly specialized, while others have varied product lines, and some maintain their own retail outlets. The Company believes that Rockport has a strong position in the walking shoe market. Competition in this area, however, has intensified as the activity of walking has grown in popularity and as athletic shoe companies have entered the market. In addition, Rockport's DRESSPORTS(R) line competes with leading makers of dress shoes. The Company's other product lines also continue to confront strong competition. The REEBOK(R) and AVIA(R) apparel lines compete with well-known brands such as Nike and Adidas. The GREG NORMAN line competes with Tommy Hilfiger, Ralph Lauren, Nautica and other makers of men's casual sportswear. ISSUES AND UNCERTAINTIES This report, as well as other public documents of the Company, may include forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from those discussed in such forward-looking statements. 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, 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. Competition and Consumer Preferences The footwear and apparel industry is intensely competitive and subject to rapid changes in consumer preferences, as well as technological innovations. A major technological breakthrough or unusual marketing or promotional success by one of the Company's competitors could adversely affect the Company's competitive position. In addition, in countries where the athletic footwear market is mature, sales growth may be dependent in part on the Company increasing its market share at the expense of its competitors. The Company also faces strong competition with respect to its other product lines, such as the ROCKPORT product line and the GREG NORMAN collection. For discussion of the Company's major competitors see "COMPETITION AND COMPETITORS" above. Competition in the markets for the Company's products occurs in a variety of ways, including price, quality, brand image and ability to meet delivery commitments to retailers. The intensity of the competition faced by the various operating units of the Company and the rapid changes in the consumer preference and technology that can occur in the footwear and apparel markets constitute significant risk factors in the Company's operations. Inventory Risk The footwear industry has relatively long lead times for design and production of product and thus, the Company must commit to production tooling and in some cases to production in advance of orders. If the Company fails to accurately forecast consumer demand or if there are changes in consumer preference or market demand after the Company has made such production commitments, the Company may encounter difficulty in liquidating its inventory, which may have an adverse effect on the Company's sales margins and brand image. Sales Forecasts The Company's investment in product marketing is based on sales forecasts and is necessarily made in advance of actual sales. The markets in which the Company does business are highly competitive, and the Company's business is affected by a variety of factors, including brand awareness, changing consumer preferences, fashion trends, retail market conditions and economic and other factors. There can be no assurance that sales forecasts will be achieved, and to the extent sales forecasts are not achieved, these investments will represent a higher percentage of net revenues, and the Company will experience higher inventory levels and associated carrying costs, all of which would adversely impact the Company's financial condition and results. Advertising and Marketing Investment Because consumer demand for athletic footwear and apparel is heavily influenced by brand image, the Company's business requires substantial investments in marketing and advertising, including television and other advertising, athlete endorsements and athletic sponsorships, as well as investments in retail presence. The Company intends to continue its increased investment in advertising and marketing in 1996; however, there can be no assurance that such increased investment will result in increased sales. Retail Operations At the end of 1995, the Company operated approximately 100 retail stores in the U.S. and a significant number of retail stores internationally which are operated either directly or through the Company's distributors. The Company has made a significant capital investment in opening these stores and incurs significant expenditures in operating these stores. To the extent the Company continues to expand its retail organization, the Company's performance could be adversely affected by lower than anticipated sales at its retail stores. The performance of the Company's retail organization is also subject to the general retail market conditions. Timeliness of Product Timely product deliveries are essential in the footwear and apparel business since the Company's orders are cancelable by customers if agreed delivery windows are not met. If as a result of design, production or distribution problems, the Company is late in delivering product, it could have an adverse impact on its sales and/or profitability. International Sales and Production A substantial portion of the Company's products are manufactured abroad and approximately 40% of the Company's sales are made outside the U.S. The Company's footwear and apparel production operations are thus subject to the usual risks of doing business abroad, such as import duties, tariffs, quotas and other threats to free trade, labor unrest, political instability and other problems linked to local production conditions. If such factors limited or prevented the Company from selling products in any significant international market or prevented the Company from acquiring products from its suppliers in Indonesia, China or Thailand, or significantly increased the cost to the Company of such products, the Company's operations could be seriously disrupted until alternative suppliers were found or alternative markets were developed, with a significant negative impact. See "TRADE POLICY" above. Sources of Supply The Company depends upon its independent manufacturers to manufacture high-quality product in a timely and cost-efficient manner and relies upon the availability of sufficient production capacity at its existing manufacturers or the ability to utilize alternative sources of supply. In addition, if the Company were to experience significant shortages in raw materials used in its products, it could have a negative effect on the Company's business, including increased costs or difficulty in delivering product. Risks of Currency Fluctuations The Company conducts operations in various international countries and a significant portion of its sales are transacted in local currencies. As a result, the Company's revenues are subject to foreign exchange rate fluctuations. The Company enters into forward currency exchange contracts to hedge its exposure for merchandise purchased in U.S. dollars that will be sold to customers in other currencies. The Company also uses foreign currency exchange contracts to hedge significant inter-company assets and liabilities denominated in other currencies. Customers Although the Company has no single customer that represents 10% or more of its sales, the Company has certain significant customers, the loss of which could have an adverse effect on its business. There could also be a negative effect on the Company's business if any such significant customer became insolvent or otherwise failed to pay its debts. Intellectual Property The Company believes that its trademarks, its technologies and designs are of great value. Loss of the REEBOK or ROCKPORT trademark rights could have a serious impact on the Company's business. Because of the importance of such intellectual property rights, the Company's business is subject to the risk of counterfeiting, parallel trade or intellectual property infringement. The Company is, however, vigilant in protecting its intellectual property rights. Litigation The Company is subject to the normal risks of litigation with respect to its business operations. Economic Factors The Company's business is subject to economic conditions in the Company's major markets, including, without limitation, recession, inflation or general weakness in retail markets. Adverse changes in such economic factors could have a negative effect on the Company's business. Tax Rate Changes If the Company was to encounter significant tax rate changes in the major markets in which it operates, it could have an adverse effect on its business. EMPLOYEES As of December 31, 1995, the Company had approximately 7000 employees in all operating units. None of these employees is represented by a labor union. The Company has never suffered a material interruption of business caused by labor disputes with employees. Management considers employee relations to be good. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS Financial information pertaining to the Company's foreign and domestic operations is set forth in note 14 to the Financial Statements included in Item 14 and presented as a separate section of this report. Executive Officers of the Registrant The following information is submitted as to the executive officers of the Company: NAME AGE OFFICE HELD Paul B. Fireman 52 President, Chief Executive Officer and Chairman of the Board of Directors Paul R. Duncan 55 Executive Vice President, President of the Specialty Business Group and Director Robert Meers 52 Executive Vice President, President and Chief Executive Officer of the Reebok Division and Director Angel R. Martinez 40 Executive Vice President, President and Chief Executive Officer of The Rockport Company Kenneth I. Watchmaker 53 Executive Vice President and Chief Financial Officer John B. Douglas III 42 Senior Vice President, Law, Human Resources and Administration Officers hold office until the first meeting of the Board of Directors following the annual meeting of stockholders, or special meeting in lieu thereof, and thereafter until their respective successors are chosen and qualified. Paul B. Fireman is the founder of the Company and has served as its Chief Executive Officer since the Company's founding in 1979 and its Chairman of the Board since 1986. Mr. Fireman served as President of the Company from 1979 to 1987 and was appointed again to that position in 1989. Mr. Fireman has been a Director since 1979. Paul R. Duncan has been an Executive Vice President of the Company since February 1990 and a Director of the Company since March 1989. He was appointed President of the Specialty Business Group in October 1995. From June 1995 until October 1995, Mr. Duncan was Chief Operating Officer for the Reebok Division. Prior to June 1995 Mr. Duncan was Executive Vice President and Chief Financial Officer. Mr. Duncan joined the Company in 1985 as Senior Vice President and Chief Financial Officer. Robert Meers has been an Executive Vice President of the Company since February 1994 and a Director of the Company since 1993. He was appointed President and Chief Executive Officer of the Reebok Division in October 1995. Prior to that, he was President of the Company's Specialty Business Group from January 1994 to October 1995. Previously, Mr. Meers was President, U.S. Operations of the Reebok Division from November 1990 to January 1993 and President, U.S. and Canadian Operations of the Reebok Division from January 1993 until January 1994. Mr. Meers joined the Company in 1984. Angel R. Martinez has been President and Chief Executive Officer of The Rockport Company since August 1994. He has been an Executive Vice President of the Company since February 1994. Prior to that, Mr. Martinez was the President of the Fitness Division of the Company from September 1992 to January 1994 and Executive Vice President of Marketing Services from January 1994 to August 1994, and prior to that he was Vice President for Business Development of the Company for several years. Mr. Martinez joined the Company in 1982. Kenneth I. Watchmaker has been an Executive Vice President of the Company since February 1994. He was appointed Chief Financial Officer of the Company in June 1995. Previously, since February 1994, he was Executive Vice President with responsibility for finance, footwear production and management information systems. He joined the Company in July 1992 as Executive Vice President, Operations and Finance, Reebok Division. Prior to joining Reebok, Mr. Watchmaker was the partner in charge of audit services in the Boston office of Ernst & Young. John B. Douglas III has been a Senior Vice President of the Company since February 1994, and was its General Counsel from 1986 until November 1995. He has been Senior Vice President, Law, Human Resources and Administration since June 1995. Prior to that, he was Senior Vice President of Law and Human Resources from June 1994 to June 1995, and Senior Vice President and General Counsel from February 1994 to June 1994. Mr. Douglas joined the Company in 1986 as Vice President and General Counsel. Item 2. Properties. The Company leases most of the properties that are used in its business. Its corporate headquarters and the offices of the Reebok Division and its U.S. Operations are located in office facilities in Stoughton, Massachusetts. At its corporate headquarters the Company occupies under lease approximately 200,000 square feet of space. The Company signed a six-year lease in July 1989, with two three-year renewal options, for its principal facility at its corporate headquarters. This lease was later amended to extend the term of the lease until June 30, 1997, with the two three-year renewal options thereafter. This facility and three other smaller facilities, one of which is leased and the other two of which are owned by the Company, at the Company's corporate headquarters are located approximately one mile from the Reebok Division's U.S. Operations group's principal warehouse and distribution center in Stoughton, which is owned by the Company and which contains approximately 450,000 total square feet of usable space. The Company is currently exploring various alternative solutions to address its need for additional space at its corporate headquarters. In 1994, the Company purchased a building in Avon, Massachusetts containing approximately 400,000 square feet of space which it uses as an office and warehouse. The Company also leases approximately 330,000 square feet of space in Memphis, Tennessee and approximately 380,000 square feet in Brockton, Massachusetts which it uses as warehouse and distribution centers. In 1993, Rockport purchased its corporate headquarters facility in Marlboro, Massachusetts, containing approximately 80,000 square feet of floor space. In 1995, Rockport completed construction of a distribution center of approximately 285,000 usable square feet on approximately 140 acres of land in Lancaster, Massachusetts which it purchased in 1992. Avia extended its lease of a distribution facility of approximately 190,000 square feet in Wilsonville, Oregon, which now expires in 1999. Avia also has a lease ending in 2003 for an approximately 55,000 square foot facility in Beaverton, Oregon, where its corporate headquarters and research, design and development facility are located. In June 1993, the Company's wholly owned U.K. subsidiary, Reebok International Limited, entered into a fifteen-year lease for the corporate headquarters of the Company's International operations in Stockley Park, London. The lease is for approximately 37,000 square feet of usable space, with a renewal option for a term of up to fourteen years mandated by law. This lease is guaranteed by the Company. In 1995, the Company decided to move its international operations to Stoughton, Massachusetts and, as a result, a decision was made to look for a third party to take over this lease. The Company anticipates that it will assign the lease to a third party during 1996. The Company's U.K. subsidiary, Reebok International Limited, has moved to a new corporate headquarters building in Denham Lock, London in March 1996, for which it entered into a 7 year lease. The new 14,000 square foot corporate headquarters building, will also house a showroom for use by the Reebok sales force in Southern England. The Company's wholly owned Canadian distribution subsidiary, Reebok Canada Inc., leases an approximately 145,000 square foot office/warehouse facility in Aurora, Ontario pursuant to a lease which expires in 1998. The Company and its subsidiaries own and lease other warehouses, offices, showrooms and retail and other facilities in the United States and in various foreign countries to meet their space requirements. Except as otherwise indicated, the Company believes that these arrangements are satisfactory to meet its needs. Item 3. Legal Proceedings. On August 29, 1995, the Company obtained a favorable ruling on its motion for summary judgment in the lawsuit entitled Stutz Motor Car of America, Inc. v. Reebok International Ltd., (filed on July 1, 1993 in the Central District of Los Angeles County Superior Court as Case Number BC074579 and removed to the United States District Court for the Central District of California where it was assigned Civil Action No. 93-4433LGB) and, as a result, the case was dismissed. The Plaintiff has appealed the decision. The Company believes that the Plaintiff's appeal is without merit and is confident that the District Court decision will be upheld. As previously reported, the Company's settlement with the National Association of Attorneys General ("NAAG") relating to the investigation by NAAG against the Company was approved by the Federal Court for the Southern District of New York on October 20, 1995. The Court's order approving the settlement was appealed to the Second Circuit Court of Appeals on January 9, 1996 by counsel purporting to represent a class of Reebok and Rockport consumers. The Company is currently awaiting a decision on the appeal, which it believes to be without merit. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock is quoted on the New York Stock Exchange under the symbol RBK. The following table, derived from data supplied by the NYSE, sets forth the quarterly high and low sales prices during 1994 and 1995. 1995 1994 High Low High Low - --------------------------------------------------------------------------- First 39 5/8 33 5/8 35 3/4 29 3/4 Second 37 1/2 31 1/8 34 1/8 28 3/8 Third 37 7/8 32 7/8 38 5/8 29 1/8 Fourth 36 1/4 24 1/8 40 1/4 35 5/8 - --------------------------------------------------------------------------- The number of record holders of the Company's common stock at December 31, 1995 was 8,064. Information regarding dividends is set forth under the heading "Quarterly Results of Operations" in the Supplementary Data included in Item 8 and presented as a separate section of this report. Item 6. Selected Financial Data.
