-----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, FTLOVp/Iy9SHA4B83Ww9VEjMG9BlahW3rNHqJB3t0iMvxZXObjSXlSxS9K9jt5W9 zOtk67rLeVv6QlsV7GLZ6A== 0000950135-98-001796.txt : 19980326 0000950135-98-001796.hdr.sgml : 19980326 ACCESSION NUMBER: 0000950135-98-001796 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REEBOK INTERNATIONAL LTD CENTRAL INDEX KEY: 0000770949 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 042678061 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09340 FILM NUMBER: 98572666 BUSINESS ADDRESS: STREET 1: 100 TECHNOLOGY CTR DR CITY: STOUGHTON STATE: MA ZIP: 02072 BUSINESS PHONE: 6173415000 10-K405 1 REEBOK INTERNATIONAL LTD 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-9340 REEBOK INTERNATIONAL LTD. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ MASSACHUSETTS 04-2678061 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 100 TECHNOLOGY CENTER DRIVE, 02072 STOUGHTON, MASSACHUSETTS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 401-5000 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, PAR VALUE, $.01 PER SHARE NEW YORK STOCK EXCHANGE COMMON STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 11, 1998, the aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was approximately $1,434,988,737. As of March 11, 1998, 56,374,938 shares of the registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Annual Report to Shareholders for the fiscal year ended December 31, 1997 (certain parts as indicated herein in Parts I and II). Definitive Proxy Statement dated March 27, 1998 for the Annual Meeting of Shareholders to be held on May 5, 1998 (certain parts as indicated herein in Part III). ================================================================================ 2 PART I Item 1. Business. Reebok International Ltd., a Massachusetts corporation organized on July 26, 1979, is a global company engaged primarily in the design and marketing of sports and fitness products, including footwear and apparel, as well as the design and marketing of footwear and apparel for non-athletic "casual" use. The Company has three major business groups: the Reebok Division, which is primarily responsible for the Company's REEBOK(R) brand, the Greg Norman Division, which is responsible for the GREG NORMAN(R) brand, and the Company's major subsidiary, The Rockport Company, Inc. ("Rockport") which is responsible for the ROCKPORT(R) brand, as well as footwear sold under the RALPH LAUREN(R) and Polo Sport brands. (Reebok International Ltd. is referred to herein, together with its subsidiaries, as "Reebok" or the "Company" unless the context requires otherwise.) During calendar year 1997, net income for the Company decreased by 2.8% to $135.1 million, or $2.32 per share (inclusive of special charges related to the Company's global restructuring activities and the restructuring of a number of marketing contracts, as well as a tax benefit related to the conclusion of outstanding tax matters associated with the June 1996 sale of the Company's Avia subsidiary), from $139.0 million, or $2.03 per share(1), for the year ended December 31, 1996, while net sales increased by 4.7%, from $3.479 billion in 1996 to $3.644 billion in 1997. Excluding the after-tax effect of the special charges and tax benefit, in 1997 net income was $134.3 million or $2.30 per share. As a result of the current conditions within the athletic footwear and apparel industry and the Company's expected near term business outlook, the Company is taking a number of actions designed to manage its business more efficiently. Such actions include simplifying the Reebok Division's organizational structure by eliminating management layers, combining and reducing business units and centralizing operations. The intention of these actions is to become more focused in order to free up resources to be allocated to certain near-term projects that the Company believes can generate immediate results, and to postpone certain longer-term investments and simplify operations to gain greater efficiencies and to generate cost savings. As a result of such actions, the Company expects to take a restructuring charge in the first quarter of 1998 of $25-$35 million on a pre-tax basis. The following is a discussion of the business of each of the Company's operating units. REEBOK DIVISION The Reebok Division designs, produces and markets sports and fitness footwear, apparel and accessories, as well as related sports and fitness products, that combine the attributes of athletic performance and style. The Division's products include footwear for basketball, running, soccer, rugby, tennis, golf, track and field, volleyball, football, baseball, aerobics, cross training, outdoor and walking activities, as well as athletic apparel and accessories. The Division continues to expand its product scope through the development and marketing of related sports and fitness products and services, such as sports and fitness videos and programming, and through its strategic licensing program, pursuant to which the Company's technologies and/or trademarks are licensed to third parties for fitness equipment, sporting goods and related products and services. The Reebok Division has targeted as its primary customer base athletes and others who believe that technical and other performance features are the critical attributes of athletic footwear and apparel. Over the past few years, the Company has sought to increase Reebok's on-field - ------------------ (1) The earnings per share amounts for 1996 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". - 2 - 3 presence and establish itself as an authentic sports brand. Through such effort, Reebok has gained increased visibility on playing fields worldwide through endorsement arrangements with such prominent athletes as NBA Rookie of the Year Allen Iverson of the Philadelphia 76ers, and with various sports and event sponsorships. Recently, given the diminishing influence of sports "icons" on consumer buying preferences and the increasing consumer appeal of "brown shoe" or "casual" footwear products, the Company has been re-evaluating its substantial investment in sports marketing deals and is in the process of eliminating or restructuring certain of its underperforming marketing contracts that the Company believes no longer reflect the Company's brand positioning. In 1998 the Reebok Division intends to focus its efforts on the performance of its products and, in particular, its proprietary technologies, and on bringing its message, both product and brand essence, directly to the consumer. Consistent with this focus, in 1998 the Reebok Division will implement a new direct-to-the consumer campaign called "Try on the Future," a nationwide mobile tour designed to give consumers the opportunity to experience and "try on" Reebok's new products and technologies. As part of its commitment to offer leading athletic footwear technologies, the Division engages in product research, development and design activities in the Company's Stoughton, Massachusetts headquarters, where it has a state-of-the-art 50,000 square foot product development facility which is dedicated to the design and development of technologically-advanced athletic and fitness footwear, and in its various Far East offices. Recently, Reebok has opened development centers in the Far East to enable its development activities to be more closely integrated with production. A development center was opened in Korea in May 1996 and in China in June 1997. New development centers are also scheduled to open in Taiwan and Thailand during 1998. TECHNOLOGY Reebok places a strong emphasis on technology and has continued to incorporate various proprietary performance technologies in its products, focusing on cushioning, stability and lightweight features. In 1995 Reebok introduced its proprietary DMX(R) technology for superb cushioning. DMX(R) utilizes a two pod system that allows air to flow from the heel to forefoot. This technology continues to be used successfully in several Reebok walking shoes. In April 1997, the Company debuted its DMX(R) 10 technology at retail with the introduction of the DMX Run shoe. This advanced technology incorporates a ten pod, heel to forefoot, active air transfer system delivering cushioning when and where it is needed. The DMX(R) 10 technology was also introduced at retail in November 1997 in The Answer, an Allen Iverson signature basketball shoe. In February 1998, Reebok debuted at retail DMX(R) 6, a six pod, heel to forefoot, active air transfer system, in a running shoe, Run DMX(R) 6. In addition, DMX(R) 6 was available at retail in February 1998 in The Lightening, a signature basketball shoe to be worn by NBA player Nick Van Exel and as a team shoe to be worn by many college athletes. The Company will also introduce a DMX(R) Sockliner which is expected to debut at retail in a golf shoe in March 1998 and in a soccer shoe in April 1998. 3D ULTRALITE(TM) technology is Reebok's approach to lightweight performance footwear. 