-----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, LO+dnLJg0L2ooUiv7cxGN5FiICqEnmjiJatZE+KFrpET4F4H7aHG/0vs1OntsJwb z9FNWYRA5a3JRh59CTK8pQ== 0000770949-98-000026.txt : 19981116 0000770949-98-000026.hdr.sgml : 19981116 ACCESSION NUMBER: 0000770949-98-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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-Q SEC ACT: SEC FILE NUMBER: 001-09340 FILM NUMBER: 98746947 BUSINESS ADDRESS: STREET 1: 100 TECHNOLOGY CTR DR CITY: STOUGHTON STATE: MA ZIP: 02072 BUSINESS PHONE: 7814015000 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 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 (I.R.S. Employer incorporation or organization) Identification No.) 100 Technology Center Drive, Stoughton, Massachusetts 02072 - ----------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (781) 401-5000 - ----------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) The number of shares outstanding of registrant's common stock, par value $.01 per share, at November 6, 1998, was 56,444,900 shares. REEBOK INTERNATIONAL LTD. INDEX PART I. FINANCIAL INFORMATION: Item 1 Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - September 30, 1998 and 1997, and December 31, 1997 . . . . . . . . . . . . . . . . . 3-4 Condensed Consolidated Statements of Income - Three and Nine Months Ended September 30, 1998 and 1997. 5 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997 . . . 6-7 Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 8-11 Item 2 Management's Discussion and Analysis of Results Of Operations and Financial Condition . . . . . . . 12-21 Part II. OTHER INFORMATION: Items 1-4 Not Applicable . . . . . . . . . . . . . . . . . . . 22 Item 5 Other Information . . . . . . . . . . . . . . . . . . 22 Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . 22-23 2 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
September 30, December 31, 1998 1997 1997 ---- ---- ---- (Unaudited) (See Note 1) Current assets: Cash and cash equivalents $ 99,021 $ 139,906 $ 209,766 Accounts receivable, net of allowance for doubtful accounts (September 1998, $51,678; September 1997, $47,597; December 1997, $44,003) 617,353 744,660 561,729 Inventory 535,734 562,829 563,735 Deferred income taxes 79,183 79,078 75,186 Prepaid expenses and other current assets 50,971 48,378 54,404 Refundable income taxes 36,078 Total current assets 1,382,262 1,610,929 1,464,820 --------- --------- --------- Property and equipment, net 174,286 169,022 156,959 Non-current assets: Intangibles, net of amortization 62,344 67,187 65,784 Deferred income taxes 21,037 9,022 19,371 Other 41,643 52,339 49,163 125,024 128,548 134,318 --------- --------- --------- Total Assets $1,681,572 $1,908,499 $1,756,097 ========= ========= =========
3 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Amounts in thousands)
September 30, December 31, 1998 1997 1997 ---- ---- ---- (Unaudited) (See Note 1) Current liabilities: Notes payable to banks $ 45,541 $ 85,886 $ 40,665 Current portion of long-term debt 60,572 104,704 121,000 Accounts payable 190,412 193,196 192,142 Accrued expenses 207,617 241,367 219,386 Income taxes payable 20,381 52,632 4,260 ---------- ---------- ---------- Total current liabilities 524,523 677,785 577,453 ---------- ---------- ---------- Long-term debt, net of current portion 578,614 683,012 639,355 Minority interest 34,706 38,820 32,132 Commitments and contingencies Outstanding redemption value of equity put options 16,559 Stockholders' equity: Common stock, par value $.01; authorized 250,000 shares; issued September 30, 1998, 93,161; issued September 30, 1997, 93,001; issued December 31, 1997, 93,116 932 930 931 Retained earnings 1,162,019 1,139,008 1,145,271 Less 36,716 shares in treasury at cost (617,620) (617,620) (617,620) Unearned compensation (41) (172) (140) Foreign currency translation adjustment (18,120) (13,264) (21,285) ---------- ---------- ---------- 527,170 508,882 507,157 ---------- ---------- ---------- Total liabilities and stockholders' equity $1,681,572 $1,908,499 $1,756,097 ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $ 878,335 $1,009,053 $2,519,026 $2,780,153 Other expense (6,280) (3,141) (11,869) (2,828) 872,055 1,005,912 2,507,157 2,777,325 Costs and expenses: Cost of sales 546,341 638,842 1,592,651 1,730,202 Selling, general and administrative expenses 267,623 259,129 786,495 805,526 Special charge 33,161 35,000 33,161 Amortization of intangibles 846 856 2,588 2,476 Interest expense 15,939 16,111 50,164 48,329 Interest income (3,737) (2,311) (11,962) (6,803) --------- ---------- ---------- ---------- 827,012 945,788 2,454,936 2,612,891 --------- ---------- ---------- ---------- Income before income taxes and minority interest 45,043 60,124 52,221 164,434 Income tax expense 14,500 (18,150) 16,811 19,550 --------- ---------- ---------- ---------- Income before minority interest 30,543 78,274 35,410 144,884 Minority interest 2,314 4,306 4,392 10,410 --------- ---------- ---------- ---------- Net income $ 28,229 $ 73,968 $ 31,018 $ 134,474 ========= ========== ========== ========== Basic earnings per share $ .50 $ 1.31 $ .55 $ 2.40 ========= ========== ========== ========== Diluted earnings per share $ .50 $ 1.26 $ .54 $ 2.30 ========= ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Nine Months Ended September 30, ---------------- 1998 1997 ---- ---- Cash flows from operating activities: Net income $ 31,018 $ 134,474 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 35,981 33,735 Minority interest 4,393 10,410 Deferred income taxes (5,141) (10,828) Special charge 35,000 33,161 Changes in operating assets and liabilities: Accounts receivable (36,844) (175,071) Inventory 36,732 (36,129) Prepaid expenses 4,122 (22,489) Other 6,150 16,042 Accounts payable (7,611) 6,288 Accrued expenses (50,314) 47,676 Income taxes payable 15,341 (12,887) Refundable income taxes (36,078) ---------- ---------- Total adjustments 37,809 (146,170) ---------- ---------- Net cash provided by (used for) operating activities 68,827 (11,696) ---------- ---------- Cash flows from investing activity: Payments to acquire property and equipment (45,610) (23,215) ---------- ---------- Net cash used by investing activity (45,610) (23,215) ---------- ----------
6 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd) (Amounts in thousands) (Unaudited)
Nine Months Ended September 30, ---------------- 1998 1997 ---- ---- Cash flows from financing activities: Net borrowings of notes payable to banks $ 3,125 $ 67,659 Payments of long-term debt (121,049) (131,098) Proceeds from issuance of common stock to employees 3,470 11,971 Proceeds from premium on equity put options 2,002 Dividends to minority shareholders (6,649) (1,600) Repurchases of common stock (3,181) -------- -------- Net cash used for financing activities (122,282) (53,068) -------- -------- Effect of exchange rate changes on cash and cash equivalents (11,680) (4,480) -------- -------- Net decrease in cash and cash equivalents (110,745) (92,459) -------- -------- Cash and cash equivalents at beginning of period 209,766 232,365 -------- --------- Cash and cash equivalents at end of period $ 99,021 $ 139,906 ======== ========= Supplemental disclosures of cash flow information: 1998 1997 ---- ---- Cash paid during the period for: Interest $ 35,551 $ 46,659 Income taxes 23,879 43,929
The accompanying notes are an integral part of the condensed consolidated financial statements. 7 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollar amounts in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- Basis of Presentation - --------------------- The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals, as well as special charges) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim period. The interim financial information and notes thereto should be read in conjunction with the Company's latest annual report to shareholders. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of results to be expected for the entire year. Certain amounts in the prior year have been reclassified to conform to the 1998 presentation. Recently Issued Accounting Standards - ------------------------------------ During 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" ("Statement 130"). The Company will adopt the provisions of Statement 130 for fiscal year end 1998. Comprehensive income is generally defined as all changes in stockholders' equity exclusive of transactions with owners such as capital investments and dividends. Comprehensive income for the quarters ended September 30, 1998 and September 30, 1997 was $33,267 and $68,413 respectively. Comprehensive income for the nine months ended September 30, 1998 and 1997 was $34,183 and $115,562, respectively. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("Statement 131"). The Company will adopt the provisions of Statement 131 for fiscal year end 1998. 8 NOTE 2 - SPECIAL CHARGE - ----------------------- In the first quarter of 1998, the Company recorded a special charge of $35,000, amounting to approximately $23,700 after taxes, or $0.42 per share in connection with the Company's ongoing business re-engineering efforts. The charge was for personnel related expenses and certain other expenses associated with the restructuring or adjustment of underperforming marketing contracts. The business re-engineering, which will result in the termination of approximately 485 full-time positions, should enable the Company to achieve greater operating efficiencies by reducing management layers, combining business units and centralizing various business functions. The underperforming marketing contracts are being terminated or restructured to focus the Company's spending on those key athletes and teams who are more closely aligned with its brand positioning. The charge covers certain one-time expenses, substantially all of which will affect cash. The components of the first quarter 1998 charge are presented below with additional information concerning the activities affecting the reserve for special charges:
Balance Q1 98 Nine Months Balance 12/31/97 Additions Payments/ 9/30/98 Utilization -------- --------- ----------- ------- Marketing contracts $ 25.0 M $ 18.5 M $(24.2) M $ 19.3 M Fixed asset write-downs 6.9 (.1) 6.8 Employee severance 8.4 14.8 (13.3) 9.9 Termination of leases and other 6.8 1.7 (4.2) 4.3 ------ ------- -------- ------- $ 47.1 M $ 35.0 M $(41.8) M $ 40.3 M ======== ========= ========= ========
9 NOTE 3 - EARNINGS PER SHARE - --------------------------- The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands, except per share data):
Three Months Ended Nine Months Ended September 30 September 30 ------------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Numerator: Net income $ 28,229 $ 73,968 $ 31,018 $134,474 ------- ------- ------- ------- Denominator for basic earnings per share: Weighted average shares 56,445 56,258 56,376 56,115 Dilutive employee stock options and equity put options 445 2,483 696 2,318 ------- ------- ------- ------- Denominator for diluted earnings per share: Weighted average shares and assumed conversions 56,890 58,741 57,072 58,433 ======= ======= ======= ======= Basic earnings per share $ .50 $ 1.31 $ .55 $ 2.40 Diluted earnings per share $ .50 $ 1.26 $ .54 $ 2.30