Amounts in thousands, except per share data YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------- Net sales $3,481,450 $3,280,418 $2,893,900 $3,022,627 $2,734,474 Income before income taxes 264,551 408,472 363,247 257,964 389,886 Net income 164,798 254,478 223,415 114,818 234,711 Net income per common share 2.07 3.02 2.53 1.24 2.37 Cash dividends per common share .30 .30 .30 .30 .30 Weighted average common and common equivalent shares outstanding 79,487 84,311 88,348 92,697 98,958 - --------------------------------------------------------------------------------------------------------------------
Amounts in thousands YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------- Working capital $910,981 $831,856 $730,757 $682,342 $564,072 Total assets 1,656,223 1,649,461 1,391,711 1,345,346 1,422,283 Long-term debt 254,178 131,799 134,207 116,037 169,613 Stockholders' equity 895,289 990,505 846,617 838,656 823,537 - --------------------------------------------------------------------------------------------------------------------
Financial data for 1995 includes special charges ($44,934 after-tax) related to the anticipated sale of the Avia subsidiary ($33,699 after-tax) and facilities consolidation and severance and other related costs associated with the streamlining of certain segments of the Company's operations ($11,235 after-tax). Financial data for 1993 includes a special charge ($7,037 after-tax) related to the sale of Ellesse U.S.A., Inc. and Boston Whaler, Inc. Financial data for 1992 includes special charges ($135,439 after-tax) principally related to the write-down of the Company's subsidiary, Avia Group International, Inc., to estimated fair value and estimated losses from the planned sales of Ellesse U.S.A., Inc. and Boston Whaler, Inc., and after-tax gains of $17,967 from the sale of investments. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below and those described in Item 1 of this Annual Report on Form 10-K under the heading "Issues and Uncertainties". OPERATING RESULTS 1995 Net sales for the year ended December 31, 1995 increased by 6.1%, or $201.0 million, to $3.482 billion from $3.280 billion in 1994. The Reebok Division's worldwide sales were $2.984 billion, in 1995, an increase of 6.3% from $2.808 billion in 1994. This increase was due to growth in the Reebok Division's U.S. apparel sales as well as growth in International sales. The Reebok Division's U.S. footwear sales decreased .4% to $1.405 billion from $1.410 billion in 1994. The decrease was due primarily to decreases in sales in the running, tennis and outdoor categories, which were offset in part by sales increases in the walking, cleated and children's categories. The 1995 U.S. footwear sales comparison benefits from the fact that the Company increased the number of Reebok owned retail stores as compared with a year ago. At December 31, 1995, there were 66 stores in operation as compared with 45 at the end of 1994. Of the stores in operation, 62 are outlet stores with the balance being full scale retail stores primarily used for testing retail concepts. The Reebok outlet store business had a same store sales increase for 1995 of 7.1%. The Reebok Division's U.S. apparel sales increased by 27.1% to $183.6 million from $144.5 million(A) in 1994. The increase resulted primarily from increases in licensed apparel, T-shirts and performance running product. The Reebok Division's International sales (including both footwear and apparel) were $1.395 billion in 1995, an increase of 11.3% from $1.253 billion in 1994. For the year ended December 31, 1995, slightly less than one half of the International sales increase can be attributed to the impact of the weaker dollar. On a local currency basis, Korea, Spain and the United Kingdom had significant percentage increases in sales whereas Japan and Mexico experienced a decline in sales. Rockport's sales for 1995 increased by 17.0% to $368.1 million from $314.5 million in 1994. All categories, except outdoor, increased in comparison with the prior year. Sales of Rockport(R) product in Rockport retail stores also contributed to the sales growth. At December 31, 1995, there were 40 Rockport stores in operation as compared with 13 a year ago. Of the stores in operation, 36 are outlet stores with the balance being full scale retail stores primarily used for testing retail concepts. (A) The 1994 sales were adjusted on a pro forma basis to reflect Tinley apparel sales in Avia sales. The Tinley division was transferred to the Avia group from Reebok during 1995. In order to present amounts on a comparable basis, Tinley's apparel sales for 1994 have been reclassified to Avia. Avia's sales for 1995 decreased by 18.1% to $129.6 million from $158.2 million in 1994. All categories except running had decreases from the prior year. Other income decreased in 1995 due mainly to losses on foreign exchange transactions in 1995 compared to recognized gains in 1994. A decrease in joint venture income also contributed to the decline in other income. Gross margins declined from 40.1% in 1994 to 39.3% in 1995. U.S. margins were unfavorably impacted by higher than normal markdowns taken on excess inventory, as a result of a commitment to reduce inventory levels, a trend which is expected to continue into 1996. Margins on International sales were favorably impacted by exchange rate changes. Selling, general and administrative expenses increased as a percentage of sales from 27.1% in 1994 to 28.7% in 1995. During 1995 the Company announced its intention to reduce planned expenditures in non-essential areas with the primary impact being realized in the second half of the year. For the full year, the increase in SG&A expenses was primarily the result of increased investments in brand building expenses, including sports marketing and on field presence, retail presence and the growth of the Company's retail outlet stores. In addition, SG&A expenses increased by approximately $20 million due to a weaker dollar. In 1996, the Company intends to invest incrementally in advertising with the introduction of its new brand campaign "This is my planet." The Company recorded special charges totaling $72.1 million in 1995. In connection with the effort to reduce SG&A spending, a special charge of $18.0 million was recorded in the second quarter, principally related to facilities consolidation and severance and other related costs associated with the streamlining of certain segments of the Company's operations. In the fourth quarter of 1995, the Company recorded a charge of $54.1 million to adjust the carrying value of its Avia subsidiary to estimated fair value on sale. In January, 1996, the Company announced its intention to sell Avia in order to focus its resources on its core brands. Minority interest represents the minority shareholders' proportionate share of the net income of certain of the Company's consolidated subsidiaries. Interest expense increased from $16.5 million to $25.7 million in 1995 as a result of increased borrowings to finance working capital needs and the Company's share repurchase program. During 1995, $225.5 million of the Company's common stock was repurchased. On October 19, 1995, the Company's Board of Directors authorized the repurchase of up to an additional $200 million in Reebok common stock in open market or privately-negotiated (A) The 1994 sales were adjusted on a pro forma basis to reflect Tinley apparel sales in Avia sales. The Tinley division was transferred to the Avia group from Reebok during 1995. In order to present amounts on a comparable basis, Tinley's apparel sales for 1994 have been reclassified to Avia. transactions. This authorization was in addition to the share repurchase programs of $200 million each adopted by the Company in July 1992, July 1993 and October 1994. At December 31, 1995, the Company had approximately $198.1 million available for future repurchases of its common stock under these programs. As of December 31, 1995, the Company had repurchased 42,933,902 shares of its common stock at an average price of $23.25 per share since April, 1991. Year-to-year earnings per share comparisons benefited from the share repurchase programs. Weighted average common shares outstanding for the year ended December 31, 1995 declined to 79.5 million shares, compared to 84.3 million shares for the year ended December 31, 1994. The Company's footwear and apparel production operations are subject to the usual risks of doing business abroad, such as import duties, quotas and other threats to free trade, foreign currency fluctuations, labor unrest and political instability. The Company believes that it has the ability to develop, over time, adequate substitute sources of supply for the products obtained from present foreign suppliers. If, however, events should prevent the Company from acquiring products from its suppliers in Indonesia, China, or Thailand, or significantly increase the cost to the Company of such products, the Company's operations could be seriously disrupted until alternative suppliers are found. For several years, imports from China to the U.S., including footwear, have been threatened with higher or prohibitive tariff rates, either through statutory action or intervention by the Executive Branch, due to concern over China's trade policies, human rights, foreign weapons sales practices and its foreign policy. Further debate on these issues is continuing in 1996. If adverse action is taken with respect to imports from China, it could have an adverse effect on some or all of the Company's product lines, which could result in a negative financial impact. The Company has put in place contingency plans which should allow it to diversify some of its sourcing to countries other than China if any such adverse action occurred. In addition, the Company does not believe that it would be more adversely impacted by any such adverse action than its major competitors. The European Union ("EU") imposed import quotas on certain footwear from China in 1994. The effect of such quota scheme on Reebok has not been significant because the quota scheme provides an exemption for certain higher-priced special technology athletic footwear, which exemption is available for most REEBOK and AVIA products. This quota scheme continued in 1995 with an expanded exemption which lowers the price threshold for footwear covered by the exemption and is expected to continue with such expanded exemption in 1996, and thus should permit continued supply of the European market. The EU initiated a dumping case during 1995 against footwear from China, Indonesia and Thailand. However, a broad exception for athletic footwear covering most REEBOK and AVIA footwear has been incorporated in such action, significantly reducing the potential exposure to the Company. Nevertheless, if dumping duties are imposed, certain of the Company's product lines could be affected adversely, although the Company does not believe that its products will be more severely restricted than those of its major competitors. Various other countries have taken steps to restrict footwear imports or impose additional customs duties, which actions affect the Company as well as other footwear importers. The Company, in conjunction with other footwear importers, is aggressively challenging such restrictions. Such restrictions have in some cases had a significant adverse effect on the Company's sales in some of such countries, although they have not had a material adverse effect on the Company as a whole. OPERATING RESULTS 1994 Net sales for the year increased by 13.4%, or $386.5 million, to $3.280 billion in 1994 from $2.894 billion in 1993. The Reebok Division's worldwide sales were $2.813 billion, an increase of 13.4% from $2.48 billion in 1993. This increase was due to growth in Reebok U.S. footwear and apparel sales as well as International sales. Reebok U.S. footwear sales increased 10.9% to $1.410 billion from $1.271 billion in 1993. The increase in Reebok Division's U.S. footwear sales was attributed to increases in the outdoor, Classics, Preseason(R), cleated and walking categories, which were partially offset by decreases in the children's and basketball categories. The Reebok Division's U.S. apparel sales increased by 19.7% to $150.1 million(B) from $125.4 million in 1993. The Reebok Division's International sales (including both footwear and apparel) were $1.253 billion in 1994, an increase of 15.7% from $1.083 billion in 1993, primarily due to increases in all countries except for France and the Netherlands which experienced small decreases in sales. Changes in foreign exchange rates increased Reebok Division's International net sales by $9.3 million, or .9%. Rockport sales reached a record level of $314.5 million in 1994, an 11.3% increase from $282.7 million in 1993. This increase was due to an increase in the number of pairs shipped both in the U.S. and Internationally. Avia sales increased by 16.5% to $152.6 million(B) from $131.0 million in 1993. The increase in Avia's net sales was due to increases in both domestic and International net sales, primarily attributed to increases in the walking and cross training categories. Other income increased mainly due to increased income from partially-owned distributors as well as recognized gains of $.5 million on foreign exchange transactions in 1994 compared to recognized losses of $4.6 million in 1993. (B) As indicated above, the 1994 sales reflected in the section entitled "Operating Results 1995" have been adjusted on a pro forma basis to reflect Tinley apparel sales in Avia sales. The decrease in gross margin from 40.6% in 1993 to 40.1% in 1994 was due to lower margins in the Reebok Division's International business as a result of the poor economic conditions in certain countries. The decrease was partially offset by slightly increased margins in the Reebok Division's U.S. footwear business. Selling, general and administrative expenses increased as a percentage of sales from 26.6% in 1993 to 27.1% in 1994 due in part to the continuing increased investments in information systems as