3D ULTRALITE is a proprietary material that allows the midsole and outsole to be combined in one injection molded unit composed of foam and rubber, thus making the shoe lightweight, flexible and durable. In 1997 the Company introduced this technology in running, walking, basketball and women's fitness shoes. In 1998, the Company plans to continue to introduce 3D ULTRALITE technology at retail in additional footwear categories, including women's sport training and men's cross-training. Reebok continues to incorporate HEXALITE(R), a honeycomb-shaped material, which provides stability and cushioning, in many of its shoes and in many different applications. Radial HEXALITE(R), one application of this technology, combines under-the-foot cushioning and lateral stabilization and was first available at retail in early 1997. HEXLINER(TM), a PU foam sockliner - 3 - 4 which includes reengineered HEXALITE(R) material in the heel for a softer feel close to the foot, was first available at retail in June 1997. Finally, Reebok has incorporated advanced technology into its apparel products with the introduction of HYDROMOVE(TM) technology in certain performance apparel. This moisture management system helps keep athletes warm in cold weather and dry and cool in hot weather. Performance apparel incorporating the HYDROMOVE(TM) technology first became available at retail at the end of 1996. MARKETING AND PROMOTIONAL ACTIVITIES The Reebok Division devotes significant resources to advertising its products to a variety of audiences through television, radio and print media and utilizes its relationships with major sports figures in a variety of sports to maintain and enhance visibility for the REEBOK brand. The Reebok Division's advertising program in 1997 was directed toward both the trade and the ultimate consumers of REEBOK(R) products. The major advertising campaigns in 1997 included an ad campaign featuring real-life portraits of rookies Allen Iverson of the National Basketball League ("NBA") and Saudia Roundtree of the American Basketball League ("ABL") depicting their adjustment to professional sports, as well as real-life portraits of Reebok endorsers Shawn Kemp and Shaquille O'Neal, and a marketing campaign for the DMX(R) Run shoe featuring Spencer White, Reebok's director of research engineering. Substantial resources were devoted to promotional activities in 1997, including endorsement agreements with athletes, teams, leagues and sports federations; event sponsorships; in-store promotions and point-of-sale materials. In 1997 the Reebok Division gained visibility for the REEBOK brand through endorsement arrangements with such athletes as 1997 Rookie of the Year Allen Iverson of the Philadelphia 76ers, with whom Reebok markets a signature line of footwear and apparel. Other endorsements in basketball in 1997 came from professional players such as Shaquille O'Neal, Shawn Kemp, Clyde Drexler, Nick Van Exel and Steve Smith. In 1997 Reebok entered into a multi-year agreement with NBA Properties for a comprehensive licensed merchandise, marketing and basketball development program in Latin America. In addition, Reebok sponsors a number of college basketball programs and has a sponsorship agreement with the Harlem Globetrotters. Reebok is also the founding sponsor of the ABL and the official footwear and apparel sponsor of the league; Reebok is the exclusive supplier of uniforms and practice gear to the league's nine teams and an official ABL licensee and has entered into endorsement agreements with a number of ABL players including Saudia Roundtree, Jennifer Azzi and Carolyn Jones. Reebok is also an official footwear supplier to the Women's National Basketball Association ("WNBA"). To promote the sale of its cross training footwear in 1997, Reebok used endorsements by prominent athletes such as National Football League ("NFL") players Emmitt Smith, Derrick Thomas, John Elway, Ken Norton, Jr., Herman Moore and Ben Coates, as well as Major League Baseball ("MLB") players Frank Thomas, Mark McGwire, Juan Gonzalez and Roger Clemens. To promote its cleated football and baseball shoes, the Company also has endorsement contracts with numerous MLB and NFL players, and sponsors a number of college football programs. The Company has a multi-year agreement with NFL Properties under which Reebok has been designated a "Pro Line" licensee for the U.S. and international markets with the right to produce and market uniforms and sideline apparel bearing NFL team logos. Pursuant to this agreement, in 1997 Reebok supplied uniforms and sideline apparel to the San Francisco 49ers, Detroit Lions, New York Giants, New Orleans Saints, Kansas City Chiefs and Atlanta Falcons. In addition to the Pro Line license, Reebok has an agreement with the NFL under which Reebok was one of only three brands authorized to provide NFL players with footwear that has visible logos, and all NFL on-field game officials wear REEBOK(R) footwear exclusively. In soccer, Reebok has a number of endorsement arrangements including contracts with Gabriel Batistuta of Fiorentina and the Argentinean national team, Ryan Giggs of Manchester United - 4 - 5 and Wales, Dennis Bergkamp of Arsenal and the Netherlands, and Guiseppe Signori of Lazio and Italy, as well as U.S. national team members Eric Wynalda, Brad Friedel, Michelle Akers and Julie Foudy. The Company also has major sponsorship agreements with the Liverpool Football Club, one of the world's best known club soccer teams, and with the Argentina National Football Association, which will take effect in 1999. In addition, Reebok has entered into sponsorship agreements with such soccer teams as Aston Villa, Borussia Moenchengladbach of Germany, Bastia of France, Palmeiras of Brazil, Brondby of Denmark and IFK Gothenburg of Sweden. In 1997, the Company extended its sponsorship of the Bolton Wanderers of England to include naming rights to the team's new soccer arena, the Reebok Stadium. Reebok is also the official uniform supplier of U.S. major league soccer teams the New England Revolution and the Colorado Rapids. In July 1997 the first-ever Reebok Cup, an international soccer tournament featuring four of the world's most powerful club teams, was held in the United States. In rugby, the Company sponsors the national rugby teams of Australia and Italy. Tennis promotions in 1997 included endorsement contracts with well-known professionals including Michael Chang, Venus Williams, Patrick Rafter and Arantxa Sanchez-Vicario. Promotional efforts in running included endorsement contracts with such well-known runners as Ato Boldon, Derrick Adkins, Kim Batten and Marie Jose Perec. To promote its women's sports and fitness products, Reebok sponsored athletes such as Rebecca Lobo of the WNBA, as well as Michelle Akers and Julie Foudy of the U.S. national soccer team, Lisa Fernandez of the U.S. national softball team and Liz Masakayan, pro beach volleyball player. In addition, Reebok sponsors a variety of college basketball and volleyball teams and such organizations as the ABL and the WNBA. In 1997 the Reebok Division also continued its promotional efforts in the fitness area. Reebok fitness programming is featured on Fit TV, a 24-hour cable network, pursuant to a programming agreement. Through an agreement with Channel One Communications, in 1997 Reebok provided the programming for P.E.TV, an award-winning program designed to educate kids about physical fitness. Reebok has developed numerous fitness programs such as its Versa Training program, designed to help consumers meet their varied fitness goals with aerobic, strength and flexibility workouts, the WALK REEBOK program which promotes walking, its CYCLE REEBOK program that features the CYCLE REEBOK studio cycle, and the Reebok Flexible Strength program that develops strength and flexibility simultaneously. These programs were complemented by the marketing and sale of a line of REEBOK(R) fitness videos, as well as the marketing and sale of REEBOK fitness equipment products such as the STEP REEBOK exercise platform and the CYCLE REEBOK studio cycle. To gain further visibility for the REEBOK brand, Reebok has also entered into several key sport sponsorships, such as an arrangement under which Reebok was designated the official footwear and apparel sponsor of the Russian Olympic Committee and approximately 25 individual associated Russian sports federations; this arrangement was recently extended through the Sydney 2000 Summer Olympic Games. Reebok will also be an official sponsor of the Sydney 2000 Olympic Games and the official sports brand of the 1998 and 2000 Australian Olympic teams, as well as an official sponsor and supplier of sports footwear and apparel to the national Olympic teams from Brazil, New Zealand, Poland and South Africa. In addition, as an extension of its commitment to provide athletes with technologically advanced products, Reebok has entered into sponsorship agreements with the Team Scandia and Cristen Powell, a top fuel drag racer on the National Hot Rod Association circuit, as well as with Eliseo Salazar, one of the top drivers on the Indy Car racing circuit, and the R&S Indy Racing League ("IRL") Team on the 1998 IRL circuit. Reebok also has school-wide sponsorship arrangements with colleges such as U.C.L.A., University of Texas, University of Virginia and University of Wisconsin. In 1997, the Reebok Division also ran marketing promotions on its Internet website. - 5 - 6 U.S. OPERATIONS The Reebok Division's U.S. operations unit is responsible for all footwear and apparel products sold in the United States by the Division. Sales of footwear in the United States totalled approximately $1.229 billion in 1997 compared to $1.193 billion in 1996. REEBOK(R) brand apparel sales (including GREG NORMAN(R) apparel) in the U.S. in 1997 totalled approximately $431.9 million, compared to approximately $314.9 million in 1996. In the U.S., the Reebok Division generally uses an employee sales force for its principal product lines, although in 1997 it utilized independent sales representatives for some of its specialty products, such as its REEBOK golf and tennis products. Reebok's U.S. national sales staff and locally based sales employees are supported by field service representatives employed by Reebok who travel to assist in retail merchandising efforts and provide information to consumers and retailers regarding the features of the Company's products. There are also promotional personnel