NOTE 4 - CONTINGENCIES - ---------------------- The Company is involved in various legal proceedings generally incidental to its business. While it is not feasible to predict or determine the outcome of these proceedings, management does not believe that they should result in a materially adverse effect on the Company's financial position, results of operations or liquidity. Included in these proceedings is a lawsuit filed by a former distributor in Brazil in which the plaintiff asserted a claim for 10 damages in excess of $50,000. In April 1998, a court of first instance in Brazil awarded this distributor damages of approximately $15,000, plus interest and attorney's fees. The Company appealed the ruling to a three-judge panel of the appellate court which upheld the trial court's decision by a vote of two to one. Because the appellate decision was not unanimous, the case is now being referred to a new panel of five appellate judges from the same court, who will decide the case on a de novo basis which means that the appellate panel will not have any obligation to defer to the factual or legal conclusions of the trial court or the first appellate panel, but the amount awarded must be within the parameters established by the minority and majority decisions of the prior appellate panel (a range from $72 to $15,000, plus interest and attorney's fees). The Company continues to believe the trial court's decision is in error and will aggressively pursue all rights of appeal available to it. NOTE 5 - EQUITY PUT OPTIONS - --------------------------- From time to time the Company issues equity put options as part of its ongoing share repurchase programs. The redemption value of the options, which represents the option price multiplied by the number of shares under option, is presented in the accompanying condensed consolidated balance sheet as "Outstanding redemption value of equity put options." At September 30, 1998, 625 shares of outstanding common stock are subject to repurchase at prices ranging from $26.173 to $26.975 under the terms and conditions of these options. The outstanding options expire in January 1999. NOTE 6 - STOCK OPTION EXCHANGE AND RESTRUCTURING PROGRAM - -------------------------------------------------------- On October 6, 1998, the Board of Directors approved a stock option exchange and restructuring program pursuant to which certain current employees of the Company that held stock options with exercise prices above market could elect to exchange all or none of their then outstanding employee stock options for a smaller number of new options, with a new four year vesting schedule. The number of existing outstanding option shares to be exchanged for the new option shares is at a ratio of 1.25:1. The new options have an exercise price of $12.625 per share, the closing price of Reebok common stock on October 6, 1998. Executive officers of the Company who are also directors and various other option holders were not eligible to participate in this program. Of the 9,932 option shares outstanding under the Company's stock option programs as of October 6, 1998, approximately 3,900 option shares (or approximately 40%) were eligible for this exchange and restructuring program. Substantially all of these options were exchanged by employees under the program. 11 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion contains forward-looking statements about the Company's revenues, earnings, spending, margins, orders, products, plans, strategies and objectives. Any such statements are subject to risks and uncertainties that could cause the Company's actual results to 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 underlying such expectations or forecasts, become inaccurate. 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 include, but are not limited to, those discussed below and those described in Exhibit 99 - Issues and Uncertainties filed with this quarterly report on Form 10-Q. Operating Results - ----------------- Third Quarter 1998 Compared to Third Quarter 1997 - --------------------------------------------------- Net sales for the quarter ended September 30, 1998 were $878.3 million, a decrease of 13.0% from 1997's third quarter net sales of $1.009 billion. The Reebok Division's worldwide sales (which includes sales of the Greg Norman Division) were $731.1 million, a 15.1% decrease from sales of $861.1 million in the third quarter of 1997. Reebok Brand's U.S. footwear sales decreased 8.8% to $278.3 million in the third quarter of 1998 from $305.3 million in the third quarter of 1997. U.S. footwear sales of the Reebok Brand continued to be adversely impacted by over- capacity in the market due to significant retail expansion in the past few years and by changing consumer preferences. This has resulted in inventory backups for various brands and heavy promotional activity to sell the excess inventory. U.S. footwear categories that generated sales increases in the third quarter of 1998 were running, led by the Company's leadership DMX product, classics, children's and outdoor. These increases were offset by declines in most other categories principally men's and women's cross-training and walking. U.S. apparel sales decreased in the third quarter by 25.0% to $92.0 million from $122.7 million in the third quarter of 1997. Increased sales of apparel in the Company's 12 retail outlet stores and its Greg Norman Division were more than offset by declines in Reebok branded and licensed apparel. The Company is in the process of repositioning the U.S. apparel business by upgrading its product offerings and exiting many of its unprofitable licensed apparel contracts. International sales of the Reebok Division (including footwear and apparel) were $360.8 million in the third quarter of 1998, a decrease of 16.7% from $433.1 million in the third quarter of 1997. The European region reported a sales increase during the quarter whereas all other International regions reported sales declines. The Company's sales performance is being adversely affected by economic conditions in Asia Pacific, Latin America and Russia. As compared with 1997's third quarter, sales in Asia Pacific declined 60% or $52 million in the quarter, and footwear sales to unconsolidated Latin American distributors declined by 65% or approximately $30 million. Another factor affecting International sales comparisons is currency; particularly in Russia and Asia Pacific. Fluctuations in foreign currency exchange rates account for approximately a 3% decline in sales in the quarter. During the quarter, International sales of footwear declined while International apparel sales increased. Most of the Reebok Division's International footwear categories declined during the quarter, however, the outdoor category had sales increases. During the third quarter of 1998, apparel sales accounted for 46.7% of Reebok's International Division's sales, as compared with 36.1% of sales in the third quarter of 1997. Rockport's third quarter sales were $147.2 million approximately the same as in the third quarter of 1997. Domestic sales for the Rockport brand decreased by 9.4% while International sales increased by 32.1%. The Company believes the domestic sales decline was due to a generally weak month of September at retail for department stores which impacted Rockport's fill-in business as retailers managed their inventories down. During the quarter, Rockport continued to expand its retail presence and is planning additional expansion for the fourth quarter. For the period from September to December, the Company's current plans call for installing an additional 241 powershop doors. This is in addition to the 178 installed from January through August. The Ralph Lauren Footwear Division, which is included in Rockport's reported sales, had a sales increase of 2.3% in the third quarter of 1998, as compared to the third quarter of 1997. In Spring 1999, the Company expects to expand the Polo Sport segment of the Ralph Lauren/Polo Sport footwear business and in the Fall of 1999 expects to debut a separate Lauren product segment. During the third quarter, the Company's overall gross margin was 37.8% of sales which is an increase from the second quarter 13 rate of 36.9%, and an improvement from 1997's third quarter gross margin of 36.7%. This improving trend which began in the second quarter of 1998 is the result of manufacturing efficiencies the Company is achieving with technology products and from sourcing changes initiated to take advantage of currency opportunities in the Far East. Much of the improvement was offset by a greater percentage of the Company's business being off-price due to the promotional activity in the market. International margins continue to be adversely affected by the strong U.S.dollar. Selling, general and administrative expenses for the third quarter of 1998 were $267.6 million, or 30.5% of sales, as compared to $259.1 million, or 25.7% of sales in 1997's third quarter. The increased spending is attributable to the expansion of retail presence for all the Company's brands and investments in advertising, research, design and development. In addition, in the third quarter of 1998, the Company incurred start-up expenses for its European logistics and shared service companies as well as its global information system re-engineering efforts. These start-up expenses, which are mostly redundant in nature, amounted to approximately $10.0 million for the third quarter. Of this amount, $8.6 million is included in selling, general and administrative expenses and $1.4 million is included in cost of sales. These start-up expenses are expected to aggregate approximately $40-$50 million for the full year 1998. The Company expects to incur additional start-up expenses during most of 1999 until such time as these business re-engineering efforts are fully implemented. The Company has benefited from the various cost reduction programs initiated last year as all other selling, general and administrative expenses declined from last year's level by approximately $17 million. Net interest expense decreased for the third quarter of 1998 as compared to the third quarter of 1997 as a result of debt repayments. Other expense was $6.3 million for the quarter, an increase of $3.1 million from last year's third quarter. The increase is primarily due to the currency devaluation in Russia and the Company's share of losses in certain Latin American joint ventures. The effective income tax rate was approximately 32% in the third quarter of 1998 as compared to 36% in the third quarter of 1997 and 33% for the full year 1997 (exclusive of certain one-time tax benefits received in 1997). Looking forward, dependent on the geographic mix of earnings in 1998, the Company expects the third quarter 1998 rate to be indicative of the full year 1998 rate. 14 First Nine Months 1998 Compared to First Nine Months 1997 - ------------------------------------------------------- Net sales for the nine month period ended September 30, 1998 were $2.519 billion, a decrease of 9.4% from 1997's net sales of $2.780 billion. The Reebok Division's worldwide sales (which includes sales of the Greg Norman Division) were $2.116 billion, an 11.7% decrease from sales of $2.395 billion in 1997. Reebok Brand's U.S. footwear sales decreased 11.3% to $840.8 million in the first nine months of 1998 from $948.4 million in the 1997 period. U.S. footwear sales of the Reebok Brand continued to be adversely impacted by over-capacity in the market due to significant retail expansion in the past few years and by changing consumer preferences. This has resulted in inventory backups for various brands and heavy promotional activity to sell the excess inventory. U.S. footwear categories that generated sales increases in the nine month period of 1998 were running, led by the Company's leadership DMX product, classics, children's and outdoor. These increases were offset by declines in most other categories, principally men's and women's cross-training and walking. U.S. apparel sales decreased in the first nine months by 13.0% to $268.6 million from $308.6 million in 1997. Increased sales of apparel in the Company's retail outlet stores and its Greg Norman Division were more than offset by declines in Reebok branded and licensed apparel. The Company is in the process of repositioning the U.S. apparel business by upgrading its product offerings and existing many of its unprofitable licensed apparel contracts. International sales of the Reebok Division (including footwear and apparel) were $1.007 billion in the first nine months of 1998, a decrease of 11.6% from $1.138 billion in the first nine months of 1997. The European region reported a sales increase during the nine months, whereas all other International regions reported sales declines. The Company's sales performance is being adversely affected by economic conditions in Asia Pacific, Latin America and Russia. As compared to the first nine months of 1997, sales in Asia Pacific declined 45% or approximately $105 million in the first nine months and footwear sales to unconsolidated Latin American distributors declined by 53% or approximately $48 million. Another factor affecting International sales comparisons is currency; particularly in Russia and Asia Pacific. Fluctuations in foreign currency exchange rates account for approximately a 5% decline in sales in the nine month period. During the nine month period, International sales of footwear declined, and apparel sales increased slightly. Most of the Reebok Division's International footwear categories declined during the nine month period, however, the classics and children's categories 15 had sales increases. During the first nine months of 1998, apparel sales accounted for approximately 40.6% of Reebok's International Division's sales, as compared with 35.5% of sales in the first nine months of 1997. Rockport's sales for the first nine months increased by 4.7% to $403.1 million from $384.9 million in the first nine months of 1997. Domestic sales of the Rockport brand were flat while its International sales increased by 12.2%. During the nine months, Rockport continued to expand its retail presence and is planning additional expansion for the fourth quarter. For the period from September to December, the Company's current plans call for installing an additional 241 powershop doors. This is in addition to the 178 installed from January through August. The Ralph Lauren Footwear Division, which is included in Rockport's reported sales, had a sales increase of 13.9% in