well as higher distribution costs mainly associated with the opening of a new apparel distribution facility in Memphis, Tennessee. The increased investments in information systems are expected to continue over the next few years. Net income in 1994 was higher than net income in 1993 partially as a result of an additional pre-tax special charge of $8.5 million related to the completion of the sales of Boston Whaler, Inc. ("Boston Whaler") and Ellesse U.S.A., Inc. ("Ellesse"), which charge was recorded in 1993. This special charge was in addition to losses previously recorded in December 1992, when the Company announced its intention to sell these businesses. Amortization of intangibles decreased because many of the intangible assets attributable to the acquisition of Rockport in 1986 had a useful life of seven years or less and became fully amortized in 1993. Minority interest represents minority shareholders' proportionate share of the net income of the Company's Japanese, Spanish and South African subsidiaries. Interest expense decreased in 1994 due to interest paid in 1993 on certain prior years' state tax matters, as well as lower average interest rates. Similarly, interest income decreased in 1994 due to interest received in 1993 from the successful settlement of certain state tax matters. The effective tax rate decreased from 38.5% in 1993 to 37.7% in 1994 due primarily to a geographic change in the mix of worldwide income. Year-to-year earnings per share comparisons benefited from the share repurchase programs announced in July 1992 and July 1993. Weighted average common shares outstanding for the year ended December 31, 1994 declined to 84.3 million shares, compared to 88.3 million shares for the year ended December 31, 1993. OPERATING RESULTS 1993 Net sales for the year decreased by 4.3%, or $128.7 million, to $2.894 billion in 1993 from $3.023 billion in 1992. On a pro forma basis, excluding the 1992 results of operations of Boston Whaler and Ellesse (both of which were sold and were excluded from 1993 results), net sales for the year decreased by $49.6 million or 1.7%. The Reebok Division's worldwide sales were $2.48 billion in 1993, a decrease of 2.3% from $2.54 billion in 1992. This decrease was due entirely to the Reebok Division's U.S. footwear sales which decreased 12.6% to $1.271 billion in 1993 from $1.455 billion in 1992, partially offset by an increase in U.S. apparel sales and International sales. The decline in the Reebok Division's U.S. footwear sales was attributed mainly to volume decreases in the walking, basketball, aerobics and Boks(R) footwear categories, as well as the negative impact of the Company's Centennial resale pricing program (adopted effective January 1, 1993) on sales of certain Reebok(R) footwear products. 1992's sales level for footwear and apparel reflected a reclassification of $17.2 million from footwear to apparel for Weebok(R) and golf apparel. The Reebok Division's U.S. apparel sales increased by 62.6% to $125.4 million in 1993 from $77.1 million in 1992. The Reebok Division's International sales (including both footwear and apparel) were $1.083 billion in 1993, an increase of 7.5% from $1.008 billion in 1992, due primarily to improved sales in the United Kingdom, Germany, several smaller European countries, Canada and South America, and acquisition of a majority interest in the Company's Spanish distributor effective January 1, 1993. Changes in foreign exchange rates had a negative effect on the Reebok Division's International net sales of $65.1 million, or 6.5%. Rockport sales reached a record level of $282.7 million in 1993, a 5.7% increase from $267.4 million in 1992. The increase was due to an increase in the number of pairs of footwear shipped both in the U.S. and Internationally. Avia sales decreased in 1993 by 3.8% to $131.0 million from $136.2 million in 1992. The decrease in net sales at Avia was due to declines in both domestic and International net sales. The decline in domestic net sales was mainly due to lower volume in the tennis and basketball categories, partially offset by volume increases in the walking and cross training categories. The decline in International net sales volume was partly attributed to a change in the Canadian distribution from a wholly owned subsidiary to an independent distributor which changed the recording of Canadian sales from a wholesale basis to a royalty basis. International sales were also affected by a volume decrease in Avia's Germany subsidiary, offset by volume increases in sales to independent distributors. The decrease in other income was mainly due to the inclusion in 1992 of a non- recurring pre-tax gain of $29.6 million on the sale of CML Group, Inc. ("CML") common stock. The common stock was acquired from the exercise of warrants which were obtained as part of the Company's 1989 purchase of Boston Whaler. In addition, recognized losses on foreign exchange transactions in 1993 compared to recognized gains in 1992 reduced other income by $6.2 million. Gross margin increased as a percentage of sales from 40.1% in 1992 to 40.6% in 1993. This improvement was due entirely to the exclusion in 1993 of the operating results of businesses held for sale, which generally carried lower gross margins. This improvement was offset in part by lower margins in the Reebok Division's U.S. footwear operations, mainly because of higher markdowns. Selling, general and administrative expenses decreased as a percentage of sales from 26.7% in 1992 to 26.6% in 1993. This decrease was due to lower advertising expenditures partially offset by increased endorsements and sports promotions in the Reebok Division. The decrease was also offset by the Reebok Division's International operations, which generally carry higher general and administrative costs, representing a larger proportion of sales volume and the fixed nature of many of the expenses classified as general and administrative costs. During 1993, the Company recorded an additional pre-tax special charge of $8.5 million related to the sales of Boston Whaler and Ellesse, which were completed during the third quarter. This special charge was in addition to the special charges previously recorded in December 1992, when the Company announced its intention to sell these businesses. Amortization of intangibles decreased due to the write-down of the carrying value of Avia in the fourth quarter of 1992. Minority interest represents the minority shareholders' proportionate share of the net income of the Company's Japanese and Spanish subsidiaries. Minority interest increased in 1993 due in part to the acquisition of a 51% interest in Reebok's Spanish distributor as of January 1, 1993. Interest expense increased in 1993 due to the higher average borrowing levels throughout the year. Interest income increased due to interest received from the successful settlement of certain prior years' state tax matters. The effective tax rate for the twelve months ended December 31 decreased from 55.5% in 1992 to 38.5% in 1993. 1992's effective tax rate was abnormally high because of certain special charges which are not deductible for tax purposes. The Company's 1993 tax rate is more in line with the Company's future expectations. The decrease in the tax rate in 1993 was also caused in part by a change in the geographic mix of worldwide income partially offset by an increase in the U.S. federal tax rate. The higher level of net income in 1993 as compared with 1992 was a result primarily of a plan adopted by the Company during December 1992 which resulted in after-tax charges totaling $135.4 million ($1.46 per share). Under the plan, the Company announced its intention to dispose of two subsidiaries, Boston Whaler and Ellesse, a write-down of the carrying value of its Avia subsidiary, and certain office relocation charges. The effect of the special charge was reduced by the after-tax gain of $18.0 million ($.19 per share) on the sale of common stock of CML obtained as part of the Company's 1989 purchase of Boston Whaler. The Boston Whaler sale was completed on July 30, 1993 and the Ellesse sale was completed on September 28, 1993. In connection with the sales, the Company recorded an additional after-tax special charge of $7.0 million in addition to the special charge recorded in 1992. Income from operations (without the effect of the special charge) for 1993 was $2.61 per share compared to $2.51 per share in 1992 (after excluding the effect of the special charge and the gain on the sale of CML common stock). If the special charge had taken place as of the beginning of 1992, then income from operations in 1992 would have been about $.18 per share higher. Year-to-year earnings per share comparisons benefited from the share repurchase programs announced in July 1992 and July 1993. Weighted average common shares outstanding for the year ended December 31, 1993 were 88.3 million, compared to 92.7 million for the year ended December 31, 1992. BACKLOG The overall backlog of open customer orders as of December 31, 1995 for the Reebok(R) brand was down 1% from comparative levels as of December 31, 1994. The backlog position is not necessarily indicative of future sales because the ratio of future orders to "at once" shipments and sales by Company owned retail stores may vary from year to year. In addition, many of the customer orders are cancelable. LIQUIDITY AND SOURCES OF CAPITAL The Company's financial position remains strong. Working capital increased $79.1 million, or 9.5%, from the same period a year ago. The current ratio at December 31, 1995, was 3.1 to 1, compared to 2.6 to 1 at December 31, 1994. Accounts receivable were $506.6 million at December 31, 1995, a decrease of $25.9 million from year end 1994, despite increased fourth quarter sales. At December 31, 1995, the Company's inventory was $635.0 million as compared with $624.6 million at the end of 1994. The 1995 year end inventory levels were actually lower than 1994 levels after adjustment for the impact of currency, new retail store openings, and newly acquired subsidiaries. The net assets held for sale of Avia have been classified as prepaid expenses and other current assets and are not included in accounts receivable and inventory at December 31, 1995. During the twelve months ended December 31, 1995, net cash provided by operating activities was $168.8 million, compared to $172.6 million and $142.5 million for the years ended December 31, 1994 and December 31, 1993, respectively. During 1995, the Company issued a total of $130 million of medium term notes for general corporate purposes, including the repurchase of shares of the Company's common stock. On September 15, 1995, $100 million of 9.75% debentures were called and refinanced with $100 million of 6.75% debentures issued on September 18, 1995. On October 31, 1995, the Company amended existing revolving credit agreements totaling $300 million. The Company's existing $100 million Loan Agreement was amended to extend the commitment term an additional year until November 1, 2000 and to increase the amount committed to $150 million. The Company's existing $200 million Credit Agreement was amended by extending the commitment term for an additional year to October 30, 1996 and reducing the amount committed to $150 million. Total committed facilities remain at $300 million. At December 31, 1995, there were no borrowings outstanding under these agreements. These agreements, to the extent available, support the Company's commercial paper program under which it can issue up to $200 million of commercial paper, a limit which was increased from $125 million on February 15, 1996. Cash and cash equivalents decreased by $3.5 million in 1995. Cash generated from operations, together with the Company's existing credit lines and other financial resources, is expected to adequately finance the Company's current and planned 1996 cash requirements. However, the Company's actual experience may differ from the expectation set forth in the preceding sentence. Factors that might lead to such a difference include, but are not limited to, the factors discussed herein and, the matters discussed in Item 1 of this Annual Report on Form 10-K under the heading "Issues and Uncertainties" as well as future events that might have the effect of reducing the Company's available cash balances, such as unexpected operating losses or capital or other expenditures or acquisitions, or that might reduce or eliminate the availability of external financing sources. During 1995, the Company privately issued equity put options as part of its ongoing share repurchase program. These options provide the Company with an additional source to supplement open market purchases of its common stock. The options are priced based on the market value of the Company's stock at the date of issuance. At December 31, 1995, 1.450 million shares of outstanding common stock are subject to repurchase at an average price of $26.98 under the terms and conditions of these options. Lawsuits arise during the normal course of business. The Company does not expect the outcome of any existing litigation to have a significant impact on financial position or future results of operations. The Company enters into forward currency exchange contracts to hedge its exposure for merchandise purchased in U.S. dollars that will be sold to customers in other currencies. Realized and unrealized gains and losses on these contracts are included in net income except that gains and losses on contracts which hedge specific foreign currency commitments are deferred and accounted for as a part of the transaction. The Company also uses forward currency exchange contracts to hedge significant intercompany assets and liabilities denominated in other than the functional currency. Contracts used to hedge intercompany balances are marked to market and the resulting transaction gain or loss is included in the determination of net income. Foreign currency gains or losses included in net income for the years ended December 31, 1995, 1994 and 1993 were not significant. The Company has used forward exchange contracts as an element of its risk management strategy for several years. Although forward exchange contracts entail some risk of non-performance by counterparties, the Company manages this risk by establishing dollar and term limits (in total and by financial institution) and also monitors the creditworthiness of the financial institutions with whom derivatives are executed. At December 31, 1995, the Company had forward currency exchange contracts, all having maturities of less than one year, with a notional amount aggregating $377,042. The contracts involved twelve different foreign currencies. No single currency represented more than 25% of the aggregate notional amount. The notional amount of contracts intended to hedge merchandise purchases was $178,140. Deferred gains (losses) on these contracts were not material at December 31, 1995 and 1994. Item 8. Financial Statements and Supplementary Data. The information required by this Item is submitted as a separate section of this report. 