who coordinate events and promotions at a "grass roots" level to help enhance the image of the REEBOK brand. The Division's U.S. distribution strategy emphasizes high-quality retailers and seeks to avoid lower-margin mass merchandisers and discount outlets. REEBOK(R) footwear is distributed primarily through specialty athletic retailers, sporting goods stores and department stores, with specialty products, such as golf products and equipment, also being distributed in certain specialty channels. Distribution of the Company's apparel line is predominantly through pro shops and department, sporting goods and specialty stores. The Reebok Division also sells its products through REEBOK(R) concept or company stores, see discussion under "Retail Stores" below. INTERNATIONAL OPERATIONS The Reebok Division's international sales are coordinated from the Company's corporate headquarters in Stoughton, Massachusetts, which is also where the Division's regional operations responsible for Latin America are located. There are also regional offices in Leusden, Holland, which is responsible for Europe; in Hong Kong, which is responsible for Far East operations; and in Denham Lock, England, which is responsible for the Middle East and Africa, although this office will move to Delhi, India in March 1998. The Canadian operations of the Division are managed through a wholly owned subsidiary headquartered outside of Toronto, Canada. The Division markets REEBOK(R) products internationally through wholly owned subsidiaries in Austria, Belgium, Canada, France, Germany, Ireland, The Netherlands, Italy, Poland, Portugal, Russia, Switzerland and the United Kingdom and majority owned subsidiaries in Japan, India, South Korea, Spain and South Africa. REEBOK products are also marketed internationally through 29 independent distributors and joint ventures in which the Company holds a minority interest. The Company or its wholly owned U.K. subsidiary holds partial ownership interests in 6 of these international distributors, with its percentage of ownership ranging from 30 to 35 percent. Through this international distribution network products bearing the REEBOK brand are actively marketed internationally in approximately 170 countries and territories. The Division's International operations unit also has small design staffs which assist in the design of REEBOK(R) apparel. In 1997 Reebok finalized its plans to restructure its international logistics operations over the next several years. This global restructuring effort includes reducing the number of European warehouses in operation from nineteen to three, establishing a shared services company to centralize European administrative operations, and implementing a global management information system. The global restructuring initiative, which is expected to be completed in 1999, should enable the Company to achieve operational efficiencies and to manage its business on a global basis more cost-effectively. In connection with such restructuring the Company recorded a special pre-tax charge of $33.2 million in 1997. - 6 - 7 During 1997 the contribution of the Division's International operations unit to overall sales of REEBOK(R) products (including GREG NORMAN(R) apparel) decreased to $1.471 billion from $1.474 billion in 1996. The Division's 1997 international sales were negatively impacted by changes in foreign currency exchange rates. In addition, these sales figures do not reflect the full wholesale value of all REEBOK products sold outside the United States in 1997 because some of the Division's distributors are not subsidiaries and thus their sales to retailers are not included in the calculation of the Division's international sales. If the full wholesale value of all international sales of REEBOK products are included, total sales of REEBOK products outside the United States represent approximately $1.779 billion in wholesale value, consisting of approximately 33.2 million pairs of shoes totalling approximately $1.098 billion in wholesale value of footwear sold outside the United States in 1997 (compared with approximately 35.7 million pairs totalling approximately $1.189 billion in 1996) and approximately $680.5 million in wholesale value of REEBOK apparel (including GREG NORMAN apparel) sold outside the United States in 1997 (compared with approximately $613.8 million in 1996). SPORTS AND FITNESS EQUIPMENT AND LICENSING The Company has continued to pursue its strategic trademark and technology licensing program begun in 1991. This program is designed to pursue opportunities for licensing the Company's trademarks, patents and other intellectual property to third parties for sporting goods, apparel and related products and services. The licensing program is focused on expanding the REEBOK brand into new sports and fitness markets and enhancing the reputation of the Company's brands and technologies. The Company has pursued strategic alliances with licensees who Reebok believes are leaders and innovators in their product categories and who share Reebok's commitment to offering superior, innovative products. The Company believes that its licensing program reinforces Reebok's reputation as a market leader. The Company's licensing program includes such products as a full line of athletic gloves, including baseball batting gloves, football gloves, running gloves, court/racquetball gloves, fitness/weightlifting gloves, cycling gloves, golf gloves and winter gloves, all featuring the REEBOK trademark and Reebok's Vector Logo; a collection of REEBOK(R) performance sports sunglasses; the WATCH REEBOK collection of sport watches, and a line of heart rate monitors and a pedometer and stopwatch; REEBOK weight belts, both with and without Reebok's INSTAPUMP(TM) technology; and a line of gymnastic apparel including replicas of the U.S. gymnastics team uniforms. Reebok also has license agreements with Mead for a line of REEBOK school supplies and with Haddad Apparel for a line of REEBOK infant and toddler apparel. In addition, in 1997 Reebok entered into a licensing agreement with Fab-Knit, Ltd. to manufacture and sell a new line of REEBOK team uniforms and jackets. In 1997, Reebok entered into a new video license agreement with BMG Video, a unit of BMG Entertainment, to produce, market and sell a line of REEBOK(R) fitness videos. Through a licensee, Reebok also sells REEBOK(R) fitness audio tapes. In the equipment area, in January 1998 the Company signed a license agreement with industry leader, Icon Health & Fitness Inc., to develop, market and sell a complete line of Reebok fitness equipment products for the home market. The initial home fitness products from this license debuted at the Super Show in Atlanta in February 1998. Reebok also has a license agreement with Cross Conditioning Systems under which Cross Conditioning Systems sells a line of REEBOK fitness equipment products designed for use in health clubs and other institutional markets. In 1997, under this relationship, the REEBOK Body Mill, REEBOK Body Trec(TM), REEBOK Body Peak, REEBOK Studio Cycle and REEBOK Cycle Plus were sold to health clubs and other institutions. In addition, as part of the Company's licensing program, WEEBOK(R) infant and toddler apparel and accessories and a line of WEEBOK(R) footwear are sold by licensees. WEEBOK is a fashion-oriented, kid specific brand, which offers apparel in sizes 0-7 and footwear in sizes 0-12. - 7 - 8 THE ROCKPORT COMPANY The Company's Rockport subsidiary, headquartered in Marlboro, Massachusetts, designs, produces and distributes specially engineered comfort footwear for men and women worldwide under the ROCKPORT(R) brand, as well as apparel through a licensee. Rockport also develops, markets and sells footwear under the RALPH LAUREN(R) brand pursuant to a license agreement entered into in May 1996. Rockport's net sales increased by approximately $64.9 million in 1997, to $512.5 million from $447.6 million in 1996. Rockport's 1997 sales include $64.0 million of sales of the RALPH LAUREN footwear business which was acquired in May 1996. ROCKPORT BRAND Designed to address the different aspects of customers' lives, the ROCKPORT product line includes casual, dress, outdoor performance, golf and fitness walking shoes. In 1997, Rockport focused on its men's business with the introduction of its Bourbon Street(TM) collection, refined footwear combining comfort with style and targeting an expanded customer base including younger consumers. Rockport also solidified its success with its ProWalker(R) World Tour Shoe, with an expanded product line. Internationally, the ROCKPORT brand continues to grow. In 1997 the ROCKPORT brand's international revenues grew by 46%. Rockport also expanded its retail presence in 1997 with the opening of a "concept" shop in San Francisco, California and an increase in the United States in the number of its ROCKPORT shops -- independent retail shops dedicated exclusively to the sale of ROCKPORT products -- from 15 to 21. See discussions under "Retail Stores". In addition, Rockport emphasized retail in its international business by opening additional "concept" or retail shops outside of the United States, operated by Rockport distributors or third party retailers. Rockport introduced an integrated marketing campaign in 1997 using the directive, "Be Comfortable. Uncompromise(TM). Start with your feet." The campaign features real individuals, unique for their nonconformity, wearing ROCKPORT shoes with a statement of their unique comfort level. The "Uncompromise" campaign was used as the major marketing platform for the brand in the Fall of 1997, encompassing television advertising, print advertising, public relations and retail promotions. In 1997 Rockport continued to