the first nine months of 1998 as compared to the first nine months of 1997, with all of the increase coming from the Polo Sport segment. In Spring 1999, the Company expects to expand the Polo Sport segment of the Ralph Lauren/Polo Sport footwear business and in the Fall of 1999, expects to debut a separate Lauren product segment. During the first nine months of 1998, the Company's overall gross margin was 36.8% of sales which is down from last year's rate of 37.8% but an improvement when compared to the first six months of 1998, when the rate was 36.2%. This improving trend is the result of manufacturing efficiencies the Company is achieving with technology products and from sourcing changes initiated to take advantage of currency opportunities in the Far East. Much of the improvement was offset by a greater percentage of the Company's business being off-price due to the promotional activity in the market. International margins continue to be adversely affected by the strong U.S. dollar. Selling, general and administrative expenses for the first nine months of 1998 were $786.5 million, or 31.2% of sales, as compared to $805.5 million, or 29.0% of sales in the first nine months of 1997. The increased spending as a percentage of sales is attributable to the expansion of retail presence for all the Company's brands and investments in advertising, research, design and development. In addition, in the first nine months of 1998 the Company incurred start-up expenses for its European logistics and shared service companies as well as its global information system re-engineering efforts. These start-up expenses, which are mostly redundant in nature, amounted to approximately $32.7 million for the 1998 nine month period. Of this amount, $23.3 million is included in selling, general and administrative and $9.4 million is included in cost of sales. These expenses are expected to aggregate approximately $40-$50 million for the full 16 year. The Company expects to incur additional start-up expenses during most of 01999 until such time as these business re-engineering efforts are fully implemented. The Company has benefited from the various cost reduction programs initiated last year, as all other selling, general and administrative expenses declined from last year's level by approximately $57 million. Net interest expense decreased for the first nine months of 1998 as compared to the first nine months of 1997 as a result of debt repayments. Other expense was $11.9 million for the first nine months, an increase of $9.0 million from last year's first nine months. This increase is primarily due to the currency devaluation in Russia and the Company's share of losses in certain Latin American joint ventures as well as foreign exchange losses on various unhedged positions. The effective income tax rate was approximately 32% for the first nine months of 1998 as compared to 36% in the first nine months of 1997 and 33% for the full year 1997 (exclusive of certain one-time tax benefits received in 1997). Looking forward, dependent on the geographic mix of earnings in 1998, the Company expects that the full year 1998 rate will approximate the rate during the first nine month period. Reebok Brand Backlog of Open Orders - ----------------------------------- The Reebok Brand backlog of open customer orders for the period October 1 through March 31, 1999 decreased 14.7% as compared to the same period last year. North American backlog, which includes the U.S. and Canada, decreased 22.9%, whereas, the International backlog increased 2.5%. On a constant dollar basis, International backlog decreased 2.8%. U.S. footwear backlog decreased 22.6% and U.S. apparel backlog decreased 30.7% as compared to the same period last year. U.S. backlog comparisons are against a period last year which was not significantly impacted by the industry slowdown which began in the back-to-school period of 1997. That retail slowdown has continued during 1998 and has resulted in higher retail cancellations and returns. In addition, the Company believes retailers are leaving more open-to-buy dollars available for at-once business. These changes in business conditions suggest that these percentage decreases in open backlog in the U.S. are not necessarily indicative of future sales trends. In addition, many orders are cancelable, sales by Company-owned retail stores can vary from year to year, many markets in South America and Asia Pacific are not included in the open orders since sales are made by independent distributors and the ratio of orders booked early to at-once shipments can vary from period to period. 17 Liquidity and Sources of Capital - -------------------------------- The Company's financial position remains strong. Working capital was $857.7 million at September 30, 1998 and $933.1 million at September 30, 1997. The current ratio at September 30, 1998 was 2.6 as compared to 2.4 to 1 at September 30, 1997 and 2.5 to 1 at December 31, 1997. Accounts receivable decreased from September 30, 1997 by $127.3 million, a decrease of 17.1%. The decrease is partially due to the sales decline and partially due to improved cash collections in the U.S. as compared to the first nine months of 1997. Inventory decreased $27.1 million or 4.8% from September 30, 1997. In the U.S., the Company's footwear inventories are down 16%, a little less than the corresponding backlog decline. U.S. apparel inventories are down 20% and retail inventories are down 8% from last year. Inventories outside the U.S. are down slightly, but the quality of these inventories has improved, with much more of the inventory being current product. Cash provided by operations during the first nine months of 1998 was $68.6 million, as compared to cash used for operations of $11.7 million during the first nine months of 1997, an $80.3 million improvement despite lower earnings. Because of the improvement in cash flow, the Company elected to pre-pay its scheduled fourth quarter debt amortization in September. In addition, in cooperation with its bank group, the Company has amended certain of its credit arrangements to relax its debt to operating cash flow ratio covenant through December 31, 1999, at no additional cost to the Company. All other material terms and conditions of the credit arrangements remain unchanged. Cash generated from operations during the balance of 1998, together with the Company's existing credit lines and other financial resources, is expected to adequately finance the Company's current and planned 1998 cash requirements. However, the Company's actual experience may differ from the expectations set forth in the preceding sentence. Factors that might lead to a difference include, but are not limited to, the matters discussed in Exhibit 99 - Issues and Uncertainties filed herewith, as well as future events that might have the effect of reducing the Company's available cash balances (such as unexpected operating losses or increased capital or other expenditures, as well as increases in the Company's inventory or accounts receivable) or future events that might reduce or eliminate the availability of external financial resources. 18 Year 2000 Readiness Disclosure - -------------------- The year 2000 issue, which is common to most corporations, concerns the inability of information technology (IT) systems, including computer software programs, as well as non-IT systems, to properly recognize and process date sensitive information related to the year 2000 and beyond. This could potentially cause a system failure or miscalculation that could disrupt operations. In order to determine the Company's readiness for the year 2000, the Company has conducted a global review of both its IT and non-IT systems to identify the systems that could be affected by the technical problems associated with the year 2000. As part of this review, a management team was selected to inventory all IT (mainframe, network and desktop hardware and software), and non-IT embedded systems (security, fire prevention, elevators, climate control systems, etc.) to address the year 2000 issue, including an assessment of the costs required to effect such a plan. The team is currently in the process of evaluating these inventoried items to determine a remediation method and implementation plan. A significant portion of the IT evaluation is complete and the non-IT evaluation is in process and is expected to be complete by December 1998. In 1993 the Company developed a strategic information systems plan which provided for the adoption of a new global information systems infrastructure which would substantially improve the Company's systems capability. This new global system will replace substantially all legacy systems with year 2000 compliant software and will thus also address the year 2000 issue. The Company began investments in this new global strategic system in 1994, with investments continuing each year thereafter and expected to continue through the year 2000. The global SAP system being adopted by the Company did not previously have an appropriate application for the footwear and apparel industry. Thus the Company, together with its software vendor and another company in the apparel industry, developed a new software application for the footwear and apparel industry which is now being implemented by the Company. The Company believes that, with modifications to existing software and converting to SAP software and other packaged software, the year 2000 will not pose significant operational problems for the Company's computer systems. However, if the modifications and conversions are not implemented or completed in a timely or effective manner, the year 2000 problem could have a material adverse impact on the operations and financial condition of the Company. In addition, in converting to SAP software, the Company is relying on its software partner to develop and support new software applications and there could be 19 problems in successfully developing and implementing such new applications. The Company is the first in the apparel and footwear industry to implement this new software application and, because of the year 2000 time restraints, the schedule for implementation is accelerated. Thus there are substantial risks that problems could arise in implementation or that the system may not be fully effective by the end of 1999. The SAP system has been installed and implementation has been substantially completed in one of the Company's business units, as well as in certain other functional areas. The system is now being configured for rollout to other operating units. The Company also plans to do testing of its year 2000 readiness during 1999. Because the Company's conversion to SAP software will replace much of the Company's software with year 2000 compliant systems, it is difficult to segregate the incremental costs associated with the year 2000 issue. The Company expects that the total costs of converting to the global SAP system will be approximately $75 million, of which approximately $50 million has been spent to date. Capitalized costs which are included in this estimate are expected to be approximately $30 million. These costs do not include internal staffing costs. These estimates assume that the Company will not incur significant year 2000 related costs on behalf of its suppliers, customers or other third parties. The Company is also focusing on major suppliers and customers to assess their compliance with the year 2000. This effort is being handled internally and is currently in process. The Company will be assessing its largest customers and vendors to determine that their operations are year 2000 compliant. The Company is also developing plans to test year 2000 compliance with significant suppliers during 1999 and will use the results of such tests to determine if contingency plans are necessary and to prepare such plans. The Company is dependent on its suppliers, joint venture partners, independent distributors and customers to implement appropriate changes to their computer systems to address the year 2000 issue. The failure of such third parties to effectively address such an issue could have a material adverse effect on the Company's business. Contingency plans for year 2000-related interruptions are being developed and will include, but not be limited to, the development of emergency backup and recovery procedures, remediation of existing systems parallel with implementation of the new systems, and replacing electronic applications with manual processes. These contingency plans are, however, subject to variables and uncertainties. There can be no assurance that the Company will correctly anticipate the level, impact or duration of potential non-compliance or that its contingency plans will be sufficient to mitigate the impact of any potential failures. 