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. The information required by this Item with respect to the Registrant's directors is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 1996, which will be filed with the Securities Exchange Commission on or before March 29, 1996 (the "1996 Proxy Statement"), under the headings "Information with Respect to Nominees", "Executive Compensation", "Transactions with Management and Affiliates" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934". Information called for by this Item with respect to the registrant's executive officers is set forth under "Executive Officers of Registrant" in Item 1 of this report. Item 11. Executive Compensation. The information required by this Item is incorporated herein by reference from the 1996 Proxy Statement under the headings "Compensation of Directors", "Executive Compensation", "Supplemental Executive Retirement Plan", "Employee Agreements", "Report of Compensation Committee on Executive Compensation" and "Performance Graphs". Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated herein by reference from the 1996 Proxy Statement under the heading "Beneficial Ownership of Shares". Item 13. Certain Relationships and Related Transactions. The information required by this Item is incorporated herein by reference from the 1996 Proxy Statement under the heading "Transactions with Management and Affiliates". PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) and (2) List of Financial Statements and Financial Statement Schedules. 1. Financial Statements The following consolidated financial statements are included in Item 8 and presented as a separate section of this report: Form 10-K Page Consolidated Balance Sheets at December 31, 1995 and 1994 F-2 For each of the three years ended December 31, 1995, 1994 and 1993: Consolidated Statements of Income F-3 Consolidated Statements of Stockholders' Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 - F-16 2. Financial Statement Schedule The following consolidated financial statement schedule of Reebok International Ltd. is included in Item 14(d) and presented as a separate section of this report: Form 10-K Page Schedule II - Valuation and Qualifying Accounts F-19 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)3. Exhibits Listed below are all the Exhibits filed as part of this report. Certain Exhibits are incorporated by reference from documents previously filed by the Company with the Securities and Exchange Commission pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended. Exhibit (3) Articles of incorporation and by-laws. 3.1 Restated Articles of Organization of the Company, as amended 1 3.2 By-laws, as amended 5, 6, 8 (4) Instruments defining the rights of security holders, including indentures. 4.1 Indenture, dated as of September 15, 1988, as amended and restated by the First Supplemental Indenture, dated as of January 22, 1993, between Reebok International Ltd. and Citibank N.A., as Trustee 4, 12 4.2 Common Stock Rights Agreement dated as of June 14, 1990 between the Company and The First National Bank of Boston, as Rights Agent, as amended 7, 9, 10 (10) Material Contracts. 10.1 Distributorship Agreement between Reebok International Limited and the Company 2 10.2 Trademark License Agreement between Reebok International Limited and the Company 2 10.3 Continuing Letter of Credit Agreement, dated August 1, 1989, between the Company and State Street Bank and Trust Company; and Letter Agreement between The Rockport Company, Inc. and Norwest Bank, Master Security Agreement for Irrevocable Documentary Letters of Credit and Guarantee of the Company, all dated August 1, 1989 6 10.4 Lease Agreement, dated March 1, 1988, as amended, between Reebok International Ltd. and North Stoughton Industrial Park Development Trust 5, 15 10.5 Purchase and Sale Agreement between Reebok International Ltd. and Pentland Group plc dated March 8, 1991 8 10.6 Agreements with various banks in Hong Kong reflecting arrangements for letter of credit facilities 8 10.7 Third Amended and Restated Master Agreement between the Company and Bank of America Oregon dated as of July 1, 1993, as amended 15 10.8 $200,000,000 Credit Agreement and $100,000,000 Loan Agreement, each dated as of November 1, 1994, among the Company, the Lenders named therein and Credit Suisse as Administrative Agent and Arranger, as amended by Amendment No. 1 dated October 31, 1995, to the Credit Agreement and Amendment No. 1 dated October 31, 1995, to the Loan Agreement 13, 16 Management Contracts and Compensatory Plans. 10.9 Reebok International Ltd. 1994 Equity Incentive Plan 15 10.10 Reebok International Ltd. Equity and Deferred Compensation Plan for Directors 15 10.11 Reebok International Ltd. 1985 Stock Option Plan, as amended 11 10.12 Reebok International Ltd. 1987 Stock Option Plan for Directors, as amended 12 10.13 Reebok International Ltd. 1987 Stock Bonus Plan 3 10.14 Reebok International Ltd. Excess Benefits Plan 8 10.15 Reebok International Ltd. Supplemental Executive Retirement Plan 10.16 Reebok International Ltd. Executive Performance Incentive Plan 10.17 Stock Option Agreement with Paul B. Fireman 8 10.18 Split-Dollar Life Insurance Agreement with Paul B. Fireman 11 10.19 Contingent Severance Agreement with Paul R. Duncan 6 10.20 Change of Control Agreement with John B. Douglas III 12 10.21 Employment Agreement with Kenneth Watchmaker 12 10.22 Change of Control Agreement with Kenneth Watchmaker 12 10.23 Supplemental Retirement Program for Kenneth Watchmaker 12 10.24 Contingent Severance Agreement with Angel Martinez 14 10.25 Lease with Angel Martinez 14 10.26 Amendment dated October 30, 1995 to Lease with Angel Martinez (11) Statement Re Computation of Per Share Earnings. (12) Statement Re Computation of Ratio of Earnings to Fixed Charges. (21) Subsidiaries. 21.1 List of Subsidiaries of the Company (23) Consents of experts and counsel. 23.1 The consent of Ernst & Young LLP (b) Reports on Form 8-K. None. (c) Exhibits. The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this report. (27) Financial Data Schedule 1 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 30, 1987 and incorporated by reference herein and as an Exhibit to Registration Statement No. 11-13370 and incorporated by reference herein. 2 Filed as an Exhibit to Registration Statement No. 2-98367 and incorporated by reference herein. 3 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 28, 1988 and incorporated by reference herein. 4 Filed as an Exhibit to Reebok International Ltd. Form 8-K filed on September 29, 1988 and incorporated by reference herein. 5 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 30, 1989 and incorporated by reference herein. 6 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 26, 1990 and incorporated by reference herein. 7 Filed as an Exhibit to Reebok International Ltd. Form 8-A filed on July 31, 1990 and incorporated by reference herein. 8 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 28, 1991 and incorporated by reference herein. 9 Filed as an Exhibit to Reebok International Ltd. Form 8 Amendment to Registration Statement on Form 8-A filed on April 4, 1991 and incorporated by reference herein. 10 Filed as an Exhibit to Reebok International Ltd. Form 8 Amendment to Registration Statement on Form 8-A filed on December 13, 1991 and incorporated by reference herein. 11 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 27, 1992 and incorporated by reference herein. 12 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 26, 1993 and incorporated by reference herein. 13 Filed as an Exhibit to Reebok International Ltd. Form 10-Q for the quarter ended September 30, 1994 and incorporated by reference herein. 14 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated February 15, 1994 and incorporated by reference herein. 15 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 30, 1995 and incorporated by reference herein. 16 Filed as an Exhibit to Reebok International Ltd. Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference. 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. REEBOK INTERNATIONAL LTD. BY: /s/ KENNETH I. WATCHMAKER Kenneth I. Watchmaker Executive Vice President and Chief Financial Officer Dated: March 29, 1996 Pursuant to the requirements of the Securities 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 date indicated. /s/ PAUL FIREMAN Paul Fireman Director, Chairman of the Board and President (Chief Executive Officer) /s/ KENNETH I. WATCHMAKER Kenneth I. Watchmaker Executive Vice President and Chief Financial Officer (Chief Financial and Accounting Officer) /s/ PAUL R. DUNCAN Paul R. Duncan Executive Vice President Director /s/ ROBERT MEERS Robert Meers Executive Vice President Director Jill E. Barad Director Daniel E. Gill Director /s/ WILLIAM F. GLAVIN William F. Glavin Director /s/ MANNIE L. JACKSON Mannie L. Jackson Director /s/ BERTRAM M. LEE, SR. Bertram M. Lee, Sr. Director /s/ RICHARD G. LESSER Richard G. Lesser Director /s/ WILLIAM M. MARCUS William M. Marcus Director /s/ GEOFFREY NUNES Geoffrey Nunes Director /s/ JOHN A. QUELCH John A. Quelch Director Dated: March 29, 1996 ITEMS 8, 14(C) AND (D) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES Report of Ernst & Young LLP, Independent Auditors Board of Directors and Stockholders Reebok International Ltd. Stoughton, Massachusetts We have audited the accompanying consolidated balance sheets of Reebok International Ltd. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial position of Reebok International Ltd. and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP /S/ ERNST & YOUNG LLP Boston, Massachusetts January 30, 1996 REEBOK INTERNATIONAL LTD. Consolidated Balance Sheets Amounts in thousands, except share data DECEMBER 31 1995 1994 - ------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 80,393 $ 83,936 Accounts receivable, net of allowance for doubtful accounts (1995, $46,401; 1994, $44,862) 506,563 532,475 Inventory 635,012 624,625 Deferred income taxes 75,543 66,456 Prepaid expenses and other current assets 45,418 29,952 ------------------------ Total current assets 1,342,929 1,337,444 ------------------------ Property and equipment, net 192,033 164,848 Non-current assets: Intangibles, net of amortization 64,436 96,196 Deferred income taxes 2,910 Other 56,825 48,063 ------------------------ 121,261 147,169 ------------------------ $1,656,223 $1,649,461 ------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 66,682 $ 63,837 Current portion of long-term debt 946 5,190 Accounts payable 166,037 170,622 Accrued expenses 144,585 157,479 Income taxes payable 47,956 102,392 Dividends payable 5,742 6,068 ------------------------ Total current liabilities 431,948 505,588 ------------------------ Long-term debt, net of current portion 254,178 131,799 Deferred income taxes 4,604 Minority interest 31,081 21,569 Commitments and contingencies Outstanding redemption value of equity put options 39,123 Stockholders' equity: Common stock, par value $.01; authorized 250,000,000 shares; issued 111,015,133 shares in 1995, 117,155,611 shares in 1994 1,096 1,172 Additional paid-in capital 167,953 Retained earnings 1,487,006 1,428,058 Less 36,210,902 shares in treasury at cost (603,241) (603,241) Unearned compensation (1,208) (2,598) Foreign currency translation adjustment 11,636 (839) ------------------------ 895,289 990,505 ------------------------ $1,656,223 $1,649,461 - ------------------------------------------------------------------------------ The accompanying notes are an integral part of the consolidated financial statements. REEBOK INTERNATIONAL LTD. Consolidated Statements of Income Amounts in thousands, except per share data YEAR ENDED DECEMBER 31 1995 1994 1993 - ------------------------------------------------------------------------------ Net sales $3,481,450 $3,280,418 $2,893,900 Other income 3,126 7,165 33 -------------------------------------- 3,484,576 3,287,583 2,893,933 -------------------------------------- Costs and expenses: Cost of sales 2,114,084 1,966,138 1,719,869 Selling, general and administrative expenses 999,731 889,590 769,744 Special charges 72,098 8,449 Amortization of intangibles 4,067 4,345 10,052 Minority interest 11,423 8,896 8,261 Interest expense 25,725 16,515 25,021 Interest income (7,103) (6,373) (10,710) -------------------------------------- 3,220,025 2,879,111 2,530,686 -------------------------------------- Income before income taxes 264,551 408,472 363,247 Income taxes 99,753 153,994 139,832 -------------------------------------- Net income $164,798 $254,478 $223,415 -------------------------------------- Net income per common share $2.07 $3.02 $2.53 -------------------------------------- Dividends per common share $0.30 $0.30 $0.30 -------------------------------------- Weighted average common and common equivalent shares outstanding 79,487 84,311 88,348 - ------------------------------------------------------------------------------ The accompanying notes are an integral part of the consolidated financial statements. REEBOK INTERNATIONAL LTD.