expand its offerings on its Internet website, including the establishment of a business-to-business direct purchase program enabling employees at participating companies to purchase ROCKPORT products through Rockport's website. Rockport markets its products to authorized retailers throughout the United States primarily through a locally based employee sales staff, although Rockport utilizes independent sales agencies for certain products. Internationally, Rockport markets its products through approximately 30 locally based distributors in approximately 50 foreign countries and territories. A majority of the international distributors are either subsidiaries of the Company or joint venture partners or independent distributors which also sell REEBOK brand products. Rockport distributes its products predominantly through select higher-quality national and local shoe store chains, department stores, independent shoe stores, and outdoor outfitters, emphasizing retailers that provide substantial point-of-sale assistance and carry a full product line. Rockport also sells its products through independently-owned ROCKPORT dedicated retail shops, as well as ROCKPORT(sm) concept or company stores. See discussion under "Retail Stores" below. Rockport has not pursued mass merchandisers or discount outlets for the distribution of its products. - 8 - 9 RALPH LAUREN(R) BRAND In 1997 Rockport continued to develop the RALPH LAUREN footwear business, which was acquired in May 1996. The RALPH LAUREN footwear line was expanded in 1997 to include men's English dress shoes. In addition, Collection Classics were introduced for women's shoes and the Refined Casual segment for both men's and women's shoes was expanded. Also in 1997, Polo Sport athletic footwear products were offered. The Polo Sport athletic footwear product line is expected to expand over the next two years with the introduction of new product categories. RALPH LAUREN footwear is marketed to authorized retailers through a locally based employee staff. Products are distributed primarily through higher-quality department stores. Products are also sold through space licensing and merchandising arrangements at RALPH LAUREN/POLO retail stores. GREG NORMAN(R) BRAND The Company's Greg Norman Division produces a collection of apparel and accessories marketed under the GREG NORMAN(R) name and logo. The GREG NORMAN Collection has grown from a golf apparel line to a broader line of men's casual sportswear. The GREG NORMAN product line has been expanded to include a wide range of apparel products -- from leather jackets and sweaters to activewear -- at a variety of upper-end price-points. The Greg Norman Division intends to grow the GREG NORMAN brand further by offering a variety of lifestyle products and expanding into international markets. It is anticipated that the Division will accomplish such expansion through various licensing and distribution arrangements. In 1997 Greg Norman footwear, leather and hosiery products were sold through licensees of the Company. The Division anticipates entering into a number of new agreements which will broaden the scope of products offered and expand distribution internationally. The GREG NORMAN brand is marketed through its endorsement by pro golfer Greg Norman, and a marketing and advertising campaign designed to emphasize his aggressive, bold, charismatic and "winning" style. The current tag line for the brand and marketing focus is the theme "Attack Life". GREG NORMAN products are distributed principally at department and men's specialty stores, on-course pro-shops and golf specialty stores and are sold by a combination of independent and employee sales representatives. The GREG NORMAN Collection is also sold in GREG NORMAN dedicated shops within independently-owned retail stores, as well as GREG NORMAN(sm) concept or company stores. See discussion under "Retail Stores" below. RETAIL STORES AND OTHER PROPERTIES. The Company operates approximately 150 factory direct stores, including REEBOK(R), ROCKPORT(sm) and GREG NORMAN(sm) stores, which sell a variety of footwear, apparel and accessories marketed under the Company's various brands. The Company intends to continue to open additional factory direct stores, although its policy is to locate and operate these retail outlets in such a way as to minimize disruption to its normal channels of distribution. The Company also operates REEBOK(R) "concept" or company retail stores located in New York City and King of Prussia, Pennsylvania. The Company envisions its concept stores as a model for innovative retailing of its products and as a potential proving ground for testing new products and marketing/merchandising techniques. The stores sell a wide selection of current, in-line REEBOK(R), footwear and apparel. Internationally, there are a number of REEBOK retail stores owned by the Company, its subsidiaries or its independent distributors. The Company continues to open retail stores either directly or through its distributors in numerous international markets. - 9 - 10 REEBOK retail shops are expected to be an important means of presenting the brand in relatively new markets such as China, India and Russia and in other international markets. The Company is currently working to develop a retail store concept to showcase the REEBOK brand at retail and expects to incorporate this design into independently-owned retail stores, dedicated exclusively to the sale of Reebok products. In 1998 the Company plans to test this concept in a few stores to be opened in markets around the world. Rockport has concept or company retail stores in San Francisco, California, Boston, Massachusetts, Newport, Rhode Island, King of Prussia, Pennsylvania and New York City. In addition, there are a number of ROCKPORT shops -- independent stores which sell Rockport products exclusively -- in the U.S. as well as internationally. There are two GREG NORMAN concept or company retail stores in New York City. Rockport's Ralph Lauren footwear subsidiary operates "concept" footwear departments in RALPH LAUREN/POLO stores in a number of locations in the United States, including New York City and Beverly Hills, California. In addition, the Ralph Lauren footwear subsidiary has footwear retail operations in approximately 19 RALPH LAUREN/POLO factory direct stores and operates one factory direct store in Tannersville, Pennsylvania. Reebok is also a partner in the REEBOK Sports Club/NY, a premier sports and fitness complex in New York City featuring a wide array of fitness equipment, facilities and services in a luxurious atmosphere. The club utilizes approximately 125,000 square feet and occupies 5 floors of the Lincoln Square project. A REEBOK concept store, as well as ROCKPORT and GREG NORMAN concept stores, is also located in the building. MANUFACTURING Virtually all of the Company's products are produced by independent manufacturers, almost all of which are outside the United States, except that some of the Company's apparel and some of the component parts used in the Company's footwear are sourced from independent manufacturers located in the United States. Each of the Company's operating units generally contracts with its manufacturers on a purchase order basis, subject in most cases to the terms of a formal manufacturing agreement between the Company and such manufacturers. All contract manufacturing is performed in accordance with detailed specifications furnished by the operating unit, subject to strict quality control standards, with a right to reject products that do not meet specifications. To date, the Company has not encountered any significant problem with product rejection or customer returns. The Company generally considers its relationships with its contract manufacturers to be good. As part of its commitment to human rights, the Company has adopted certain human rights standards and a monitoring program which applies to manufacturers of its products. In conjunction with this program, the Company required its supplier of soccer balls in Pakistan to end the use of child labor by centralizing all production, including ball stitching, so that the labor force can be adequately monitored to prevent the use of child labor. Reebok soccer balls are sold with a guarantee that the balls are made without child labor. China, Indonesia, Thailand and the Philippines were the Company's primary sources for footwear, accounting for approximately 39%, 28%, 15%, and 8%, respectively, of the Company's total footwear production during 1997 (based on the number of units produced). The Company's largest manufacturer, which has several factory locations, accounted for approximately 13% of the Company's total footwear production in 1997. Reebok's wholly owned Hong Kong subsidiary, and a network of affiliates in China, Indonesia, India, Thailand, Taiwan, South Korea and the Philippines, provide quality assurance, quality control, and inspection services with respect to footwear purchased by the Reebok Division's - 10 - 11 U.S. and International operations. In addition, this network of affiliates inspects certain components and materials purchased by unrelated manufacturers for use in footwear production. The network of affiliates also facilitates the shipment of footwear from the shipping point to point of destination, as well as arranging for the issuance to the unrelated footwear manufacturers of letters of credit, which are the primary means used to pay manufacturers for finished products. The Company's apparel group utilizes the services of independent third parties, as well as the Company's Hong Kong subsidiary and its network of affiliates in the Far East, to assist in the placement, inspection and shipment of apparel and accessories orders