20 Estimates of time and cost and risk assessments are based on currently available information. Developments that could affect such estimates and assessments include, but are not limited to, the ability to hold to the schedule defined for SAP and other package conversion; the ability to remediate all relevant computer code for those limited applications targeted to be remediated; cooperation and remediation success of the Company's suppliers and customers; and the ability to implement suitable contingency plans in the event of year 2000 system failures at the Company or its suppliers or customers. 21 PART II - OTHER INFORMATION Item 1 - 4 Not applicable Item 5 Advance Notice Provision and Discretionary Voting Authority Under the Company's bylaws, stockholders who wish to make a proposal at the 1999 Annual Meeting - other than one that will be included in the Company's proxy materials - must notify the Company no earlier than January 5, 1999 and no later than February 19, 1999, or if the meeting is called for a date which is more than 75 days prior to the anniversary date of the 1998 Annual Meeting, not later than the close of business on the 10th day following the date notice of such meeting is mailed or made public, whichever is earlier. Under recent changes to the Federal proxy rules, if a stockholder who wishes to present such a proposal fails to notify the Company by the date required by the Company's bylaws, then the proxies that management solicits for the 1999 Annual Meeting will include discretionary authority to vote on the stockholder's proposal in the event it is properly brought before the meeting notwithstanding the Company's bylaws. Item 6 (a) Exhibits: 10.1 Letter Agreement dated July 14, 1998 between Robert Meers and Reebok International Ltd. 10.2 Employment Agreement dated September 8, 1998 between Carl J. Yankowski and Reebok International Ltd. 10.3 Promissory Note dated September 11, 1998 by Carl J. Yankowski to Reebok International Ltd. 27. Financial Data Schedule 99. Issues and Uncertainties 22 (b) Reports on Form 8-K: A report on Form 8-K was filed by the Company on October 7, 1998 to report the Company's stock option exchange and restructuring program. A report on Form 8-K was filed by the Company on October 22, 1998 to report amendments to the Company's Amended and Restated Credit Agreement and Guarantee Agreement and its Participation Agreement. 23 SIGNATURE Pursuant to the requirements 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. Dated: November 13, 1998 REEBOK INTERNATIONAL LTD. BY: /s/ KENNETH WATCHMAKER ------------------------- Kenneth Watchmaker Executive Vice President and Chief Financial Officer 24 EX-10.1 2 EXHIBIT 10.1 To: Bob Meers From: Paul Fireman Date: July 14, 1998 This letter agreement (the "Agreement") will confirm the terms of your employment relationship with Reebok International Ltd. (the "Company" or "Reebok") from the date of this agreement forward. From the date of this Agreement until your employment ends on December 31, 1999 (the "Employment Period"), you will continue to be employed by Reebok under the following terms: We have agreed that, effective immediately, you will move into a "special assignments" role, taking on such responsibilities as may be requested by the Chairman and C.E.O. of the Company. Your first assignment will be to drive Sales Operations for the Reebok Brand. You will retain your title as President of the Reebok Brand while in this role. You understand that your title will change as your assignments change during the course of this agreement. You also agree to resign your position as a Director of the Company when a new President of the Reebok Brand is hired, or at such earlier time as requested by me. Future assignments may include, at the Company's option, some or all of the following: assisting the new President of the Reebok Brand and other executives of the Company in transition matters, assistance in relationship-building with key retailers, helping to facilitate the international expansion of the Greg Norman brand, assisting with the rollout of Reebok concept stores, consultation in building of a Reebok Classics brand, work in connection with developing strategic alliances, and such other projects as may be requested by the Chairman and C.E.O. of the Company. You will continue to receive your current base salary of $750,000.00 per year and the employee benefits which you currently receive from Reebok throughout the Employment Period. Your salary will not be reviewed or adjusted in March 1999. In addition, you will continue to be eligible to participate in the Management Performance Incentive Plan for 1998, subject to the terms and conditions of such plan, with a target bonus of 100% of your base salary. Your eligibility for incentive compensation under the plan will depend on achievement of the previously-established financial performance targets for the Company and the Reebok Brand, as well as individual performance objectives which will be established for your new "special assignments" role. There will be no bonus eligibility for calendar year 1999. During the Employment Period, you will continue to vest for purposes of the Supplemental Executive Retirement Plan and the Reebok Profit Sharing and Retirement Plan. Your entitlement to the salary continuation, bonus eligibility, vesting and all other benefits discussed in this Agreement, of course, ceases if you voluntarily leave Reebok at any time prior to expiration of the Employment Period. Assuming you do not voluntarily leave the Company, you will continue the normal vesting of your stock options throughout the Employment Period as specified in your stock option grant certificates, as well as the Company's 1985 Stock Option Plan (for options granted prior to 1994) and its 1994 Equity Incentive Plan (collectively, the "Plan Documents"). Assuming continued employment through December 31, 1999, a summary of your options which will have vested by that date appears on Schedule 1. Any unvested stock options held by you will automatically be canceled on your last day of employment. The time frame for exercising any vested options will be governed by the terms of your applicable stock option grant certificates and the Plan Documents, including the provisions on retirement, which provide a period of three years following termination of employment for exercise of previously vested options. Notwithstanding the foregoing, please note that if the Company terminates your employment for "cause" (as defined below), you will have only a 90 day period following the date of your separation in which to exercise your vested shares, any unvested stock options held by you will automatically be canceled as of that termination date, and the Company shall have no further obligations to you pursuant to this Agreement. For purposes of this Agreement, "cause" shall mean the following: (1) your conviction of a felony or of a misdemeanor involving moral turpitude which has a material adverse effect on Reebok or your ability to perform your obligations hereunder; (2) any conduct on your part amounting to fraud or gross misconduct; (3) violation of your non-competition or confidentiality obligations set forth in your Non-Competition and Employee Agreements (attached as Schedule 2 to this letter); or (4) your repeated failure (after notice) to act in good faith in the performance of your obligations hereunder. Your last day of employment will be considered your separation date ("Separation Date"). The only circumstance in which your Separation Date will be different than December 31, 1999 will be in the event of termination for cause, as discussed above. You will be eligible on the Separation Date for continuation of health benefits under the federal law known as COBRA. You will receive detailed information about COBRA, and how to elect coverage, on or about the Separation Date. If you elect COBRA, your qualifying start date will be the Separation Date. Your existing life, AD&D and supplemental life insurance will remain in effect for 30 days from the Separation Date. During that period you may elect to convert such insurance to an individual policy. You agree that, with the exception of the foregoing, your participation in all other Company benefit programs will terminate on the Separation Date. You acknowledge that, by signing this agreement, you will waive your rights to any severance, or other severance-related compensation or benefits, except as expressly set forth in this Agreement. You agree that you will comply with the obligations set forth in your Reebok Employee Agreement and the Non-Competition Agreement, and that after the Separation Date, you will comply with the post-termination obligations of both agreements. Furthermore, you agree, as a condition of this Agreement, not to discuss with any third party, other than prospective employers, your attorney or other advisor or family members, anything related to your employment by the Company, the termination of that employment or the terms of this Agreement. You also agree that you will not disparage the Company or any of its employees, products, policies, decisions, advertising, marketing or other programs. You agree that the obligations described in this paragraph will survive the termination of this Agreement. Reebok wants to be certain that the payment and provision of the compensation and benefits set forth in this Agreement will resolve any and all dissatisfactions that you might have and, in that regard, requests that you carefully consider the following Release of All Claims. The provision of these financial and other benefits is conditioned upon your signing this Agreement, which includes the following Release of All Claims. RELEASE OF ALL CLAIMS THIS AGREEMENT SHALL BE IN COMPLETE AND FINAL SETTLEMENT OF, AND RELEASES THE COMPANY AND ALL THOSE CONNECTED WITH IT FROM ANY AND ALL CAUSES OF ACTION, CLAIMS, DEMANDS OR LIABILITIES (WHETHER OR NOT CURRENTLY KNOWN OR SUSPECTED TO EXIST BY YOU) THAT YOU HAVE HAD, NOW HAVE OR MAY NOW HAVE, IN ANY WAY RELATED TO YOUR EMPLOYMENT, EVENTS OR ACTIONS OCCURRING DURING THE COURSE OF YOUR EMPLOYMENT, AND THE TERMINATION OF YOUR EMPLOYMENT, OR PURSUANT TO ANY FEDERAL, STATE OR LOCAL LAW OR REGULATION (INCLUDING WITHOUT LIMITATION, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE FEDERAL AGE DISCRIMINATION IN EMPLOYMENT ACT AND THE OLDER WORKERS BENEFIT PROTECTION ACT). YOU ALSO AGREE THAT YOU WILL NEVER INSTITUTE ANY CLAIM, SUIT OR ACTION AGAINST THE COMPANY OR THOSE CONNECTED WITH IT IN ANY COURT OR BEFORE ANY REGULATORY BODY OR AGENCY WHICH IN ANY WAY RELATES TO YOUR EMPLOYMENT OR THE TERMINATION OF YOUR EMPLOYMENT. IF YOU VIOLATE THIS PROVISION BY SUING REEBOK OR THOSE CONNECTED WITH IT, OR BY OTHERWISE CHALLENGING THIS RELEASE OF ALL CLAIMS, YOU AGREE TO REFUND TO REEBOK ALL AMOUNTS PAID HEREUNDER, AND TO PAY ALL COSTS AND EXPENSES INCURRED BY REEBOK OR SUCH RELATED PARTY IN DEFENDING SUCH CLAIM, ACTION OR SUIT, INCLUDING REASONABLE ATTORNEYS' FEES. You agree to sign a similar release of all claims effective as of the Separation Date. This Agreement, with its attachments, will constitute the entire agreement between you and the Company with respect to all matters discussed in this Agreement, and will supersede any and all prior agreements (whether oral or written) between you and the Company with respect to matters relating to your employment by the Company, the termination of your employment, or any other matters covered in this Agreement, except for the Employee Agreement and the Non-Competition Agreement attached as SCHEDULE 2. You acknowledge that the May 29, 1997 Change of Control Agreement between you and the Company has been superseded by this Agreement and is of no further force or effect. Your employment and this Agreement shall be governed by the laws of the Commonwealth of Massachusetts, U.S.A. Any dispute or claim arising out of your employment during the Employment Period shall be submitted to the exclusive jurisdiction of the state courts in the Commonwealth of Massachusetts or of the U.S. District Court for the District of Massachusetts, and you hereby consent to such exclusive jurisdiction. You further agree not to challenge the enforcement in any jurisdiction of any relief obtained in such courts. You acknowledge that you have been advised by Reebok to seek the advice of an attorney before signing this Agreement, afforded sufficient time to do so, and that you fully understand the terms of this Agreement. Your signature below also certifies that your agreement is made voluntarily, knowingly and without duress, and that neither Reebok nor its agents have made any statements or representations inconsistent with the written provisions of this Agreement. Should any provision of this Agreement be determined by any court or other body to be illegal or invalid, the validity of the remaining provisions shall not be affected thereby. You have up to twenty-one (21) days to consider and accept