Consolidated Statements of Stockholders' Equity Foreign Common Stock Additional Unearned Currency Paid-in Retained Treasury Compen- Translation Dollar amounts in thousands Shares Par Value Capital Earnings Stock sation Adjustment - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 125,574,291 $ 1,256 $ 448,056 $1,000,615 $ (603,241) $ (611) $ (7,419) Net income 223,415 Adjustment for foreign currency translation (5,726) Issuance of shares to certain employees 102,400 1 2,956 (2,957) Amortization of unearned compensation 292 Shares repurchased and retired (6,235,100) (62) (193,959) Shares issued under employee stock purchase plans 149,977 1 3,493 Shares issued upon exercise of stock options 310,730 3 4,648 Income tax reductions relating to exercise of stock options 1,696 Dividends declared (25,840) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 119,902,298 1,199 266,890 1,198,190 (603,241) (3,276) (13,145) - ----------------------------------------------------------------------------------------------------------------------------------- Net income 254,478 Adjustment for foreign currency translation 12,306 Issuance of shares to certain employees 19,293 611 (611) Amortization of unearned compensation 827 Shares repurchased and retired (3,261,200) (33) (112,105) Shares retired (16,000) (462) 462 Shares issued under employee stock purchase plans 158,965 2 4,082 Shares issued upon exercise of stock options 352,255 4 6,172 Income tax reductions relating to exercise of stock options 2,765 Dividends declared (24,610) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 117,155,611 1,172 167,953 1,428,058 (603,241) (2,598) (839) - ----------------------------------------------------------------------------------------------------------------------------------- Net income 164,798 Adjustment for foreign currency translation 12,475 Issuance of shares to certain employees 43,545 1,558 (1,558) Amortization of unearned compensation 1,008 Shares repurchased and retired (6,639,600) (66) (182,569) (42,835) Shares retired (67,200) (1) (1,385) (554) 1,940 Shares issued under employee stock purchase plans 161,377 2 4,253 Shares issued upon exercise of stock options 361,400 4 6,004 Put option contracts outstanding (15) (39,108) Premium received from unexercised equity put options 3,233 Income tax reductions relating to exercise of stock options 953 Dividends declared (23,353) Balance, December 31, 1995 111,015,133 $ 1,096 $ 0 $1,487,006 $ (603,241) $ (1,208) $ 11,636 - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. REEBOK INTERNATIONAL LTD. Consolidated Statements of Cash Flows Amounts in thousands YEAR ENDED DECEMBER 31 1995 1994 1993 - ------------------------------------------------------------------------------ Cash flows from operating activities: Net income $164,798 $254,478 $223,415 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,504 32,228 25,209 Amortization of intangibles 4,067 4,345 10,052 Minority interest 11,423 8,896 8,261 Amortization of unearned compensation 1,008 827 292 Deferred income taxes (1,573) (13,332) 17,470 Special charges 62,743 8,449 Changes in operating assets and liabilities, exclusive of those arising from business acquisitions: Accounts receivable 16,157 (64,786) (44,682) Inventory (29,531) (81,948) (84,020) Prepaid expenses 7,841 (7,752) 2,023 Other (21,715) (15,789) (23,012) Accounts payable and accrued expenses (25,327) 35,211 6,035 Income taxes payable (55,553) 20,236 (6,959) ------------------------------- Total adjustments 4,044 (81,864) (80,882) ------------------------------- Net cash provided by operating activities 168,842 172,614 142,533 ------------------------------- Cash flows from investing activities: Payments to acquire property and equipment (63,610) (61,839) (26,628) Payments for business acquisitions, net of cash acquired (4,297) (10,321) Proceeds from sale of businesses held for sale 36,500 ------------------------------- Net cash used for investing activities (63,610) (66,136) (449) ------------------------------- Cash flows from financing activities: Net borrowings of notes payable to banks 2,426 37,148 19,961 Proceeds from issuance of common stock to employees 11,216 13,025 9,841 Dividends paid (23,679) (24,827) (26,276) Repayments of long-term debt (112,445) (2,585) (4,351) Proceeds from long-term debt 230,000 20,000 Proceeds from premium on equity put options 3,233 Repurchases of common stock (225,470) (112,138) (194,021) ------------------------------- Net cash used for financing activities (114,719) (89,377) (174,846) ------------------------------- Effect of exchange rate changes on cash 5,944 (12,512) 6,723 ------------------------------- Net increase (decrease) in cash and cash equivalents (3,543) 4,589 (26,039) ------------------------------- Cash and cash equivalents at beginning of year 83,936 79,347 105,386 ------------------------------- Cash and cash equivalents at end of year $ 80,393 $ 83,936 $ 79,347 ------------------------------- Supplemental disclosures of cash flow information: Interest paid $ 23,962 $ 19,135 $ 24,348 Income taxes paid 152,690 135,060 132,456 - ------------------------------------------------------------------------------ The accompanying notes are an integral part of the consolidated financial statements. REEBOK INTERNATIONAL LTD. Notes to Consolidated Financial Statements Dollar amounts in thousands, except per share data 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITY The Company and its subsidiaries design and market sports and fitness products, including footwear and apparel, as well as footwear and apparel for non-athletic "casual" use, under various trademarks, including REEBOK, WEEBOK, THE PUMP, INSTAPUMP, Boks, the GREG NORMAN Logo, AVIA, ROCKPORT, and TINLEY. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the amounts of the Company and its subsidiaries. All significant intercompany transactions and accounts are eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECOGNITION OF REVENUES Sales are recognized upon shipment of products. ADVERTISING Advertising production costs are expensed the first time the advertisement is run. Media (TV and print) placement costs are expensed in the month the advertising appears. Advertising expense (including cooperative advertising) amounted to $157,573, $163,210 and $158,318 for the years ended December 31, 1995, 1994 and 1993, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for its stock compensation arrangements under the provisions of APB25, "Accounting for Stock Issued to Employees," and intends to continue to do so. CASH EQUIVALENTS Cash equivalents are defined as highly liquid investments with maturities of three months or less at date of purchase. INVENTORY VALUATION Inventory, substantially all finished goods, is recorded at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed principally on the straight line method over the assets' estimated useful lives. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Dollar amounts in thousands, except per share data INTANGIBLES Excess purchase price over the fair value of assets acquired is amortized using the straight line method over periods ranging from 5 to 40 years. Other intangibles are amortized using the straight line method over periods ranging from 3 to 40 years. FOREIGN CURRENCY TRANSLATION Assets and liabilities of most of the Company's foreign subsidiaries are translated at current exchange rates. Revenues, costs and expenses are translated at the average exchange rates for the period. Translation adjustments resulting from changes in exchange rates are reported as a separate component of stockholders' equity. Other foreign currency transaction gains and losses are included in the determination of net income. For those foreign subsidiaries operating in a highly inflationary economy or having the U.S. dollar as their functional currency, net nonmonetary assets are translated at historical rates and net monetary assets are translated at current rates. Translation adjustments are included in the determination of net income. INCOME TAXES The Company accounts for income taxes in accordance with FASB Statement No. 109 "Accounting for Income Taxes" ("Statement 109"). Tax provisions and credits are recorded at statutory rates for taxable items included in the consolidated statements of income regardless of the period for which such items are reported for tax purposes. Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities for which income tax benefits will be realized in future years. NET INCOME PER COMMON SHARE Net income per common share is computed based on the weighted average number of common and common equivalent shares outstanding and the dilutive effect of equity put options, if applicable. 2. SPECIAL CHARGES The Company recorded special charges totaling $72,098 in 1995. In the second quarter of 1995, the Company recorded a special charge of $18,034, principally related to facilities consolidation and severance and other related costs associated with the streamlining of certain segments of the Company's operations. The after-tax effect of this charge was $11,235 or $0.14 per share. In connection with the anticipated sale of the Company's Avia subsidiary, the Company recorded a special charge of $54,064 in the fourth quarter of 1995 to adjust the carrying value of Avia to its estimated fair value on sale. The after-tax effect of this write- down was $33,699 or $0.44 per share. The sale of Boston Whaler was completed on July 30, 1993 and the sale of Ellesse was completed on September 28, 1993. In connection with these sales, the Company recorded a pre-tax special charge of $8,499 in 1993. Dollar amounts in thousands, except per share data 3. PROPERTY AND EQUIPMENT - ----------------------------------------------------------------------------- Property and equipment consist of the following: DECEMBER 31 1995 1994 - ----------------------------------------------------------------------------- Land $32,226 $32,243 Buildings 67,233 60,440 Machinery and equipment 189,731 156,046 Leasehold improvements 46,654 34,506 - ----------------------------------------------------------------------------- 335,844 283,235 Less accumulated depreciation and amortization 143,811 118,387 - ----------------------------------------------------------------------------- $192,033 $164,848 - ----------------------------------------------------------------------------- 4. INTANGIBLES - ----------------------------------------------------------------------------- Intangibles consist of the following: DECEMBER 31 1995 1994 - ----------------------------------------------------------------------------- Excess of purchase price over fair value of assets acquired (net of accumulated amortization of $130,925 in 1995 and $128,545 in 1994) $20,698 $49,811 Other intangible assets: Purchased technology 52,827 52,827 Company tradename and trademarks 49,144 50,104 Other 13,693 13,693 - ----------------------------------------------------------------------------- 115,664 116,624 Less accumulated amortization 71,926 70,239 - ----------------------------------------------------------------------------- 43,738 46,385 - ----------------------------------------------------------------------------- $64,436 $96,196 - ----------------------------------------------------------------------------- In connection with the special charge recorded in the fourth quarter of 1995 (see note 2), the Company wrote-off the remaining $28,461 of excess purchase price over fair value of assets acquired relating to Avia. 5. SHORT-TERM BORROWINGS The Company has various arrangements with numerous banks which provide an aggregate of approximately $838,000 of uncommitted facilities, substantially all of which are available to the Company's foreign subsidiaries. Of this amount, $245,000 is available for short-term borrowings and bank overdrafts, with the remainder available for letters of credit for inventory purchases. In addition Dollar amounts in thousands, except per share data to amounts reported as notes payable to banks, approximately $212,000 was outstanding for open letters of credit for inventory purchases at December 31, 1995. On October 31, 1995, the Company amended existing revolving credit agreements totaling $300,000. The Company's existing $100,000 Loan Agreement was amended to extend the commitment term an additional year until November 1, 2000 and to increase the amount committed to $150,000. The Company's existing $200,000 Credit Agreement was amended by extending the commitment term for an additional year to October 30, 1996 and reducing the amount committed to $150,000. Total committed facilities remain at $300,000. At December 31, 1995, there were no borrowings outstanding under these agreements. The Company has a Commercial Paper program through which it can borrow up to $200,000 for periods up to 270 days. The borrowing amount was increased from $125,000 on February 15, 1996. This program is supported, to the extent available, by the unused portion of the Company's $300,000 revolving credit agreements. As of December 31, 1995, the Company had no commercial paper obligations outstanding. The weighted average interest rate on notes payable to banks was 5.8% and 4.9% at December 31, 1995 and 1994, respectively. 6. LEASING ARRANGEMENTS The Company leases various offices, warehouses, retail store facilities and certain of its data processing and warehouse equipment under lease arrangements expiring between 1996 and 2002. Minimum annual rentals for the five years subsequent to December 31, 1995 and in the aggregate are as follows: 1996 $ 37,567 1997 28,090 1998 23,216 1999 19,239 2000 13,876 2001 and thereafter 20,477 - ------------------------------------------------------------------------------ Total minimum lease obligations $142,465 - ------------------------------------------------------------------------------ Total rent expense for all operating leases amounted to $40,602, $29,167 and $23,868 for the years ended December 31, 1995, 1994 and 1993, respectively. Dollar amounts in thousands, except per share data 7. LONG-TERM DEBT - ------------------------------------------------------------------------------ Long-term debt consists of the following: DECEMBER 31: 1995 1994 - ------------------------------------------------------------------------------ Medium-term notes, bearing interest at rates approximating 6.75%, due May 15, 2000, with interest payable semiannually on May 15 and November 15 $100,000 9.75% debentures due September 15, 1998, with interest payable semiannually on March 15 and September 15 $ 99,645 (A) 6.75% debentures due September 15, 2005, with interest payable semiannually on March 15 and September 15 98,729 (A) Medium-term notes, bearing interest at rates approximating 6%, due July 15, 1998, with interest payable semiannually on February 15 and August 15 30,000 Medium-term notes, bearing interest at rates approximating 6%, due February 11, 1998, with interest payable semiannually on February 15 and August 15 20,000 20,000 Bank and other notes payable 6,395 17,344 - ------------------------------------------------------------------------------ 255,124 136,989 Less current portion 946 5,190 - ------------------------------------------------------------------------------ $254,178 $131,799 - ------------------------------------------------------------------------------ Maturities of long-term debt during the five-year period ending December 31, 2000 are $946 in 1996, $2,875 in 1997, $50,282 in 1998, $297 in 1999, and $100,280 in 2000. 