internationally. Production of apparel in the United States is through independent contractors which are retained and managed by the Company's apparel group. ROCKPORT(R) products are produced by independent contractors which are retained and managed through country managers employed by Rockport. The remainder of the Company's order placement, quality control and inspection work abroad is handled by a combination of employees and independent contractors in the various countries in which its products are made. SOURCES OF SUPPLY The principal materials used in the Company's footwear products are leather, nylon, rubber, ethylvinyl acetate and polyurethane. Most of these materials can be obtained from a number of sources, although a loss of supply could temporarily disrupt production. Some of the components used in the Company's technologies are obtained from only one or two sources, and thus a loss of supply could disrupt production. The principal materials used in the Company's apparel products are cotton, fleece, nylon and spandex. These materials can be obtained from a number of sources. The footwear products of the Company that are manufactured overseas and shipped to the United States for sale are subject to U.S. Customs duties. Duties on the footwear products imported by the Company range from 6% to 37.5% (plus a unit charge in some cases of 90 cents), depending on whether the principal component is leather or some other material and on the construction. As with its international sales operations, the Company's footwear and apparel production operations are subject to the usual risks of doing business abroad, such as import duties, quotas and other threats to free trade, foreign currency fluctuations and restrictions, labor unrest and political instability. See "TRADE POLICY" below. The Company believes that it has the ability to develop, over time, adequate substitute sources of supply for the products obtained from present foreign suppliers. If, however, events should prevent the Company from acquiring products from its suppliers in China, Indonesia, Thailand or the Philippines, or significantly increase the cost to the Company of such products, the Company's operations could be seriously disrupted until alternative suppliers were found, with a significant negative financial impact. TRADE POLICY For several years, imports from China to the U.S., including footwear, have been threatened with higher or prohibitive tariff rates, either through statutory action or intervention by the Executive Branch, due to concern over China's trade policies, human rights, foreign weapons sales practices and its foreign policy. Further debate on these issues is expected to continue in 1998. However, the Company does not currently anticipate that restrictions on imports from China will be imposed by the U.S. during 1998. If adverse action is taken with respect to imports from China, it could have an adverse effect on some or all of the Company's product lines, which could result in a negative financial impact. The Company has put in place contingency plans which should allow it to diversify some of its sourcing to countries other than China if any such adverse action occurred. In addition, the Company does not believe that it would be more adversely impacted by any such adverse action than its major competitors. The actual effect of any such action will, however, depend on a number of factors, including how reliant the Company, as compared to its competitors, is on production in China and the effectiveness of the contingency plans put in place. - 11 - 12 The European Union ("EU") imposed import quotas on certain footwear from China in 1994. The effect of such quota scheme on Reebok has not been significant because the quota scheme provides an exemption for certain higher-priced special technology athletic footwear, which exemption is available for most REEBOK products. This exemption does not, however, cover most of Rockport's products. Nevertheless, the volume of quota available to Reebok and Rockport in 1998 is expected to be sufficient to meet the anticipated sales for ROCKPORT products in EU member countries. If, however, such quota is not sufficient, there could be an adverse effect on Rockport's international sales. In addition, the EU has imposed antidumping duties against certain textile upper footwear from China and Indonesia. A broad exemption from the dumping duties is provided for athletic textile footwear which covers most REEBOK models. If the athletic footwear exemption remains in its current form, few REEBOK product lines will be affected by the duties; however, ROCKPORT products would be subject to these duties. Nevertheless, the Company believes that those REEBOK and ROCKPORT products affected by the duties can generally be sourced from other countries not subject to such duties. If, however, the Company was unable to implement such alternative sourcing arrangements, certain of its product lines could be adversely affected by these duties. The EU also has imposed antidumping duties on certain leather upper footwear from China, Thailand and Indonesia. These duties will apply only to low cost footwear, below the import prices of most Reebok and Rockport products. Thus the Company does not anticipate that its products will be impacted by such duties. The EU continues to review the athletic footwear exemption which applies to both the quota scheme and antidumping duties discussed above. The Company, through relevant trade associations, is working to prevent imposition of a more limited athletic footwear exception. Should revisions be adopted narrowing such exemption, certain of the Company's product lines could be affected adversely, although the Company does not believe that its products would be more severely affected than those of its major competitors. Various other countries have taken or are considering steps to restrict footwear imports or impose additional customs duties or other impediments, which actions affect the Company as well as other footwear importers. The Company, in conjunction with other footwear importers, is aggressively challenging such restrictions. Such restrictions have in some cases had a significant adverse effect on the Company's sales in some of such countries, most notably Argentina, although they have not had a material adverse effect on the Company as a whole. PRINCIPAL PRODUCTS Sales of the following categories of products contributed more than 10% to the Company's total consolidated revenue in the years indicated: 1997, footwear (approximately 72%) and apparel (approximately 27%); 1996, footwear (approximately 75%) and apparel (approximately 24%); 1995, footwear (approximately 81%) and apparel (approximately 18%). TRADEMARKS AND OTHER PROPRIETARY RIGHTS The Company believes that its trademarks, especially the REEBOK and ROCKPORT trademarks, and its rights to use the GREG NORMAN name and logo, are of great value, and the Company is vigilant in protecting these marks from counterfeiting or infringement. Loss of the REEBOK, ROCKPORT or GREG NORMAN trademark rights could have a serious impact on the Company's business. The Company also believes that its technologies and designs are of great value and the Company is vigilant in procuring patents and enforcing its patents and other proprietary rights in the United States and in other countries. - 12 - 13 WORKING CAPITAL ARRANGEMENTS In conjunction with the Company's repurchase of approximately 17 million shares of its common stock pursuant to a Dutch Auction self-tender offer in 1996, the Company entered into a credit agreement underwritten by Credit Suisse and a syndicate of major banks. The facility included a committed $750 million revolving credit line to replace the Company's previous $300 million revolving credit facility. The balance of the facility is a $640 million six-year term loan which was used to finance the share repurchase. In July 1997, the Company amended and restated this agreement to reduce the revolving credit portion of the facility to $400 million. As part of this amendment, the commitment fees the Company is required to pay on the unused portion of the revolving credit facility, as well as the borrowing margins over the London Interbank Offer Rate paid on the term loan and used portion of the revolving credit facility, were reduced. The amendment further removed or relaxed various covenants including the restrictions on asset acquisitions and sales, capital expenditures, future indebtedness and investments. The Company elected to make two prepayments of $50 million each in February and May 1997 on the term loan reducing the balance of the term loan as of December 31, 1997 to approximately $497 million. The Company also has various arrangements with numerous banks which provide an aggregate of approximately $1.028 billion of uncommitted facilities, substantially all of which are available to the Company's foreign subsidiaries. Of this amount, approximately $383 million is available for short-term borrowings and bank overdrafts, with the remainder available for letters of credit for inventory purchases. At December 31, 1997, approximately $317 million was outstanding for open letters of credit for inventory purchases, in addition to approximately $41 million in notes payable to banks. The Company also has authority to issue up to $200 million of commercial paper which is supported to the extent available by its revolving credit and loan agreements, referred to above. As of December 31, 1997, the Company had no commercial paper obligations outstanding. SEASONALITY Sales by the Company of athletic and casual footwear tend to be seasonal in nature, with the strongest sales occurring in the first and third quarter. Apparel