the terms of this Agreement. You will also have seven (7) days after signing this Agreement to revoke your acceptance of its terms by delivering notice of the same in writing to the attention of the General Counsel at Reebok. To be effective, such notice must be hand delivered, or postmarked within the seven (7) day period and sent by certified mail, return receipt requested, to General Counsel, Reebok International Ltd., Legal Department, 100 Technology Center Drive, Stoughton, MA 02072. If the Agreement is not so revoked, its terms will become fully effective and binding on the eighth day following your execution of the Agreement. ROBERT MEERS REEBOK INTERNATIONAL LTD. /s/ ROBERT MEERS /s/ PAUL FIREMAN Signature Signature Robert Meers Paul Fireman Print Name Print Name July 15, 1998 August 17, 1998 Date Date SCHEDULE 1 OPTIONS WHICH WILL HAVE VESTED AS OF DECEMBER 31, 1999 (assuming continued employment) Option Grant Date Number of Option Exercise Price Shares Exercisable Per Share 12/05/89 20,000 $21.71 12/05/89 10,000 $21.28 12/14/90 50,000 $12.75 12/10/91 75,000 $27.125 12/15/93 25,000 $28.875 3/07/95 32,000 $35.375 10/18/95 80,000 $34.375 2/15/96 60,000 $26.875 7/26/96 150,000 $31.25 1/08/97 35,000 $41.00 EX-10.2 3 EXHIBIT 10.2 September 8, 1998 Carl J. Yankowski 127 Farm Street Dover, Massachusetts 02030 Dear Carl: This letter will evidence the agreement between you and Reebok International Ltd. ("Reebok" or the "Company") relating to your employment by Reebok. Our agreement is as follows: 1. Your Position; Duties and Responsibilities. You will be designated during the initial term of this Agreement as President and Chief Executive Officer, Reebok Brands Division, and as an Executive Vice President of Reebok International Ltd. In such assignment, you will have all responsibilities normally associated with such positions (other than shared service functions which will be handled on the basis previously discussed), including strategic and operating responsibility for the business conducted in the Reebok Brands Division on a worldwide basis, operating within corporate policies and guidelines, and mutually-agreed budgets and capital authorization levels. In addition, as we have discussed, I will be recommending you for election as a Director at the next Reebok Board meeting. Although your responsibilities as of the date of this letter are as described above, you should understand that changes may occur which result in some operations being removed and some being added to your responsibility. On an overall basis, however, your level of responsibility will be at least commensurate with that of the prior President and C.E.O. of the Reebok Brands Division and with the level of your responsibilities as of the date of this letter. You will devote your full business time and your best efforts to the businesses of the Reebok Brands Division and will perform the duties required by such position and such other duties as may be specified from time to time by the Company's Board of Directors or Chief Executive Officer. You agree to comply in all material respects with Company policies as in effect from time to time, as such policies may be articulated by the Company's Board of Directors or Chief Executive Officer. You shall not be prevented from accepting positions of responsibility in outside business and charitable organizations, such as directorships of outside business corporations and public charities, subject to the limitation that such activities shall not interfere with your discharge of your responsibilities to Reebok hereunder and shall not include any involvement with any competing enterprise. You agree to comply with whatever policies are in existence in this regard, including the current policy, which limits senior executives to serving on no more than two (2) for-profit Boards. 2. Term of Agreement. You and Reebok agree that, unless earlier terminated pursuant to Section 10, this Agreement will be for an initial period of five years beginning as of the date of this letter (the "Term"). Unless notice to the contrary is given by you or Reebok prior to six (6) months before the end of the Term or any extension thereof, the term of this Agreement shall be extended for one (1) additional year beyond the end of the initial Term, or the end of any extension term, as the case may be. 3. Base Salary. Your base salary will be at the annual rate of $800,000, payable in accordance with Reebok's normal pay practices, to be reviewed for possible increase (but not decrease) initially in March of 2000, and annually thereafter. 4. Annual Incentive Compensation. Your annual incentive compensation has been targeted at 100% of your base salary. You will participate in the same incentive compensation plan as the other senior executives of the Company, and to the extent that you share either Reebok Brand or Company-wide financial performance criteria with those other executives under the plan, your required level of financial performance will be set at the same level as for those other executives. Actual payment levels under the incentive compensation program will be based on your achievement of financial and management performance goals, with such goals to be established each year by the Company's Chief Executive Officer or Board of Directors. In the event of any disagreement concerning whether such goals have been achieved and/or the percentage bonus to be awarded, the decision of the Company's Chief Executive Officer shall be final. If you believe that the decision of the Company's Chief Executive Officer has not been made in good faith, you may submit your position on the matter in writing to the Compensation Committee of the Company's Board of Directors, which will consider your position at its next regular meeting and revise the Chief Executive Officer's decision if it determines that revision is appropriate. 5. Loan Amount. Reebok will lend you, on an interest-free basis, the sum of $1,000,000 (the "Loan"), with the loan proceeds to be payable to you within fourteen (14) days after your execution of a Promissory Note furnished by the Company. Reebok will provide you with a Promissory Note for execution within seven (7) days of your execution of this Agreement. The Company will also make lump-sum payments sufficient, after giving effect to all federal, state and other applicable taxes, to make you whole for any taxes that might be incurred as a result of the making of, any imputation of interest on, or forgiveness of, the Loan. You agree that in the event your employment with the Company is terminated for any reason (other than as specified in Sections 10B and 10D through 10G) prior to September 7, 2001, you will repay to the Company a pro rata portion of the Loan based on the following formula: Amount of Loan Repayment = $1,000,000 x (1095 - Number of Days Employed by the Company) divided by 1095 Any repayment called for under this Section will be made to the Company within fourteen (14) days of your last day of employment by the Company; alternatively, at the Company's sole discretion, the loan repayment obligation may be satisfied, in whole or in part, by the Company offsetting that obligation against amounts owed to you by the Company. If your employment continues beyond September 7, 2001, then the Company will forgive the Loan in its entirety. Notwithstanding the foregoing, in the event this Agreement is terminated by you for other than "good reason" at any time prior to the expiration of the initial Term, you agree to repay the entire Loan amount. 6. Stock Options. Options will be granted to you to acquire 500,000 shares of Reebok common stock, at the market price of Reebok's common stock upon the opening of the market as of the date you execute this Agreement, which options will be granted under the Company's 1994 Equity Incentive Plan (the "Plan"), or, to the extent options cannot be so granted, outside the Plan. In the event that options are granted outside the Plan, you will, except as otherwise provided in this Agreement, have the same rights and obligations as an optionee under the Plan, including, without limitation, with respect to a merger, consolidation, sale or other change of control transaction or a recapitalization or other change in the Company's capitalization, and the Company will register the shares covered by such options on Form S-8 promptly after receipt of Board approval and will include such shares in the next listing application to be filed by the Company. As we have discussed, these options are intended as a megagrant, in lieu of annual grants during the initial Term. These options will expire ten (10) years after the date of grant and will otherwise be governed by the terms prescribed in the Plan. The first 200,000 of your options will become exercisable on the second anniversary of your first date of employment. The remaining 300,000 options will vest in 100,000 share increments on each of the third and fourth anniversaries of your first date of employment, and the final 100,000 share increment will vest on the day preceding the fifth anniversary of the date of this letter. Certificates confirming the grant of such option will be delivered to you no later than September 24, 1998. 7. Fringe Benefits. You will participate in all benefits that are provided generally by Reebok to other senior executives of the Company. In addition, the Company will provide to you during your employment a car allowance of $2,500 per month and life insurance in the amount of two (2) times your annual base salary, subject only to your insurability at standard rates. You will also have the opportunity to purchase additional insurance coverage under the terms of the Company's Flexible Benefits Plan. Furthermore, the Company will arrange for insurance coverage for your spouse's current medical condition, regardless of any pre-existing condition limitation in its medical insurance, but subject to any applicable caps under its existing medical plan. We have agreed that you will be eligible for participation in the Company's Supplemental Executive Retirement Plan ("SERP"), with vesting backdated to September 8, 1998, provided that your employment extends beyond the initial Term of this Agreement. It is understood that the SERP is currently being reviewed and that if you become eligible for participation in the SERP pursuant to the preceding sentence, you will be enrolled in whatever version is next adopted by the Company; provided however that if no amendment to the SERP is adopted prior to September 8, 2003, then you would be eligible for the version in effect as of the date of this Agreement. 8. Vacation. You will be entitled to vacation in accordance with normal Reebok policy for senior executives, with any additional amount to be determined by the Company's Chief Executive Officer. 9. Confidentiality and Non-Competition. You agree that during the Term and thereafter you will maintain the confidentiality of all confidential information learned by you while at Reebok. The standard Reebok Employee Agreement is attached hereto and incorporated herein as Exhibit A. You further agree that during the period of your employment by Reebok and for a period of one year thereafter you will not accept any position with any organization which competes anywhere in the world where Reebok products are sold, with the Reebok Brands Division or with other businesses of Reebok as it shall be constituted at the time of your termination, whether as officer, director, employee, agent, consultant, partner, shareholder or otherwise. You acknowledge and agree that, because the legal remedies of the Company would be inadequate in the event of your breach of, or other failure to perform, any of your obligations set forth in this Section, the Company may, in addition to obtaining any other remedy or relief available to it (including without limitation damages at law), enforce the provisions of this Section by injunction and other equitable remedies. You agree that the provisions with respect to duration and geographic scope and product scope of the restrictions set forth in this Section are reasonable to protect the legitimate interests of the Company and the goodwill of the Company. The provisions of this Section will continue to apply after termination of this Agreement or your employment by the Company. 