8. EMPLOYEE BENEFIT PLANS The Company sponsors defined contribution retirement plans covering substantially all of its domestic employees and certain employees of its foreign subsidiaries. Contributions are determined at the discretion of the Board of Directors. Aggregate contributions made by the Company to the plans and charged to operations in 1995, 1994, and 1993 were $11,644, $13,660 and $11,833, respectively. (A) On September 13, 1995, $100,000 of 9.75% debentures were called and refinanced with $100,000 of 6.75% debentures on September 18, 1995. Dollar amounts in thousands, except per share data 9. STOCK PLANS The Company has stock option plans which provide for the grant of options to purchase shares of the Company's common stock to key employees, other persons or entities who make significant contributions to the success of the Company, and eligible members of the Company's Board of Directors. The Board of Directors approved the 1994 Equity Incentive Plan on December 15, 1993 which replaced three of the Company's existing stock option and stock bonus plans. Under this new Equity Incentive Plan, options may be incentive stock options or "non-qualified options" under applicable provisions of the Internal Revenue Code. The exercise price of any stock option granted may not be less than fair market value at the date of grant except in the case of grants to participants who are not executive officers of the Company and in certain limited circumstances. The exercise period cannot exceed ten years from the date of grant. The vesting schedule for options granted under the 1994 Equity Incentive Plan is determined by the Compensation Committee of the Board of Directors. The Company also has an option plan for its Directors. Under this plan a fixed amount of options are granted annually to all non-employee Directors. Grants of options under the Directors Plan vest in equal annual installments over three years. The following schedule summarizes the changes in stock options during the three years ended December 31, 1995: Number of Shares Under Option - ------------------------------------------------------------------------------ Non-Qualified Option Stock Options Price Per Share - ------------------------------------------------------------------------------ Outstanding at December 31, 1992 5,511,138 8.75-39.77 Granted 1,605,800 11.38-41.74 Exercised (310,730) 8.75-27.63 Canceled (399,240) 11.38-33.25 - ------------------------------------------------------------------------------ Outstanding at December 31, 1993 6,406,968 8.75-41.74 Granted 212,797 28.88-38.88 Exercised (352,255) 8.75-33.25 Canceled (387,935) 11.38-41.74 - ------------------------------------------------------------------------------ Outstanding at December 31, 1994 5,879,575 8.75-39.77 Granted 1,361,502 28.75-36.75 Exercised (361,400) 8.75-33.25 Canceled (722,760) 11.38-39.77 - ------------------------------------------------------------------------------ Outstanding at December 31, 1995 6,156,917 8.75-38.88 - ------------------------------------------------------------------------------ At December 31, 1995 and 1994, options to purchase 3,956,545 and 3,241,684 shares of common stock were exercisable, and 3,369,311 and 4,351,514 options, respectively, were available for future grants under the Company's stock option plans. Dollar amounts in thousands, except per share data The Company's 1994 Equity Incentive Plan also permits the Company to grant restricted stock to key employees, and other persons or entities who make significant contributions to the success of the Company. The restrictions and vesting schedule for restricted stock granted under this Plan are determined by the Compensation Committee of the Board of Directors. The Company has two employee stock purchase plans. Under the 1987 Employee Stock Purchase Plan eligible employees are granted options to purchase shares of the Company's common stock through voluntary payroll deductions during two option periods, running from January 1 to June 30 and from July 1 to December 31, at a price equal to the lower of 85% of market value at the beginning or end of each period. Under the 1992 Employee Stock Purchase Plan, for certain foreign based employees, eligible employees are granted options to purchase shares of the Company's common stock during two option periods, running from January 1 to June 30 and from July 1 to December 31, at the market price at the beginning of the period. The option becomes exercisable 90 days following the date of grant and expires on the last day of the option period. During 1995, 1994 and 1993, respectively, 161,377, 158,965, and 149,977 shares were issued pursuant to these plans. In June 1990, the Company adopted a shareholders' rights plan and declared a dividend distribution of one common stock purchase right ("Right") for each share of common stock outstanding. Each Right entitles the holder to purchase one share of the Company's common stock at a price of $60 per share, subject to adjustment. The Rights will be exercisable only if a person or group of affiliated or associated persons acquires beneficial ownership of 10% or more of the outstanding shares of the Company's common stock or commences a tender or exchange offer that would result in a person or group owning 10% or more of the outstanding common stock, or in the event that the Company is subsequently acquired in a merger or other business combination. When the Rights become exercisable, each holder would have the right to purchase, at the then-current exercise price, common stock of the surviving company having a market value of two times the exercise price of the Right. The Company can redeem the Rights at $.01 per Right at any time prior to expiration on June 14, 2000. At December 31, 1995, 10,313,239 shares of common stock were reserved for issuance under the Company's various stock plans and 85,117,470 shares were reserved for issuance under the shareholders' rights plan. 10. ACQUISITION OF COMMON STOCK On October 19, 1995, the Board of Directors authorized the repurchase of up to an additional $200 million in Reebok common stock in open market or privately-negotiated transactions. This authorization was in addition to the share repurchase programs of $200 million each adopted by the Company in July 1992, July 1993 and October 1994. As of December 31, 1995, the Company had approximately $198 million available for future repurchases of common stock under these programs. Dollar amounts in thousands, except per share data 11. EQUITY PUT OPTIONS During 1995, the Company issued equity put options as part of its ongoing share repurchase program. These options provide the Company with an additional source to supplement open market purchases of its common stock. The options are priced based on the market value of the Company's stock at the date of issuance. The redemption value of the options, which represents the option price times the number of shares under option is presented in the accompanying consolidated balance sheet at December 31, 1995 as "Outstanding redemption value of Equity Put Options." At December 31, 1995 1,450,000 shares of outstanding common stock are subject to repurchase under the terms and conditions of these options. All equity put options outstanding as of December 31, 1995 expire during 1996. 12. FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments: Cash and cash equivalents and notes payable to banks: the carrying amounts reported in the balance sheet approximate fair value. Long term-debt: the fair value of the Company's medium term notes and debentures is estimated based on quoted market prices. The fair value of other long-term debt is estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. Unrealized gains or losses on foreign currency exchange contracts: the fair value of the Company's foreign currency exchange contracts is estimated based on current foreign exchange rates. The carrying amounts and fair value of the Company's financial instruments are as follows: Carrying Fair Amount Value - ------------------------------------------------------------------------------ DECEMBER 31: 1995 1994 1995 1994 - ------------------------------------------------------------------------------ Long-term debt $255,124 $136,989 $261,860 $139,842 Unrealized gains (losses) on foreign currency exchange contracts (1,108) (2,152) (1,108) (179) - ------------------------------------------------------------------------------ The Company enters into forward currency exchange contracts to hedge its exposure for merchandise purchased in U.S. dollars that will be sold to customers in other currencies. Realized and unrealized gains and losses on these contracts are included in net income except that gains and losses on contracts which hedge specific foreign currency commitments are deferred and accounted for as a part of the transaction. The Company also uses forward currency exchange contracts to hedge significant intercompany assets and liabilities denominated in other than the functional currency. Contracts used to hedge intercompany balances are marked to market and the resulting transaction gain or loss is included in the determination of net income. Foreign currency gains or losses included in net income for the years ended December 31, 1995, 1994 and 1993 were not significant. The Company has used forward exchange contracts as an element of its risk management strategy for several years. Although Dollar amounts in thousands, except per share data forward exchange contracts entail some risk of non-performance by counterparties, the Company manages this risk by establishing dollar and term limits (in total and by financial institution) and also monitors the creditworthiness of the financial institutions with whom derivatives are executed. At December 31, 1995, the Company had forward currency exchange contracts, all having maturities of less than one year, with a notional amount aggregating $377,042. The contracts involved 12 different foreign currencies. No single currency represented more than 25% of the aggregate notional amount. The notional amount of contracts intended to hedge merchandise purchases was $178,140. Deferred gains (losses) on these contracts were not material at December 31, 1995 and 1994. 13. INCOME TAXES - ------------------------------------------------------------------------------ The components of income before income taxes are as follows: 1995 1994 1993 - ------------------------------------------------------------------------------ Domestic $14,292 $171,166 $141,428 Foreign 250,259 237,306 221,819 - ------------------------------------------------------------------------------ $264,551 $408,472 $363,247 - ------------------------------------------------------------------------------ The provision for income taxes consists of the following: 1995 1994 1993 - ------------------------------------------------------------------------------ Current: Federal $3,998 $66,879 $39,725 State 13,878 16,607 14,082 Foreign 83,450 83,840 68,555 - ------------------------------------------------------------------------------ 101,326 167,326 122,362 - ------------------------------------------------------------------------------ Deferred: Federal (1,594) (3,038) 16,244 State (3,112) (303) (310) Foreign 3,133 (9,991) 1,536 - ------------------------------------------------------------------------------ (1,573) (13,332) 17,470 - ------------------------------------------------------------------------------ $ 99,753 $153,994 $139,832 - ------------------------------------------------------------------------------ Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $410,402, $316,099 and $215,559 at December 31, 1995, 1994 and 1993, respectively. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and foreign withholding taxes, less an adjustment for applicable foreign tax credits. Determination of the amount of U.S. income tax liability that would be incurred is not practicable because of the complexities associated Dollar amounts in thousands, except per share data with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce some portion of any U.S. income tax liability. Income taxes computed at the federal statutory rate differ from amounts provided as follows: 1995 1994 1993 - ------------------------------------------------------------------------------ Tax at statutory rate 35.0% 35.0% 35.0% State taxes, less federal tax effect 2.7 2.6 2.5 Effect of tax rates of foreign subsidiaries and joint ventures (2.0) (1.3) (.8) Effect of minority interest 1.5 .8 .8 Amortization of intangibles .4 .5 .6 Other, net .1 .1 .4 - ------------------------------------------------------------------------------ Provision for income taxes 37.7% 37.7% 38.5% - ------------------------------------------------------------------------------ Effective January 1, 1993, the Company adopted Statement 109. Under Statement 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of Statement 109, income tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. As permitted by Statement 109, the Company did not restate the financial statements of any prior years. The effect of the change on net income for 1993 was not material. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are attributable to the following temporary differences at DECEMBER 31: 1995 1994 - ------------------------------------------------------------------------------ Inventory $34,570 $34,757 Accounts receivable 25,810 27,825 Other - net 10,559 6,784 - ------------------------------------------------------------------------------ $70,939 $69,366 - ------------------------------------------------------------------------------ ______________________________________________________________________________ Dollar amounts in thousands, except per share data 14. OPERATIONS BY GEOGRAPHIC AREA Sales to unaffiliated customers, net income and identifiable assets by geographic area are summarized below: 1995 1994 1993 - ------------------------------------------------------------------------------ Sales: United States $2,027,080 $1,974,904 $1,775,496 United Kingdom 492,843 506,658 434,249 Europe 642,622 536,629 479,640 Other countries 318,905 262,227 204,515 - ------------------------------------------------------------------------------ $3,481,450 $3,280,418 $2,893,900 - ------------------------------------------------------------------------------ Net income: United States $36,176 $126,916 $98,692 United Kingdom 69,277 62,949 65,734 Europe 20,648 44,290 36,915 Other countries 38,697 20,323 22,074 - ------------------------------------------------------------------------------ $164,798 $254,478 $223,415 - ------------------------------------------------------------------------------ Identifiable assets: United States $818,539 $963,462 $916,962 United Kingdom 291,825 282,795 152,206 Europe 311,903 230,912 153,492 Other countries 233,956 172,292 169,051 - ------------------------------------------------------------------------------ $1,656,223 $1,649,461 $1,391,711 - ------------------------------------------------------------------------------ The 1994 and 1993 operations information by geographic area for Europe and other countries was updated in order to reflect the present country boundaries. There are various differences between income before income taxes for domestic and foreign operations as shown in Note 13 and net income shown above. 