sales also generally vary during the course of the year, with the greatest demand occurring during the spring and fall seasons. SINGLE CUSTOMER There was no single customer of the Company that accounted for 10% or more of the Company's net sales in 1997. BACKLOG The Company's backlog of orders at December 31, 1997 (many of which are cancelable by the purchaser), totalled approximately $1.224 billion, compared to $1.198 billion as of December 31, 1996. The Company expects that substantially all of these orders will be shipped in 1998, although, as noted above, many of these orders are cancelable. The backlog position is not necessarily indicative of future sales because the ratio of future orders to "at once" shipments and sales by Company owned retail stores may vary from year to year. COMPETITION AND COMPETITORS Competition in sports and fitness footwear and apparel sales is intense. Competitors include a number of sports and fitness footwear and apparel companies, such as Nike, Adidas, Fila and others. Competition is very strong in each of the sports and fitness footwear and apparel market segments, with new entrants and established companies providing challenges in every category. - 13 - 14 The casual footwear market into which the ROCKPORT(R) product lines fall is also highly competitive. Some competitors are highly specialized, while others have varied product lines and some maintain their own retail outlets. The Company believes that Rockport has a strong position in the walking shoe market. Competition in this area, however, has intensified as the activity of walking has grown in popularity and as athletic shoe companies have entered the market. In addition, Rockport's DRESSPORTS(R) line competes with leading makers of dress shoes. The Company's other product lines also continue to confront strong competition. The REEBOK(R) apparel line competes with well-known brands such as Nike, Adidas and Fila. The GREG NORMAN(R) line competes with Tommy Hilfiger, Ralph Lauren, Nautica and other makers of men's casual sportswear. The RALPH LAUREN footwear brand competes with such brands as Cole Haan, Ferragamo and Donna Karan. ISSUES AND UNCERTAINTIES This report 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 industry is experiencing some shift in consumer preference away from athletic footwear to "brown shoe" or "casual" product offerings. This change in preference has adversely affected the Company's business, as well as that of its competitors. The Company is taking steps to respond to this shift by focusing on its products and technologies and continuing to grow its Rockport, Ralph Lauren Footwear and Greg Norman brands. There is, however, substantial uncertainty as to whether the Company 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 Section. 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 - 14 - 15 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 cancelling 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 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 and the cost of the goods sold. 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. The Company has recently experienced declining margins partially as a result of the higher cost associated with its new technology products and its inability to increase its sale prices sufficiently to cover such costs. In order for the Company to increase its margins, it will need to either reduce its costs, for example, by achieving production efficiencies or economies of scale, or increase its selling price. There can be no assurance that either of such results can be achieved. In addition, because of the shift in the marketplace and the resulting over-inventoried promotional retail environment, the Company's full-margin at once business has decreased, resulting in declining 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. 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 athletic footwear products and some of the "icon" athletes supporting - 15 - 16 them. As a result, the Company is re-evaluating 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. The Company recorded a one-time pre-tax special charge in 1997 of $25 million relating to restructuring or eliminating certain of its marketing contracts. 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. 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. 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 above under "Trade Policy" and 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, the Company incurred $640 million in additional debt to finance the repurchase of shares (as of December 31, 1997, the outstanding balance of such debt was approximately $497 million) and has a $400 million revolving - 16 - 17 credit line (as of December 31, 1997, there were no borrowings outstanding under the revolving credit line). As a result of this debt, the Company currently faces significantly increased interest expense and debt amortization, as compared to the past. The credit arrangements contain 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. The Company believes that its cash, short-term investments and access to new 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. 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, the Company's international sales, gross margins and profits were negatively impacted by changes in foreign currency exchange rates. CUSTOMERS Although the Company has no single customer that represents 10% or more of its sales, the Company has certain significant customers, the loss of which could have an adverse effect on its business. There could also be a negative effect on the Company's business if any such significant customer became insolvent or otherwise failed to pay its debts. INTELLECTUAL PROPERTY The Company believes that its trademarks, 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. - 17 - 18 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. In addition, 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. 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. 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. 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. 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 The Company has conducted a global review of its 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. As part of its global restructuring, in 1997 the Company began its global implementation of SAP software, which will replace substantially all legacy systems. The Company presently believes that, with modifications to existing software and converting to SAP software, the year 2000 will not pose significant operational problems for the Company's computer systems. The cost of such modifications is not expected to be material. The Company expects its SAP programs to be substantially implemented by 1999 and the implementation is currently on schedule. 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 impact on the operations of the Company. In addition, in converting to SAP software, the Company is relying on its software partner to develop new software applications and there could be problems in successfully developing such new applications. - 18 - 19 EMPLOYEES As of December 31, 1997, the Company had approximately 6,948 employees in all operating units. None of these employees is represented by a labor union. The Company has never suffered a material interruption of business caused by labor disputes with employees. Management considers employee relations to be good. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS The Company is filing herewith selected portions of its Annual Report to Shareholders for the year ended December 31, 1997 (the "1997 Annual Report") with the Securities and Exchange Commission. Financial information pertaining to the Company's foreign and domestic operations is incorporated herein by reference from Note 16 on page 36 of the 1997 Annual Report. EXECUTIVE OFFICERS OF THE REGISTRANT The following information is submitted as to the executive officers of the Company:
NAME AGE OFFICE HELD - ---- --- ----------- Paul B. Fireman 54 President, Chief Executive Officer and Chairman of the Board of Directors Robert Meers 54 Executive Vice President, President and Chief Executive Officer of the Reebok Division and Director Angel R. Martinez 42 Executive Vice President, President and Chief Executive Officer of The Rockport Company Kenneth I. Watchmaker 55 Executive Vice President and Chief Financial Officer Arthur I. Carver 47 Senior Vice President, Sourcing and Logistics, Reebok Division William M. Sweeney 40 Senior Vice President of the Reebok Division and General Manager - Reebok North America Roger Best 45 Senior Vice President of the Reebok Division and General Manager of the Reebok Division's European Region James R. Jones, III 53 Senior Vice President of Human Resources, Reebok Division Barry Nagler 41 General Counsel and Senior Vice President