10. Termination. Notwithstanding the provisions of Section 2 above, this Agreement may be terminated prior to the end of the Term in any of the following cases: A. Voluntary Termination Without Good Reason. You may terminate this Agreement, without "good reason," upon ninety (90) days prior written notice to the Company. B. Voluntary Termination With Good Reason. You may terminate this Agreement with "good reason" upon fourteen (14) days prior written notice to the Company, provided however that you must first provide written notice of the "good reason" to the Company, and the Company must fail to cure such "good reason" within thirty (30) days. For purposes of this Agreement, "good reason" will mean the following: (i) failure by the Company to maintain you in the positions of President and C.E.O. of the Reebok Brand and Executive Vice President of Reebok International Ltd.; (ii) a material diminution in the overall level of your responsibilities or authority; (iii) a change in your reporting relationship so that you no longer report to the Chief Executive Officer of Reebok International Ltd.; (iv) a failure to elect you to the Board of Directors of Reebok International Ltd. prior to December 31, 1998 or to nominate you for membership on the Board at such time as your term as a Director expires; (v) relocation of your principal place of business more than thirty (30) miles from the current location; (vi) a failure, by December 31, 1998, to have the Compensation Committee of the Board of Directors approve a Change in Control Agreement for you in a form substantially similar to the May 29, 1997 Change in Control Agreement signed by other senior executives, with the only substantive changes being as follows: (a) elimination of the second sentence of section 4.b.(i) of the Change in Control Agreement; and (b) addition of language making it clear that a "Change in Control" would not be deemed to occur under the last paragraph of Section 3 of the Change in Control Agreement in the case of a leveraged buy-out or recapitalization of the Company so long as you retained all the benefits of this Agreement and continued future coverage under your Change in Control Agreement following the leveraged buyout or recapitalization, and your existing stock options were converted to equity or replacement options on a basis no less favorable than that generally adopted for other senior executives of the Company. Any benefits provided to you under the Change in Control Agreement (in the event that such agreement applies) will be in substitution for benefits provided pursuant to Section 11 of this Agreement; or (vii) failure to make timely payment of material compensation or benefits required to be provided under this Agreement, or to provide for assumption of this Agreement as required by Section 12 (a). C. Cause. The Company may terminate this Agreement for cause, upon written notice to you. For purposes of this Agreement, "cause" will mean: (i) fraud, embezzlement, or other intentional misappropriation from the Company; (ii) your material breach of any material written policies, rules or regulations of employment which may be adopted or amended from time to time by the Company and which have been communicated to you in writing prior to the conduct giving rise to the alleged breach; (iii) your conviction of a felony or a misdemeanor (excluding traffic offenses) involving moral turpitude; (iv) any other conduct on your part involving fraud, gross negligence or willful misconduct, or other action which materially damages the reputation of the Company; (v) your refusal to perform material duties assigned in accordance with the terms of this Agreement (provided that such duties are not unlawful) or your failure to act in good faith in the performance of your employment duties; or (vi) your default of any material obligations under this Agreement, which default is not cured within thirty (30) days after the date on which the Company gives you written notice of such default. It is understood and agreed that a failure to achieve financial or other business results is not a basis for a "for cause" termination. No termination of your employment for cause shall be deemed to have occurred unless you have been given notice of the reason therefore including the allegations which may constitute reason for such termination and after (a) you have been provided an opportunity to be heard by the Board of Directors of the Company or the Executive Committee thereof, and (b) such decision has been upheld by the Board or Executive Committee. D. Death. This Agreement will terminate immediately upon your death. However, upon your death, all outstanding stock options will become immediately exercisable pursuant to the provisions of the Plan. E. Incapacity. Upon written notice to you, the Company may terminate this Agreement in the event of your incapacity, subject, however, to any legal obligations that mandate continued employment. For purposes of this Agreement, "incapacity" will mean such incapacity or disability as would qualify you for long-term disability coverage under the Company's long-term disability insurance plan. In addition, in the event your employment is terminated as a result of your disability (as that term is defined in the Plan), all outstanding stock options will become immediately exercisable pursuant to the provisions of the Plan. F. Non-Performance. On or after February 1, 2001, the Company may, subject to the provisions of Section 11C, upon written notice to you, terminate your employment for non-performance. For purposes of this Agreement, "non-performance" will mean your material failure to satisfy any of your annual management objectives (beginning with your calendar year 2000 objectives), provided however that (i) such objectives must have been approved by the Compensation Committee of the Board of Directors or the Board of Directors itself; and (ii) to the extent that the failure to meet an objective is the result of specific direction received from the Chief Executive Officer, your objectives will, for purposes of this Section, be adjusted to eliminate the effect of the Chief Executive Officer's decision. G. Other Reasons. Subject to the terms of Section 11D, the Company may terminate your employment for any other reason, upon written notice to you. 11. Payment Obligation in the Event of Termination. In the event of any termination pursuant to Section 10, Reebok shall have the following payment obligations. A. Voluntary Termination Without Good Reason, and Terminations for Cause, Death, or Incapacity. In the event of any termination of this Agreement pursuant to Sections 10A and C-E, you will be entitled to payment of your base salary only until the last day of your employment, and no further payments of any kind will be due you from the Company, except as may be payable pursuant to the Company's employee benefit plans (other than the Company's severance plan), the Change in Control Agreement referenced in Section 10B.(vi) hereof (if applicable), and Section 12(f) hereof. B. Voluntary Termination With Good Reason. In the event that you terminate this Agreement with "good reason" pursuant to Section 10B, you will be entitled to collect your base salary at the times and in the amounts that would have been paid had you remained in the employ of the Company for the balance of the Term, provided, however, that in no event will you receive less than twelve (12) months or more than thirty-six (36) months of base salary continuation. You will also be entitled to your annual incentive compensation for the year in which termination occurs, such incentive compensation, if any, to be payable to you no later than sixty (60) days after the end of the year in which termination occurs. (The amount of incentive compensation to be paid pursuant to the foregoing sentence will be based on the average percentage of target paid to other senior executives of the Reebok Brand operating unit.) In addition, any stock options set forth in Section 6 that would have become exercisable during the Term will become immediately exercisable as of your last day of employment, and the Company will continue any medical coverage in effect for you and your family as of the date of termination until such date as you become eligible for or receive other medical coverage, but in no event any longer than eighteen (18) months following the date of termination. The foregoing payments and benefits will be contingent upon your execution of a Release acceptable to the Company, and will be in lieu of payments and other benefits, if any, to which you may be entitled under any other severance agreement or severance plan of the Company. C. Termination for Non-Performance. In the event of any termination by Company of this Agreement pursuant to Section 10F, you will be entitled to collect as severance your base salary at the times and in the amounts that would have been paid had your employment continued for a period of eighteen (18) months following the date of termination. The foregoing payments will be contingent upon your execution of a Release acceptable to the Company, and will be in lieu of payments and other benefits, if any, to which you may be entitled under any other severance agreement or severance plan of the Company. D. Termination for Other Reasons. In the event of any termination by Company of this Agreement pursuant to Section 10G, you will be entitled to collect your base salary at the times and in the amounts that would have been paid had you remained in the employ of the Company for the balance of the Term, provided however that in no event will you receive less than twelve (12) months of base salary continuation. You will also be entitled to your annual incentive compensation for the year in which termination occurs, such incentive compensation, if any, to be payable to you no later than sixty (60) days after the end of the year in which termination occurs. (The amount of incentive compensation to be paid pursuant to the foregoing sentence will be based on the average percentage of target paid to other senior executives of the Reebok Brand operating unit.) In addition, any stock options set forth in Section 6 that would have become exercisable during the Term will become immediately exercisable as of your last day of employment, and the Company will continue any medical coverage in effect for you and your family as of the date of termination until such date as you become eligible for or receive other medical coverage, but in no event any longer than eighteen (18) months. The foregoing payments and benefits will be contingent upon your execution of a Release acceptable to the Company, and will be in lieu of payments and other benefits, if any, to which you may be entitled under any other severance agreement or severance plan of the Company. E. Payments provided by the Company under this Agreement will not be subject to mitigation or, other than amounts required to be paid to the Company pursuant to Section 5, offset. 12. Miscellaneous (a) Successors, Assigns, Amendment, etc.. This Agreement shall be binding upon and shall inure to the benefit of Reebok and its successors and assigns. Unless such assumption would otherwise occur by operation of law, the Company shall not enter into any agreement for the merger, consolidation, restructuring, sale of assets or other reorganization of the Company, without providing for the express assumption of this Agreement by the Company's successor. This Agreement shall be binding upon you and shall inure to the benefit of your heirs, executors, administrators and legal representatives, but shall not be assignable by you. This Agreement may be amended or altered only by the written agreement of Reebok and you. (b) Notice. All notices, requests, consents and other communications required or permitted hereunder shall be in writing and shall be hand delivered or mailed by certified mail, postage prepaid, addressed as follows: If to Reebok, to 100 Technology Center Drive, Stoughton, MA 02072 with a copy to General Counsel at the same address, or to such other address as may have been furnished to you in writing as herein provided; or, if to you, to the address set forth above, with a copy to Stephen Lindo, Esq., Willkie Farr & Gallagher, 787 Seventh Avenue, New York New York 10019, or to such other address as may have been furnished to Reebok by you as herein provided in writing. Any notice or other communication so addressed and so mailed shall be deemed to have been given three days after said mailing. (c) Applicable Law. This Agreement has been executed and delivered by both parties in the Commonwealth of Massachusetts and shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts. (d) Severability. Each provision of this Agreement is severable from the others, and if any provision hereof shall be to any extent unenforceable, it and the other provisions hereof shall continue to be enforceable to the full extent allowable by any court of competent jurisdiction, as if such offending provision had not been a part of this Agreement. (e) Entire Agreement. This agreement, together with Exhibit A hereto, constitutes the entire agreement between the parties concerning its subject matter, and supersedes any and all prior agreements between the parties. (f) Legal Fees. The Company will promptly reimburse you for reasonable and customary legal fees and expenses incurred by you in connection with the negotiation of this