15. CONTINGENCIES On August 29, 1995, the Company obtained a favorable ruling on its motion for summary judgment in the lawsuit entitled Stutz Motor Car of America, Inc. v. Reebok International Ltd., (filed on July 1, 1993 in the Central District of Los Angeles County Superior Court as Case Number BC074579 and removed to the United States District Court for the Central District of California where it was assigned Civil Action No. 93-443LGB) and, as a result, the case was dismissed. The Plaintiff has appealed the decision. The Company believes that the Plaintiff's appeal is without merit and is confident that the District Court decision will be upheld. During 1995, the Company's settlement with the National Association of Attorneys General ("NAAG") relating to the investigation by NAAG against the Company was approved by the Federal Court for the Southern District of New York on October 20, 1995. The Court's order approving the settlement was appealed to the Second Circuit Court of Appeals on January 9, 1996 by counsel purporting to represent a class of Reebok and Rockport consumers. The Company is currently awaiting a decision on the appeal, which it believes to be without merit. Quarterly Results of Operations Amounts in thousands, except per share data First Second Third Fourth Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------ Year ended December 1995 - ------------------------------------------------------------------------------ Net sales $935,478 $788,692 $1,005,980 $751,300 Gross profit 378,079 316,847 391,145 281,295 Net income 65,917 21,404 76,202 1,275 Net income per common share .80 .26 .96 .02 Cash dividends per common share .075 .075 .075 .075 - ------------------------------------------------------------------------------ Year ended December 1994 - ------------------------------------------------------------------------------ Net sales $857,366 $776,753 $937,148 $709,151 Gross profit 337,522 307,774 375,330 293,654 Net income 65,789 51,008 84,655 53,026 Net income per common share .77 .60 1.01 .64 Cash dividends per common share .075 .075 .075 .075 - ------------------------------------------------------------------------------ Net income for the second quarter of 1995 includes an after-tax special charge of $11,235 ($0.14 per share). Net income for the fourth quarter of 1995 includes an after-tax special charge of $33,699 ($0.44 per share). Report of Management FINANCIAL STATEMENTS The management of Reebok International Ltd. and its subsidiaries has prepared the accompanying financial statements and is responsible for their integrity and fair presentation. The statements, which include amounts that are based on management's best estimates and judgments, have been prepared in conformity with generally accepted accounting principles and are free of material misstatement. Management has also prepared other information in the annual report and is responsible for its accuracy and consistency with the financial statements. INTERNAL CONTROL SYSTEM Reebok International Ltd. and its subsidiaries maintain a system of internal control over financial reporting, which is designed to provide reasonable assurance to the Company's management and Board of Directors as to the integrity and fair presentation of the financial statements. Management continually monitors the system of internal control for compliance, and actions are taken to correct deficiencies as they are identified. Even an effective internal control system, no matter how well designed, has inherent limitations -- including the possibility of the circumvention or overriding of controls -- and therefore can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control system effectiveness may vary over time. The Company maintains an internal auditing program that monitors and assesses the effectiveness of the internal controls system and recommends possible improvements thereto. The Company's accompanying financial statements have been audited by Ernst & Young LLP, independent auditors, whose audit was made in accordance with generally accepted auditing standards and included a review of the system of internal accounting controls to the extent necessary to determine the audit procedures required to support their opinion on the consolidated financial statements. Management believes that, as of December 31, 1995, the Company's system of internal control is adequate to accomplish the objectives discussed herein. Reebok International Ltd., /S/ PAUL FIREMAN Paul Fireman Chairman President and Chief Executive Officer /S/ KENNETH WATCHMAKER Kenneth Watchmaker Executive Vice President and Chief Financial Officer
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS REEBOK INTERNATIONAL LTD (Amounts in thousands) Balance at Charged to Charged to Deductions Balance at Beginning Costs and Other From End of Description of Period Expenses Accounts Allowances(A) Period ___________ __________ __________ __________ _____________ __________ YEAR ENDED DECEMBER 31, 1995 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $44,862 $13,151 $11,612 $46,401 YEAR ENDED DECEMBER 31, 1994 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts 46,455 6,691 8,284 44,862 YEAR ENDED DECEMBER 31, 1993 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts 43,224 8,562 5,331 46,455 (A) Uncollectible accounts written off, net of recoveries
EXHIBIT INDEX EXHIBIT LOCATION 3.1 Restated Articles of Organization Incorporated by of the Company, as amended reference 3.2 By-laws, as amended Incorporated by reference 4.1 Indenture, dated September 15, 1988, Incorporated by as amended and restated by the First reference Supplemental Indenture, dated as of January 22, 1993, between Reebok International Ltd. and Citibank N.A., as Trustee 4.2 Common Stock Rights Agreement dated Incorporated by as of June 14, 1990 between the reference Company and The First National Bank of Boston, as Rights Agent, as amended 10.1 Distributorship Agreement between Incorporated by Reebok International Limited and reference the Company 10.2 Trademark License Agreement between Incorporated by Reebok International Limited and the reference Company 10.3 Continuing Letter of Credit Agreement, Incorporated by dated August 1, 1989, between the reference Company and State Street Bank and Trust Company; and Letter Agreement between The Rockport Company, Inc. and Norwest Bank, Master Security Agreement for Irrevocable Documentary Letters of Credit and Guarantee of the Company, all dated August 1,1989 10.4 Lease Agreement, dated March 1, 1988, Incorporated by as amended, between Reebok reference International Ltd. and North Stoughton Industrial Park Development Trust 10.5 Purchase and Sale Agreement between Incorporated by Reebok International Ltd. and Pentland reference Group plc dated March 8, 1991 10.6 Agreements with various banks in Hong Incorporated by Kong reflecting arrangements for letter reference of credit facilities 10.7 Third Amended and Restated Master Incorporated by Agreement between the Company and reference Bank of America Oregon dated as of July 1, 1993, as amended 10.8 $200,000,000 Credit Agreement and Incorporated by $100,000,000 Loan Agreement, each reference dated as of November 1, 1994, among the Company, the Lenders named therein and Credit Suisse as Administrative Agent and Arranger, as amended by Amendment No. 1 dated October 31, 1995, to the Credit Agreement and Amendment No. 1 dated October 31, 1995 to the Loan Agreement 10.9 Reebok International Ltd. 1994 Equity Incorporated by Incentive Plan reference 10.10 Reebok International Ltd. Equity and Incorporated by Deferred Compensation Plan for reference Directors 10.11 Reebok International Ltd. 1985 Stock Incorporated by Option Plan, as amended reference 10.12 Reebok International Ltd. 1987 Stock Incorporated by Option Plan for Directors, as amended reference 10.13 Reebok International Ltd. 1987 Stock Incorporated by Bonus Plan reference 10.14 Reebok International Ltd. Excess Incorporated by Benefits Plan reference 10.15 Reebok International Ltd. Supplemental Filed herewith Executive Retirement Plan 10.16 Reebok International Ltd. Executive Filed herewith Performance Incentive Plan 10.17 Stock Option Agreement with Paul Incorporated by B. Fireman reference 10.18 Split-Dollar Life Insurance Agreement Incorporated by with Paul B. Fireman reference 10.19 Contingent Severance Agreement with Incorporated by Paul R. Duncan reference 10.20 Change of Control Agreement with Incorporated by John B. Douglas III reference 10.21 Employment Agreement with Kenneth Incorporated by Watchmaker reference 10.22 Change of Control Agreement with Incorporated by Kenneth Watchmaker reference 10.23 Supplemental Retirement Program for Incorporated by Kenneth Watchmaker reference 10.24 Contingent Severance Agreement with Incorporated by Angel Martinez reference 10.25 Lease with Angel Martinez Incorporated by reference 10.26 Amendment dated October 30, 1995 Filed herewith to Lease with Angel Martinez 11. Statement Re Computation of Per Filed herewith Share Earnings 12. Statement Re Computation of Ratio Filed herewith of Earnings to Fixed Charges 21.1 List of Subsidiaries of the Company Filed herewith 23.1 The consent of Ernst & Young LLP Filed herewith 27. Financial Data Schedule Filed herewith EX-10.15 2 EXHIBIT 10.15 REEBOK INTERNATIONAL LTD. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN SECTION 1. PURPOSE The purpose of this Plan is to reward certain key executive employees of Reebok International Ltd. and its subsidiaries (the "Employer") through supplemental retirement payments. SECTION 2. ADMINISTRATION The Plan will be administered by the Compensation Committee of the Board of Directors of the Employer (the "Compensation Committee"). The Compensation Committee has the full discretionary power and authority to interpret the plan, select employees to participate in the Plan, determine benefit amounts, make all other decisions relating to the administration and operation of the Plan, and may promulgate rules and regulations governing the administration and operation of the Plan and its own acts and proceedings. The decisions of the Compensation Committee relating to the Plan will be final and conclusive on all persons. SECTION 3. PARTICIPANTS Participants in the Plan will be those key executive employees of the Employer selected from time to time by the Compensation Committee to participate in plan benefits. SECTION 4. BENEFITS (a) Normal Retirement Benefit. Each Participant who attains age 60 while an employee of the Employer may retire on the first day of any month thereafter and receive an annual normal retirement benefit calculated as of his or her retirement date equal to twenty-five percent (25%) of his or her Final Average Total Compensation ( as hereinafter defined) multiplied by a fraction the numerator of which is his or her Full Years of Continuous Service (hereinafter defined) (which in no event shall exceed 15) at the time of his or her retirement and the denominator of which is 15. (b) Early Retirement Benefit. Each Participant who attains age 55 while an employee of the Employer and who has completed five Full Years of Continuous Service may retire on the first day of any month thereafter and receive an annual early retirement benefit calculated as of his or her retirement date in the same manner as described in Section 4(a) above, but reduced by an amount equal to .41666% multiplied by the aggregate number of months between the date his or her benefit commences and the date he or she attains age 60. (c) Vested Benefit. Each Participant who has completed at least 10 Full Years of Continuous Service and who terminates employment prior to his or her early retirement date described in Section 4(b) above will be entitled to receive an annual vested benefit, commencing on the first day of any month after he or she attains age 55, calculated as of his or her termination of employment date in the same manner as described in Section 4(a) above, but reduced by an amount equal to .41666% multiplied by the aggregate number of months between the date his or her benefit commences and the date he or she attains age 60. (d) Payments of Benefits. The annual benefit payable to a Participant under Section 4(a), (b) or (c) above will be paid to the Participant in equal monthly installments on the first day of each month during the Participant's lifetime, and, following the Participant's death, one half of such annual benefit shall be paid in the same manner to the Participant's surviving spouse, if any, during the spouse's lifetime (but in no event shall payment to the spouse continue for more than 30 years following such date). (e) Benefit Definitions. For purposes of this Section 4, the following terms have the following meanings: (1) Final Average Total Compensation means the average of the Participant's Total Compensation for the three calendar years out of the five consecutive calendar years immediately prior to the year in which the Participant retires, in which the Participant had the highest Total Compensation. (2) Total Compensation means, for any calendar year, the Participant's base compensation and annual incentive bonus payments earned from the Employer for such calendar year, plus any amount that would have been paid to the Participant by the Employer as base compensation or incentive bonus but for a salary reduction agreement in effect during such year pursuant to Sections 125 or 401(k) of the Internal Revenue Code of 1986 as amended. (3) Full Years of Continuous Service will be based on full years and completed months of continuous service as determined by the Compensation Committee in its sole discretion. SECTION 5. PRE-RETIREMENT DEATH BENEFIT In the case of a Participant who dies after attaining the age or service requirements described in 4(a), (b) or (c) above, but prior to the commencement of his or her benefits under Section 4 above, his or her surviving spouse, if any, will be entitled to receive the following death benefit. Such death benefit, commencing with the month following the later of (i) the month in which the Participant dies or (ii) the month in which the Participant would have attained age 55, shall be payable in equal monthly installments on the first day of each month during such spouse's lifetime (but in no event shall payment to the spouse continue for more than 30 years), and shall be equal to one-half of the amount of benefit the Participant would have received if he or she had commenced receiving benefits under Section 4 above immediately prior to the later of (x) the date of the Participant's death (y) the date the Participant would have attained age 55. SECTION 6. NO PLAN ASSETS All benefits payable under the Plan will be paid from the general assets of the Employer. SECTION 7. PARTICIPANT'S RIGHTS; NO ASSIGNMENT A Participant's rights to benefits under the Plan shall be no greater than the rights of a general, unsecured creditor of the Employer, and shall not be assignable or subject to alienation, anticipation, garnishment, attachment, or any other legal process by his creditors. SECTION 8. NO CONTRACT OF EMPLOYMENT The Plan will not be deemed to constitute a contract of employment between the Employer and any Participant, or to be consideration for the employment of any Participant. SECTION 9. APPLICATION OF ERISA The Plan is intended to be "a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" within the meaning of sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended, and shall be administered in a manner consistent with that intent. SECTION 10. AMENDMENT OR TERMINATION This Plan may be amended or terminated at any time and in any respect by the Compensation Committee or the Employer. SECTION 11. GOVERNING LAW This Plan shall be governed by and construed under the laws of the Commonwealth of Massachusetts. SECTION 12. LEGAL FEES AND EXPENSES The Employer shall pay all legal fees and expenses, including but not limited to, counsel fees, stenographer fees, printing cost, etc. reasonably incurred by a Participant in obtaining any benefit to which the Participant is entitled under this Plan. IN WITNESS WHEREOF, Reebok International Ltd. has caused this Plan to be executed by its officer hereunto duly authorized this 15th day of February, 1996. REEBOK INTERNATIONAL LTD. By: /S/ JOHN B. DOUGLAS III EX-10.16 3 EXHIBIT 10.16 REEBOK INTERNATIONAL LTD. EXECUTIVE PERFORMANCE INCENTIVE PLAN 1. Purpose The purpose of the Reebok International Ltd. Executive Performance Incentive Plan (the "Plan") is to provide an incentive for corporate officers and other key employees who are in a position to contribute materially to the success of the Company and its Subsidiaries and to recognize and reward those officers and employees who make such contributions. 