Agreement. In addition, the Company will promptly reimburse you for reasonable and customary legal fees incurred by you in connection with efforts to enforce the provisions of this Agreement (provided such efforts result in your recovery of any sum from the Company, whether through court award or settlement). (g) Background Check. This Agreement, and the parties' obligations hereunder, are contingent upon Reebok's satisfaction with the results of a background check to which you hereby consent. It is expected that the background check will be completed by August 27, 1998, and Reebok will communicate to you whether it is satisfied with its results by no later than August 28, 1998. If you accept and agree to the foregoing, please signify by signing and returning a counterpart of this letter, whereupon this letter will become a binding agreement between you and the Company as of the date first above written. Very truly yours, REEBOK INTERNATIONAL LTD. By: /s/ PAUL FIREMAN Paul Fireman Chief Executive Officer Accepted and agreed to: /S/ CARL J. YANKOWSKI Carl J. Yankowski EX-10.3 4 EXHIBIT 10.3 PROMISSORY NOTE $1,000,000.00 STOUGHTON, MASSACHUSETTS September 11, 1998 FOR VALUE RECEIVED, the undersigned Carl J. Yankowski (hereinafter "Yankowski") hereby promises to pay to the order of Reebok International Ltd., 100 Technology Center Drive, Stoughton, Massachusetts 02072 (hereinafter called "Reebok") the principal amount of ONE MILLION DOLLARS ($1,000,000.00), without interest, in the manner set forth herein. This Note and the indebtedness evidenced hereby are being provided pursuant to the terms of the letter agreement dated September 8, 1998 between Yankowski and Reebok (the "Employment Agreement"). Subject to the terms and conditions herein, if Yankowski (i) is employed by Reebok for the full period from September 8, 1998 through and continuing beyond September 7, 2001 and (ii) does not terminate his employment with Reebok prior to September 7, 2003 for other than "good reason" (as defined in the Employment Agreement), then on September 8, 2003 the indebtedness evidenced by this Note shall be forgiven by Reebok in full as of September 8, 2001 and this Note shall be marked cancelled. In the event Yankowski's employment with Reebok is terminated prior to September 7, 2001, the following shall apply: A. If Yankowski's employment with Reebok is terminated pursuant to Section 10C of the Employment Agreement, Yankowski will repay to Reebok within fourteen (14) days of such termination date a pro rata portion of the sums advanced to him pursuant to this Note based on the following formula: Amount of principal to be repaid = $1,000,000 multiplied by (1,095 minus the number of days Yankowski was employed by Reebok) divided by 1,095. B. In the event Yankowski's employment with Reebok is terminated pursuant to Sections 10B or 10D, E, F or G of the Employment Agreement, the indebtedness evidenced by this Note shall be forgiven by Reebok in full as of the date of such termination and this Note shall be marked cancelled. In the event Yankowski terminates his employment with Reebok prior to September 7, 2003 for other than "good reason" (as defined in the Employment Agreement), Yankowski shall repay the full principal amount evidenced by this Note within fourteen (14) days of such termination date. The repayment obligation referenced in the preceding sentence shall not apply in the event of a termination of the Employment Agreement pursuant to Section 10B, 10D or 10E of the Agreement. Reebok shall have the right to set off any amounts which Yankowski owes Reebok hereunder against any monies which Reebok or any of its subsidiaries may owe to Yankowski, of any nature whatsoever, including without limitation, any compensation and any severance owed under the Employment Agreement or any other benefit owed to or held by Yankowski as an employee of Reebok or any of its subsidiaries, and Yankowski hereby agrees to and authorizes any such setoff. If payment of the principal on this Note is not paid in accordance with the terms aforementioned, then this Note shall be deemed to be in default and if suit is brought to collect this Note, Reebok shall be entitled to collect, in addition to any principal outstanding, all reasonable costs and expenses to include, but not necessarily be limited to, reasonable attorneys' fees and expenses. Presentment, notice of dishonor and protest are hereby waived by Yankowski. This Note shall be binding upon Yankowski and his heirs, executors, administrators, and legal representatives. No delay or omission on the part of Reebok in exercising any rights hereunder shall operate as a waiver of such rights or of any other right of Reebok, nor shall any delay, omission or waiver on any one occasion be deemed as a bar to or waiver of the same or any other right on any future occasion. This Note may not be changed or terminated orally. Yankowski shall have the right to prepay the principal of this Note, in whole or in part, at any time or times, without penalty. All rights and obligations hereunder shall be governed by, and construed and enforced in accordance with, the substantive laws of The Commonwealth of Massachusetts, and this Note is executed as, and shall have effect of, a sealed instrument. If any provision of this transaction is inconsistent with the laws and statutes of The Commonwealth of Massachusetts, the rest of the transaction shall not be affected, and that part that is not in accord with the said laws shall be adjusted to so comply. IN WITNESS WHEREOF, the undersigned has executed this Note as an instrument under seal this 11 day of September, 1998. /S/ CARL J. YANKOWSKI Carl J. Yankowski EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1998 CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 99,021 0 669,031 51,678 535,734 1,382,262 399,236 224,950 1,681,572 524,523 639,186 0 0 932 526,238 1,681,572 2,519,026 2,507,157 1,592,651 1,592,651 816,513 0 50,164 47,829 16,811 31,018 0 0 0 31,018 .55 .54
EX-99 6 EXHIBIT 99 ISSUES AND UNCERTAINTIES The Company's Quarterly report on Form 10-Q filed herewith includes, and other documents, information or statements released or made from time to time by the Company may include, forward-looking statements. These statements 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 underlying such expectations or forecasts, become inaccurate. The following discussion identifies certain important issues and uncertainties that are among the 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 marketing or promotional success by one of the Company's competitors could adversely affect the Company's competitive position. A shift in consumer preferences could also negatively impact the Company's sales and financial results. Currently, the athletic footwear and apparel industry is experiencing some shift in consumer preference away from athletic footwear to "casual" product offerings. This change in preference has adversely affected the Company's business, as well as that of some of its competitors. The Company is taking steps to respond to this shift by focusing on its products and technologies and pursuing growth opportunities with its Rockport, Ralph Lauren Footwear and Greg Norman brands. There is, however, substantial uncertainty as to whether the Company's actions will be effective and how significant the adverse impact of the shift in consumer preference will be on the Company's business. The outcome will be dependent on a number of factors, including the extent of the change in consumer preference, consumer and retailer acceptance of the Company's products, technologies and marketing, and the ability of the Company to effectively respond to the shift in the marketplace, as well as the other factors described in this Exhibit. The Company has received initial positive feedback from retailers and customers regarding its DMX product line. However, whether this technology will be successful is dependent on numerous factors including consumer preference, consumer and retailer acceptance of such technology, competitive product offerings, the Company's ability to utilize such technology and to extend it to other products, as well as other factors described in this Exhibit. In addition, in countries where the athletic footwear market is mature (including the U.S.), sales growth may be dependent in part on the Company increasing its market share at the expense of its competitors, which may be difficult to accomplish. The Company also faces strong competition with respect to its other product lines, such as the ROCKPORT product line and the GREG NORMAN Collection. Competition in the markets for the Company's products occurs in a variety of ways, including price, quality, product design, brand image, marketing and promotion 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 filling customer orders or in liquidating excess inventory, or may find that retailers are canceling orders or returning product, all of which may have an adverse effect on the Company's sales, its margins and brand image. In addition, the Company may be required to pay for certain tooling if it does not satisfy minimum production quantities. Sales Forecasts The Company's investment in advertising and marketing and in certain other expenses 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, currency changes 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 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. See also discussion below under "Advertising and Marketing Investment." Pricing and Margins The prices that the Company is able to charge for its products are dependent on the type of product offered and the consumer and retailer response to such product, as well as the prices charged by the Company's competitors. If, for example, the Company's products provide enhanced performance capabilities, the Company should be able to achieve relatively higher prices for such products. The gross margins which the Company earns are dependent on the prices which the Company can charge for these goods and the costs incurred in acquiring the products for sale. To the extent that the Company has higher costs, such as the higher startup costs associated with technological products, its margins will be lower unless it can increase its prices or reduce its costs. Recently, the Company has experienced an improving trend in its pricing margins as a result of manufacturing efficiencies and changes in sourcing initiated to take advantage of currency opportunities in the Far East. There can be no assurance that this trend will continue. In addition, because of the shift in the marketplace and the resulting over-inventoried promotional retail environment, the Company's full-margin business has decreased and the Company has encountered increased returns and cancellations from retailers, which have adversely affected its margins. The ability of the Company to increase its full margin business is dependent on a number of factors including the success of the Company's products and marketing, the retail environment and general industry conditions. In addition, because of the over-inventoried environment, retailers have been more reluctant to place future orders for products, thus the Company has fewer future orders and may be required to take on more inventory risk to fulfill "at once" business. Backlog The Company reports its backlog of open orders for the Reebok Brand. However, its backlog position is not necessarily indicative of future sales because the ratio of future orders to "at once" shipments, as well as sales by Company-owned retail stores, may vary from year to year. In addition, many customer orders are cancelable. The recent slowdown at retail has resulted in higher cancellations and returns. 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. In the event that such investments do not achieve the desired effect in terms of increased retailer acceptance and/or consumer purchase of the Company's products, there could be an adverse impact on the Company's financial results. Recently, there has been some shift in the marketplace away from certain "icon" athletes and the products they endorse. As a result, the Company has re-evaluated its investment in certain sports marketing deals and is in the process of eliminating or restructuring certain of its marketing contracts that no longer reflect Reebok's brand positioning. Retail Operations The Company currently operates approximately 150 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 or other third parties. 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 general retail market conditions. The recent over-inventoried promotional environment in the U.S. has resulted in a decline in retail margins, thus adversely affecting the Company's own retail business. 