2. Definitions The following terms will have the following meaning for purposes of the Plan: (a) "Award" means a cash and/or stock bonus paid in accordance with Section 4. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means the Compensation Committee of the Board. (e) "Company" means Reebok International Ltd. (f) "Participant" means a corporate officer or other key employee of the Company or a Subsidiary selected by the Committee to participate in the Plan. (g) "Performance Criteria" means the following measures of performance: - net income (before or after taxes); - operating income; - revenue; - advance orders or bookings; - expenses; - return on sales; - gross or net margin; - cash flow; - earnings per share; - return on assets; - return on equity; - total shareholder return; - market share; - inventory turnover; and - stock price. A Performance Criterion may be applied by the Committee as a measure of the performance of any, all, or any combination of the following: the Company, a Subsidiary, a division, group or other unit of the Company or a Subsidiary, or a particular product category or categories of the Company or a Subsidiary. (h) "Performance Goal(s)" means the goal or goals established for a Participant by the Committee in accordance with Section 4(a). (i) "Subsidiary" means any corporation in which the Company, directly or indirectly, controls 50 percent or more of the total combined voting power of all classes of stock. (j) "Target Award" means the amount of the target award established for each Participant by the Committee in accordance with Section 4(a). 3. Term The Plan shall be effective as of January 1, 1996, subject to shareholder approval, and shall continue until December 31, 2000 unless reapproved by the Company's shareholders or unless amended or terminated pursuant to Section 9 hereof. 4. Awards (a) Within 90 days after the beginning of each fiscal year of the Company (a "year"), the Committee will select Participants for the year and establish in writing (i) objective Performance Goal or Goals for each Participant for that year based on one or more of the Performance Criteria, (ii) the specific Award amounts that will be paid to each Participant if the Performance Goal or Goals are achieved (the "Target Award") and (iii) the method by which such amounts will be calculated. At the Committee's option, the Committee may determine that all or any part of any Award may be paid in shares of Common Stock of the Company having an equivalent value to the amount of the Award to be paid in stock, which shares shall be subject to such restrictions as the Committee may determine. If the Committee determines that any part of the Award shall be paid in stock, it shall also determine the basis on which the Award will be converted into stock. (b) The maximum Award that may be paid to any Participant under the Plan for any year will be the lesser of 300% of such Participant's annual base salary in effect during such year or $3 million. (c) The Committee may reduce or eliminate, but may not increase, any Award calculated under the methodology established in accordance with paragraph (a) in order to reflect additional considerations relating to performance. (d) As soon as practicable following each year while the Plan is in effect, the Committee shall determine and certify, for each Participant, the extent to which the Performance Goal or Goals have been met and the amount of the Award, if any, to be made. Awards will be paid to the Participants in cash and/or stock, as applicable, following such certification by the Committee and no later than ninety (90) days following the close of the year with respect to which the Awards are made. (e) The Company shall withhold from any Award made hereunder any amount required to be withheld for taxes. 5. Termination of Employment A Participant shall have no right to an Award under the Plan for any year in which the Participant is not actively employed by the Company or its Subsidiaries on December 31 of such year. In establishing Target Awards, the Committee may also provide that in the event a Participant is not employed by the Company or its Subsidiaries on the date on which the Award is paid, Participants may forfeit his or her right to the Award paid under the Plan. 6. Administration The Plan will be administered by the Committee. The Committee will have the authority to interpret the Plan, to prescribe rules relating to the Plan and to make all determinations necessary or advisable in administering the Plan. Decisions of the Committee with respect to the Plan will be final and conclusive. 7. Unfunded Plan Awards under the Plan will be paid from the general assets of the Company, and the rights of Participants under the Plan will be only those of general unsecured creditors of the Company. 8. Code Section 162(m) It is the intent of the Company that all Awards under the Plan qualify as performance-based compensation for purposes of Code Section 162(m)(4)(C) so that the Company's tax deduction for such Awards is not disallowed in whole or in part under Code Section 162(m). The Plan is to be applied and interpreted accordingly. 9. Amendment or Termination of the Plan The Committee may from time to time suspend, revise, amend or terminate the Plan; provided, that any such amendment or revision which requires approval of the Company's shareholders in order to maintain the qualification of Awards as performance- based compensation pursuant to Code Section 162(m)(4)(C) shall not be made without such approval. 10. Applicable Law The Plan will be governed by the laws of The Commonwealth of Massachusetts. 11. No Rights to Employment Nothing contained in the Plan shall give any person the right to be retained in the employment of the Company or any of its Subsidiaries. The Company reserves the right to terminate any Participant at any time for any reason notwithstanding the existence of the Plan. 12. No Assignment Except as otherwise required by applicable law, any interest, benefit, payment, claim or right of any Participant under the Plan shall not be sold, transferred, assigned, pledged, encumbered or hypothecated by any Participant and shall not be subject in any manner to any claims of any creditor of any Participant or beneficiary, and any attempt to take any such action shall be null and void. During the lifetime of any Participant, payment of an Award shall only be made to such Participant. Notwithstanding the foregoing, the Committee may establish such procedures as it deems necessary for a Participant to designate a beneficiary to whom any amounts would be payable in the event of any Participant's death. 13. Stockholder Approval This Plan shall be subject to approval by a vote of the stockholders of the Company at the 1996 Annual Meeting, and such stockholder approval shall be a condition to the right of any Participant to receive any benefits hereunder. EX-10.26 4 EXHIBIT 10.26 October 30, 1995 Angel Martinez President The Rockport Company 220 Donald Lynch Boulevard Marlboro, MA 01752 Re: Amendment to Lease Dear Angel: Reference is hereby made to the Lease dated November 1, 1992 between you and Reebok International Ltd. ("Reebok"), together with the Addendum thereto (the "Lease"). Capitalized terms used herein without definition shall have the respective meanings set forth in the Lease. We agree to amend such Lease as follows: 1. The term of the Lease shall be extended for an additional period until the earlier of (a) the date of the closing of the sale of your California residence located at 3325 Mountain Park Drive, Calabases, CA 91302, (b) the date on which your employment with Reebok or its subsidiaries is terminated for any reason, or (c) October 31, 1996 (such date shall be referred to herein as the "Lease Termination Date"). 2. During such extended term, you shall be liable for rent to Reebok at a rate of $5,000 per month (pro-rated for any partial month), which rent shall be due and payable to Reebok in full on the Lease Termination Date; provided, however, that if you sell your California residence prior to May 31, 1996 and purchase the Leased Premises prior to such date, as provided in Section 3 below, Reebok will forgive the rent payments which would otherwise be due. If you fail to pay any rent owed to Reebok when due, you agree that Reebok or its subsidiaries may deduct such amount from your compensation or any other amount which Reebok or its subsidiaries, including the Rockport Company, may owe you. 3. You have decided to exercise your option to purchase the Leased Premises in accordance with the terms set forth in the Lease and it is agreed that the closing of the sale of the Leased Premises to you by Reebok pursuant to such option shall take place on the Lease Termination Date. The purchase price for the Leased Premises shall be $ 1,064,350.71, which amount was calculated in the manner provided in Section 32 of the Lease. In addition, as indicated in Section 2 above, you will pay Reebok at such time any rent due. Angel Martinez October 30, 1995 Page Two If the foregoing reflects your agreement, please so indicate by signing this letter where indicated below. Very truly yours, REEBOK INTERNATIONAL LTD. By: /S/ PAUL R. DUNCAN Paul Duncan Executive Vice President AGREED TO AND ACCEPTED BY: By: /S/ ANGEL MARTINEZ Angel Martinez EX-11 5 EXHIBIT 11 REEBOK INTERNATIONAL LTD. (Amount in thousands, except per share data) Exhibit 11 - Statement Re: computation per share earnings 1995 1994 1993 ____ ____ ____ Primary Average shares outstanding 78,317 82,228 86,462 Net effect of dilutive stock options 1,170 2,083 1,886 ________ ________ ________ TOTAL 79,487 84,311 88,348 ________ ________ ________ Net Income $164,798 $254,478 $223,415 ________ ________ ________ Per share amount $2.07 $3.02 $2.53 ________ ________ ________ Fully Diluted Average shares outstanding 78,317 82,228 86,462 Net effect of dilutive stock options 1,170 2,455 1,911 ________ ________ ________ TOTAL 79,487 84,683 88,373 ________ ________ ________ Net Income $164,798 $254,478 $223,415 ________ ________ ________ Per share amount $2.07 $3.01 $2.53 ________ ________ ________ EX-12 6 Exhibit 12
REEBOK INTERNATIONAL LTD. (Amounts in Thousands) Exhibit 12 - Statement RE: Computation of Ratio of Earnings to Fixed Charges 1995 1994 1993 1992 1991 ____ ____ ____ ____ ____ Earnings Pretax Income $264,551 $408,472 $363,247 $257,964 $389,886 Add: Interest on indebtedness 25,725 16,515 25,021 20,080 29,295 Amortization of debt discount and issuance costs 818 816 1,368 1,914 1,741 Interest on Letters of Credit included in cost of goods sold 0 0 0 40 87 Portion of rent representative of the interest factor 13,399 9,625 7,876 6,764 5,393 ________ ________ ________ ________ ________ Income as adjusted $304,493 $435,428 $397,512 $286,762 $426,402 ======== ======== ======== ======== ======== Fixed charges Interest on indebtedness 25,725 16,515 25,021 20,080 29,295 Amortization of debt discount and issuance costs 818 816 1,368 1,914 1,741 Interest on Letters of Credit included in cost of goods sold 0 0 0 40 87 Portion of rent representative of the interest factor 13,399 9,625 7,876 6,764 5,393 ________ ________ ________ ________ ________ Fixed charges $ 39,942 $ 26,956 $ 34,265 $ 28,798 $ 36,516 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 7.6 16.2 11.6 10.0 11.7
EX-21.1 7 EXHIBIT 21.1 SUBSIDIARIES OF REEBOK INTERNATIONAL LTD. Jurisdiction of Incorporation or Name Organization RBK Thailand, Inc. Massachusetts Reebok Aviation, Inc. Massachusetts Reebok CHC, Inc. Massachusetts Reebok Eastern Territories, Inc. Massachusetts Reebok Foundation, Inc. Massachusetts Reebok International Securities Corp. Massachusetts Reebok Securities Holdings Corp. Massachusetts The Reebok Worldwide Trading Company, Ltd. Massachusetts The Rockport Company, Inc. Massachusetts AVIA Group International, Inc. Delaware RFC, Inc. Delaware The Donner Mountain Corporation Oregon Reebok Austria GmbH Austria Rockport Gmbh Austria Reebok Belgium SA Belgium Reebok Do Brasil Servicos Brazil a Participacoes Ltda Rockport do Brasil - Comercio, Servicos Brazil e Participacoes Ltda. Beijing Reebok Sports Consultancy Ltd. British Virgin Islands Reebok (China) Holdings Ltd. British Virgin Islands R.C. Investments Ltd. Canada Reebok Canada Inc. Canada EXHIBIT 21.1 - Page 2 SUBSIDIARIES OF REEBOK INTERNATIONAL LTD. Jurisdiction of Incorporation or Name Organization Beijing Reebok Sports Goods Center China Reebok France (S.A.) France Rockport France S.a.r.L. France Sud Ouest Diffusion Sport France ASL - American Sports and Leisure Germany Vertriebs GMBH Reebok Deutschland GmbH Germany Reebok (China) Services Limited Hong Kong Reebok Far East Ltd. Hong Kong Reebok Trading (FAR EAST) Limited Hong Kong Reebok India Company India Reebok Technical Services Private Limited India Reebok Italia S.r.l. Italy Rockport International Trading Italy Co. Italy S.r.l. Reebok Japan Inc. Japan Rockport Japan Inc. Japan Reebok Korea Limited Korea Reebok Korea Technical Services Korea Company, Ltd. Reebok (Mauritius) Company Limited Mauritius Reebok International Finance B.V. The Netherlands Reebok Nederland B.V. The Netherlands Rockport (Europe) B.V. The Netherlands EXHIBIT 21.1 - Page 3 SUBSIDIARIES OF REEBOK INTERNATIONAL LTD. Jurisdiction of Incorporation or Name Organization Rockport (Nederland) B.V. The Netherlands Reebok (Philippines) Services Co., Inc. Philippines Reebok Poland SA Poland Reebok Russia Retail, Inc. Russia Reebok Leisure SA Spain Reebok (South Africa) (Proprietary) Limited South Africa Reebok (Switzerland) Ltd. Switzerland Reebok (Taiwan) Services Company Taiwan J.W. Foster & Sons United Kingdom (Athletic Shoes) Limited RBK Holdings plc United Kingdom Reebok Eastern Trading Limited United Kingdom Reebok International Limited United Kingdom Reebok Sports Limited United Kingdom Reebok UK Limited United Kingdom The Rockport Company Limited United Kingdom Rockport International Limited United Kingdom EX-23.1 8 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 33-24114, 33-32664 and 33-62301) and Form S-8 (File Nos. 33-6989, 33-15729, 33-53954, 33-14698, 33-15089, 33-32663, 33-54562, 33-53523, 33-53525 and 33-53537) and related prospectuses of our report dated January 30, 1996, with respect to the consolidated financial statements and schedule of Reebok International Ltd. included in this Annual Report (Form 10-K) for the year ended December 31, 1995. /S/ ERNST & YOUNG LLP Boston, Massachusetts March 25, 1996 EX-27 9
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1995 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 80,393 0 552,964 46,401 635,012 1,342,929 335,844 143,811 1,656,223 431,948 254,178 0 0 1,096 894,193 1,656,223 3,481,450 3,484,576 2,114,084 2,114,084 0 0 25,725 264,551 99,753 164,798 0 0 0 164,798 2.07 2.07
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