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 and sales operations are thus subject to the usual risks of doing business abroad, such as currency fluctuations, longer payment terms, potentially adverse tax consequences, repatriation of earnings, import duties, tariffs, quotas and other threats to free trade, labor unrest, political instability and other problems linked to local production conditions and the difficulty of managing multinational operations. 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 China, Indonesia, Thailand or the Philippines, 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 also discussion below under "Economic Factors". Sources of Supply The Company depends upon 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. A failure by one or more of the Company's significant manufacturers to meet established criteria for pricing, product quality or timeliness could negatively impact the Company's sales and profitability. In addition, if the Company were to experience significant shortages in raw materials or components used in its products, it could have a negative effect on the Company's business, including increased costs or difficulty in delivering product. Some of the components used in the Company's technologies are obtained from only one or two sources and thus a loss of supply could disrupt production. See also discussion below under "Economic Factors". Risk Associated with Indebtedness In connection with the Company's Dutch Auction share repurchase in 1996, the Company incurred $640 million in additional debt to finance the repurchase of shares (as of September 30, 1998, the outstanding balance of such debt was approximately $428 million) and has a $400 million revolving credit line (as of September 30, 1998, there were no borrowings outstanding under the revolving credit line). As a result of this indebtedness, the Company currently faces significantly increased interest expense and debt amortization, as compared to the past. The credit arrangement contains certain covenants (including restrictions on liens and the requirements to maintain a minimum interest coverage ratio and a minimum debt to cash flow ratio) which are intended to limit the Company's future actions and which may also limit the Company's financial, operating and strategic flexibility. In addition, the Company's failure to make timely payments of interest and principal on its debt, or to comply with the material covenants applicable thereto, could result in significant negative consequences. As of September 30, 1998, the Company amended its credit arrangements to relax its debt to operating cash flow ratio. The Company believes that its cash, short-term investments and access to credit facilities, together with its anticipated cash flow from operations, are adequate for the Company's current and planned needs in 1998. However, the Company's actual experience may differ from the expectations set forth in the preceding sentence. Factors that might lead to a difference include, but are not limited to, the matters discussed herein, as well as future events that might have the effect of reducing the Company's available cash balances (such as unexpected operating losses or increased capital or other expenditures, as well as increases in the Company's inventory or accounts receivable) or future events that might reduce or eliminate the availability of external financial resources. In June 1998, two credit rating agencies, Standard & Poor's Rating Group and Moody's Investors Service, Inc., put the Company on "credit watch" with negative implications, which indicates that these agencies are reviewing the Company's financial condition to determine whether its current credit ratings are still appropriate or whether the ratings should be lowered. No determination has yet been made by either credit agency. If the Company's credit ratings were lowered, it may be more difficult for the Company to borrow and the costs of borrowing would increase, including the costs the Company incurs under some of its existing credit arrangements. Risk 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 and options 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 and options to hedge significant inter-company assets and liabilities denominated in other currencies. However, no assurance can be given that fluctuation in foreign currency exchange rates will not have an adverse impact on the Company's revenues, net profits or financial condition. In 1997 and in the first nine months of 1998, the Company's international sales, gross margins and profits were negatively impacted by changes in foreign currency exchange rates. Euro Conversion On January 1, 1999, eleven of the fifteen member countries of the European Union are scheduled to adopt a single currency called the euro. On this date, fixed conversion rates between the existing currencies of these countries ("legacy currencies") and the euro will be established and thereafter the euro will trade in the currency markets and may be used in business transactions. The legacy currencies will remain as legal tender together with the euro until at least January 1, 2002 (but not later than July 1, 2002). During the transition period, parties may settle transactions using either the euro or a participating country's legacy currency. The use of a single currency in the eleven participating countries may result in increased price transparency which may affect Reebok's ability to price its products differently in various European markets. Although it is not clear what the result of this price harmonization might be, one possible result is lower average prices for products sold in certain of these markets. Conversion to the euro is not expected to have a significant impact on the amount of Reebok's exposures to changes in foreign exchange rates since most of Reebok's exposures are incurred against the U.S. dollar, as opposed to other legacy currencies. Reebok's foreign exchange hedging costs should also not change significantly. Nevertheless, because there will be less diversity in Reebok's currency exposures, changes in the euro's value against the U.S. dollar could have a more pronounced effect, whether positive or negative, on the Company. The Company has made the necessary changes in its internal and banking systems in Europe to accommodate introduction of the euro and will be prepared to make and receive payments in Europe using the euro effective as of January 1, 1999. As part of its global restructuring, the Company is in the process of implementing SAP software on a global basis; the SAP system will be euro-compatible. Other business functions will be converted for the euro by the end of the transition period or earlier to meet business needs. The Company does not expect such conversion costs to be material. 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. See also discussion below under "Economic Factors". Intellectual Property The Company believes that its trademarks, technologies and designs are of great value. From time to time the Company has been, and may in the future be, the subject of litigation challenging its ownership of certain intellectual property. Loss of the REEBOK, ROCKPORT or GREG NORMAN 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, general weakness in retail markets and changes in consumer purchasing power and preferences. Adverse changes in such economic factors could have a negative effect on the Company's business. For example, the recent slowdown in the growth of the athletic footwear and branded apparel markets has had negative effects on the Company's business. As a result of current market conditions, a number of the Company's competitors have excess inventory which they are attempting to sell off. This over-inventoried, promotional environment has made it more difficult for the Company to sell its products and has negatively impacted the Company's gross margins. Domestically, a general decline in overall consumer confidence combined with an economic slowdown has also resulted in sales declines. The current financial crisis in the Far East has also had a negative impact on the Company's business. The economic problems in Asia have had an adverse effect on the Company's sales to that region. Such financial difficulties have also increased the risk that certain of the Company's customers in the region will be unable to pay for product orders. In addition, most of the Company's products are manufactured in the Far East by third party manufacturers. The current economic conditions have made it more difficult for such manufacturers to gain access to working capital and there is a risk that such manufacturers could encounter financial problems which could affect their ability to produce products for the Company. Similar problems have also resulted from the financial difficulties in Latin America and in Russia. 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 or profitability. Global Restructuring Activities The Company is currently undertaking various global restructuring activities designed to enable the Company to achieve operating efficiencies, improve logistics and reduce expenses. There can be no assurance that the Company will be able to effectively execute on its restructuring plans or that such benefits will be achieved. In addition, in the short-term the Company could experience difficulties in product delivery or other logistical operations as a result of its restructuring activities, which could have an adverse effect on the Company's business. In the short-term, the Company could also be subject to increased expenditures and charges from such restructuring activities. For example, the Company is currently consolidating its warehouses in Europe. Such consolidation should enable it to achieve efficiencies and improve logistics. However, in the short-term, such benefits may not be achieved and if difficulties arise in effecting such consolidation, the Company could have excess inventory or a decline in sales. The Company is also in the process of eliminating or restructuring certain of its underperforming marketing contracts. There can be no assurance that the Company will be able to successfully restructure such agreements or achieve the cost savings anticipated. Year 2000 Readiness Disclosure The Company has conducted a global review of its information technology (IT) systems, as well as its non-IT computer systems, to identify the systems that could be affected by the technical problems associated with the year 2000 and has developed an implementation plan to address the "year 2000" issue. The Company made a strategic decision in 1993 to adopt a new global information system, the SAP system, which will replace substantially all legacy systems. The Company presently believes that, with modifications to existing software and converting to SAP software and other packaged software, the year 2000 will not pose significant operational problems for the Company's computer systems. However, if the modifications and conversions are not implemented or completed in a timely or effective manner, the year 2000 problem could have a material adverse impact on the operations and financial condition of the Company. In addition, in converting to SAP software, the Company is relying on its software partner to develop and support new software applications and there could be problems in successfully developing and implementing such new applications. The Company is the first in the apparel and footwear industry to implement this new software application and, because of the year 2000 time restraints, the schedule for implementation is accelerated. Thus, there are substantial risks that problems could arise in implementation or that the system may not be fully effective by the end of 1999. Finally, the Company is dependent on its suppliers, joint venture partners, independent distributors and customers to implement appropriate changes to their IT and non-IT systems to address the "year 2000" issue. The failure of such third parties to effectively address such issue could have a material adverse effect on the Company's business. Estimates of time and cost and risk assessments are based on currently available information. Developments that could affect such estimates and assessments include, but are not limited to, the ability to hold to the schedule defined for SAP and other package conversion; the ability to remediate all relevant computer code for those limited applications targeted to be remediated; co-operation and remediation success of the Company's suppliers and customers; and the ability to implement suitable contingency plans in the event of year 2000 system failures at the Company or its suppliers or customers. Quarterly Reports The financial results reflected in the Company's quarterly report on Form 10-Q are not necessarily indicative of the financial results which may be achieved in future quarters or for year-end, which results may vary. -----END PRIVACY-ENHANCED MESSAGE-----