Officers hold office until the first meeting of the Board of Directors following the annual meeting of stockholders, or special meeting in lieu thereof, and thereafter until their respective successors are chosen and qualified. Paul B. Fireman is the founder of the Company and has served as its Chief Executive Officer since the Company's founding in 1979 and its Chairman of the Board since 1986. Mr. Fireman served as President of the Company from 1979 to 1987 and was appointed again to that position in 1989. Mr. Fireman has been a Director since 1979. - 19 - 20 Robert Meers has been an Executive Vice President of the Company since February 1994 and a Director of the Company since 1993. He was appointed President and Chief Executive Officer of the Reebok Division in October 1995. Prior to that, he was President of the Company's Specialty Business Group from January 1994 to October 1995. Previously, Mr. Meers was President, U.S. Operations of the Reebok Division from November 1990 to January 1993 and President, U.S. and Canadian Operations of the Reebok Division from January 1993 until January 1994. Mr. Meers joined the Company in 1984. Angel R. Martinez has been President and Chief Executive Officer of The Rockport Company since August 1994. He has been an Executive Vice President of the Company since February 1994. Prior to that, Mr. Martinez was the President of the Fitness Division of the Company from September 1992 to January 1994 and Executive Vice President of Marketing Services from January 1994 to August 1994, and prior to that he was Vice President for Business Development of the Company for several years. Mr. Martinez joined the Company in 1980. Kenneth I. Watchmaker has been an Executive Vice President of the Company since February 1994. He was appointed Chief Financial Officer of the Company in June 1995. Previously, since February 1994, he was an Executive Vice President of the Company with responsibility for finance, footwear production and management information systems. He joined the Company in July 1992 as Executive Vice President, Operations and Finance, Reebok Division. Prior to joining Reebok, Mr. Watchmaker was the partner in charge of audit services in the Boston office of Ernst & Young. Arthur I. Carver has been the Senior Vice President of Sourcing and Logistics of the Reebok Division since January 1996. Prior to that, Mr. Carver was Vice President of Operations Development Worldwide for the Reebok Division since February 1994. Previously, from June 1992 through February 1994, he was Vice President of North American Operations. Prior to that, he was Director of Sales Operations. Mr. Carver joined the Company in 1990. Roger Best has been Senior Vice President of the Reebok Division since February 1996. In July 1997 he became the General Manager of the Reebok Division's European Region. Prior to that, he was General Manager of Reebok North America since February 1996. Previously, from April 1995 through February 1996, he was Regional Vice President of the Reebok Division's Northern Europe Operations and Managing Director of Reebok U.K. and, from January 1992 through April 1995, he was Managing Director of Reebok U.K. Mr. Best joined the Company in 1992. William M. Sweeney has been Senior Vice President of the Reebok Division and General Manager of Reebok North America since August 1997. Prior to that, Mr. Sweeney was Regional Vice President of the Reebok Division's Asia/Pacific Region and President of Reebok Japan since November 1995. He joined Reebok in 1991 as marketing director for the Asia/Pacific Region and was based at the regional headquarters in Hong Kong. James R. Jones, III has been Senior Vice President of Human Resources for the Reebok Division since April 1997. Prior to that, Mr. Jones was Vice President of Human Resources of Inova Health System from May 1996 through April 1997. From July 1995 through May 1996, Mr. Jones was the Senior Vice President of Human Resources of Franciscan Health System. Prior to that, since 1991, Mr. Jones was the Vice President of Human Resources of The Johns Hopkins University. Barry Nagler has been Senior Vice President of the Company since February 1998 and General Counsel since September 1995. Mr. Nagler was previously a Vice President of the Company since May 1995. Prior to that, Mr. Nagler was divisional Vice President and Assistant General Counsel for the Company since September 1994. He joined the Company in June 1987 as Counsel. - 20 - 21 Item 2. Properties. The Company leases most of the properties that are used in its business. Its corporate headquarters and the offices of the Reebok Division and its U.S. Operations are located in office facilities in Stoughton, Massachusetts. At its corporate headquarters, the Company occupies under lease approximately 200,000 square feet of space. The Company signed a six-year lease in July 1989, with two three-year renewal options, for its principal facility at its corporate headquarters. This lease was later amended to extend the term of the lease until June 30, 2000, with a three-year renewal option thereafter. This facility and three other smaller facilities, one of which is leased and the other two of which are owned by the Company, at the Company's corporate headquarters are located approximately one mile from the Reebok Division's U.S. Operations group's principal warehouse and distribution center in Stoughton, which is owned by the Company and which contains approximately 450,000 total square feet of usable space. In order to address the need for additional space at its corporate headquarters, in August 1996 the Company signed an option agreement for the potential purchase of a 42 acre site in Canton, Massachusetts, to be developed as a corporate headquarters facility. Consummation of the purchase of the site is expected to be completed within the next month. Construction of the corporate headquarters facility is expected to take approximately two years following consummation of the purchase. In 1994, the Company purchased a building in Avon, Massachusetts containing approximately 400,000 square feet of space which it uses as an office and warehouse. The Company also leases approximately 330,000 square feet of space in Memphis, Tennessee which it uses as a warehouse and distribution center. In 1993, Rockport purchased its corporate headquarters facility in Marlboro, Massachusetts, containing approximately 80,000 square feet of floor space. In 1995, Rockport completed construction of a distribution center of approximately 285,000 usable square feet on approximately 140 acres of land in Lancaster, Massachusetts which it purchased in 1992. The Company's U.K. subsidiary, Reebok International Limited, has a lease for its corporate headquarters building in Denham Lock, England which is expected to end in December 1998. The 14,000 square foot corporate headquarters building also houses a showroom for use by the Reebok sales force in Southern England. Previously, the Company's International operations were headquartered in Stockley Park, London where the Company's U.K. subsidiary still leases approximately 37,000 square feet under a fifteen year lease which is guaranteed by the Company. Since the Company has moved its International operations to Stoughton, Massachusetts, this property has been subleased to two parties for the term of the lease. The Company's wholly owned Canadian distribution subsidiary, Reebok Canada Inc., leases an approximately 145,000 square foot office/warehouse facility in Aurora, Ontario pursuant to a lease which expires in 1998. Reebok Canada expects to renew this lease thereafter. The Company and its subsidiaries own and lease other warehouses, offices, showrooms and retail and other facilities in the United States and in various foreign countries to meet their space requirements. Except as otherwise indicated, the Company believes that these arrangements are satisfactory to meet its needs. Item 3. Legal Proceedings. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. - 21 - 22 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company is filing herewith selected portions of its 1997 Annual Report with the Securities and Exchange Commission. The information required by this Item is incorporated herein by reference from page 40 of the 1997 Annual Report. Item 6. Selected Financial Data. The Company is filing herewith selected portions of its 1997 Annual Report with the Securities and Exchange Commission. The information required by this Item is incorporated herein by reference from page 19 of the 1997 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company is filing herewith selected portions of its 1997 Annual Report with the Securities and Exchange Commission. The information required by this Item is incorporated herein by reference from pages 20 through 24 of the 1997 Annual Report. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. The Company is filing herewith selected portions of its 1997 Annual Report with the Securities and Exchange Commission. The consolidated financial statements required by this Item, together with the report of the Company's independent auditors for 1997, are contained therein and are incorporated herein by reference from pages 25 through 37 of the 1997 Annual Report. The supplementary financial information required by this Item is contained in the 1997 Annual Report on page 38 and such information is incorporated by reference herein. The financial statements, supplementary data, and Report of Independent Auditors for 1996 and 1995 are listed under Part IV, Item 14 in this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this Item with respect to the Registrant's directors is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 1998, which will be filed with the Securities Exchange Commission on or before March 27, 1998 (the "1998 Proxy Statement"), under the headings "Information with Respect to Nominees", "Transactions with Management and Affiliates" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934". Information called for by this Item with respect to the registrant's executive officers is set forth under "Executive Officers of Registrant" in Item 1 of this report. - 22 - 23 Item 11. Executive Compensation. The information required by this Item is incorporated herein by reference from the 1998 Proxy Statement under the headings "Compensation of Directors", "Executive Compensation", "Supplemental Executive Retirement Plan", "Employee Agreements", "Report of Compensation Committee on Executive Compensation" and "Performance Graphs". Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated herein by reference from the 1998 Proxy Statement under the heading "Beneficial Ownership of Shares". Item 13. Certain Relationships and Related Transactions. The information required by this Item is incorporated herein by reference from the 1998 Proxy Statement under the heading "Transactions with Management and Affiliates". PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) and (2) List of Financial Statements and Financial Statement Schedules. 1. Financial Statements The following consolidated financial statements appearing in the Company's 1997 Annual Report are incorporated by reference in Item 8 of this Form 10-K:
1997 ANNUAL REPORT PAGE ----------------------- Consolidated Balance Sheets at December 31, 1997 and 1996 25 For each of the three years ended December 31, 1997, 1996 and 1995: Consolidated Statements of Income 26 Consolidated Statements of Stockholders' Equity 27 Consolidated Statements of Cash Flows 28 Notes to Consolidated Financial Statements 29-36
2. Financial Statement Schedule The following consolidated financial statement schedule of Reebok International Ltd. is included in Item 14(d) and presented as a separate section of this report: - 23 - 24
FORM 10-K PAGE -------------- Schedule II - Valuation and Qualifying Accounts F-1
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a) 2. Exhibits Listed below are all the Exhibits filed as part of this report. Certain Exhibits are incorporated by reference from documents previously filed by the Company with the Securities and Exchange Commission pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended. Exhibit (3) Articles of incorporation and by-laws. 3.1 Restated Articles of Organization of the Company, as amended(1) 3.2 By-laws, as amended (5), (6), (8) 3.3 By-law Amendment dated February 24, 1998 (4) Instruments defining the rights of security holders, including indentures. 4.1 Indenture, dated as of September 15, 1988, as amended and restated by the First Supplemental Indenture, dated as of January 22, 1993, between Reebok International Ltd. and Citibank N.A., as Trustee (4), (12) 4.2 Common Stock Rights Agreement dated as of June 14, 1990 between the Company and The First National Bank of Boston, as Rights Agent, as amended (7), (9), (10) (10) Material Contracts. 10.1 Distributorship Agreement between Reebok International Limited and the Company(2) 10.2 Trademark License Agreement between Reebok International Limited and the Company(2) 10.3 Lease Agreement, dated March 1, 1988, as amended, between Reebok International Ltd. and North Stoughton Industrial Park Development Trust(5), (14) 10.4 Purchase and Sale Agreement between Reebok International Ltd. and Pentland Group plc dated March 8, 1991(8) 10.5 Agreements with various banks in Hong Kong reflecting arrangements for letter of credit facilities(8) 10.6 Credit Agreement, dated August 23, 1996, among the Company, the Lenders and Co- Agents named therein and Credit Suisse, as Administrative Agent, as amended by the First Amendment dated as of August 23, 1996(16) - 24 - 25 10.7 Amended and Restated Credit and Guarantee Agreement, dated as of July 1, 1997, among Reebok International Ltd., Reebok International Limited, the Lenders and Co- Agents named therein, Citibank N.A. as Documentation Agent and Credit Suisse, as Administrative Agent(18) Management Contracts and Compensatory Plans. 10.8 Reebok International Ltd. 1994 Equity Incentive Plan, as amended(17), (18) 10.9 Reebok International Ltd. Equity and Deferred Compensation Plan for Directors(14) 10.10 Amendments to Reebok International Ltd. Equity and Deferred Compensation Plan adopted February 1997 and February 1998 10.11 Reebok International Ltd. 1985 Stock Option Plan, as amended(11) 10.12 Reebok International Ltd. 1987 Stock Option Plan for Directors, as amended(12) 10.13 Reebok International Ltd. 1987 Stock Bonus Plan(3) 10.14 Reebok International Ltd. Excess Benefits Plan(8) 10.15 Reebok International Ltd. Supplemental Executive Retirement Plan(15) 10.16 Reebok International Ltd. Executive Performance Incentive Plan, as amended(15), (17) 10.17 Stock Option Agreement with Paul B. Fireman(8) 10.18 Split-Dollar Life Insurance Agreement with Paul B. Fireman(11) 10.19 Change of Control Agreement with Paul R. Duncan(18) 10.20 Letter Agreement with Paul R. Duncan dated December 29, 1997 10.21 Employment Agreement with Kenneth Watchmaker(12) 10.22 Change of Control Agreement with Kenneth Watchmaker(18) 10.23 Supplemental Retirement Program for Kenneth Watchmaker(12) 10.24 Change of Control Agreement with Angel Martinez(18) 10.25 Lease with Angel Martinez, as amended(13), (15), (17) 10.26 Quitclaim Deed between Reebok International Ltd. and Angel Martinez 10.27 Employment Agreement dated April 17, 1996 with Roger Best(17) 10.28 Employment Agreements dated September 11, 1997 with Roger Best 10.29 Change of Control Agreement with Robert Meers(18) 10.30 Change of Control Agreement with James R. Jones, III(18) 10.31 Change of Control Agreement with Barry Nagler(18) - 25 - 26 10.32 Form of Non-Competition Agreements signed by Arthur Carver, James R. Jones, III, Angel Martinez, Robert Meers, Barry Nagler, William Sweeney and Kenneth Watchmaker (12) Statement Re Computation of Ratio of Earnings to Fixed Charges. (13) Annual Report to Security Holders. 13.1 Selected Portions of Registrant's 1997 Annual Report to Shareholders (21) Subsidiaries. 21.1 List of Subsidiaries of the Company (23) Consents of experts and counsel. 23.1 The consent of Ernst & Young LLP (b) Reports on Form 8-K. None. (c) Exhibits. The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this report. (27) Financial Data Schedule. 27.1 Financial Data Schedule for fiscal year ended 12/31/97 27.2 Restated Financial Data Schedule for quarter ended 9/30/97 27.3 Restated Financial Data Schedule for quarter ended 6/30/97 27.4 Restated Financial Data Schedule for quarter ended 3/31/97 27.5 Restated Financial Data Schedule for fiscal year ended 12/31/96 27.6 Restated Financial Data Schedule for quarter ended 9/30/96 27.7 Restated Financial Data Schedule for quarter ended 6/30/96 27.8 Restated Financial Data Schedule for quarter ended 3/31/96 27.9 Restated Financial Data Schedule for fiscal year ended 12/31/95 - ----------------------------- (1) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 30, 1987 and incorporated by reference herein and as an Exhibit to Registration Statement No. 11-13370 and incorporated by reference herein. (2) Filed as an Exhibit to Registration Statement No. 2-98367 and incorporated by reference herein. (3) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 28, 1988 and incorporated by reference herein. (4) Filed as an Exhibit to Reebok International Ltd. Form 8-K filed on September 29, 1988 and incorporated by reference herein. (5) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 30, 1989 and incorporated by reference herein. (6) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 26, 1990 and incorporated by reference herein. (7) Filed as an Exhibit to Reebok International Ltd. Form 8-A filed on July 31, 1990 and incorporated by reference herein. (8) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 28, 1991 and incorporated by reference herein. (9) Filed as an Exhibit to Reebok International Ltd. Form 8 Amendment to Registration Statement on Form 8-A filed on April 4, 1991 and incorporated by reference herein. (10) Filed as an Exhibit to Reebok International Ltd. Form 8 Amendment to Registration Statement on Form 8-A filed on December 13, 1991 and incorporated by reference herein. (11) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 27, 1992 and incorporated by reference herein. (12) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 26, 1993 and incorporated by reference herein. - 26 - 27 (13) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated February 15, 1994 and incorporated by reference herein. (14) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 30, 1995 and incorporated by reference herein. (15) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 29, 1996 and incorporated by reference herein. (16) Filed as an Exhibit to Reebok International Ltd. Form 10-Q for the quarter ended September 30, 1996 and incorporated herein by reference. (17) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 27, 1997 and incorporated by reference herein. (18) Filed as an Exhibit to Reebok International Ltd. Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference. - 27 - 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REEBOK INTERNATIONAL LTD. BY: /s/ KENNETH I. WATCHMAKER ------------------------- Kenneth I. Watchmaker Executive Vice President and Chief Financial Officer Dated: March 25, 1998 - 28 - 29 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ PAUL B. FIREMAN - -------------------------------------------- Paul B. Fireman Director, Chairman of the Board and President (Chief Executive Officer) /s/ KENNETH I. WATCHMAKER - -------------------------------------------- Kenneth I. Watchmaker Executive Vice President and Chief Financial Officer (Chief Financial and Accounting Officer) /s/ PAUL R. DUNCAN - -------------------------------------------- Paul R. Duncan Executive Vice President Director /s/ M. KATHERINE DWYER - -------------------------------------------- M. Katherine Dwyer Director /s/ ROBERT MEERS - -------------------------------------------- Robert Meers Executive Vice President Director /s/ WILLIAM F. GLAVIN - -------------------------------------------- William F. Glavin Director /s/ MANNIE L. JACKSON - -------------------------------------------- Mannie L. Jackson Director /s/ BERTRAM M. LEE, SR. - -------------------------------------------- Bertram M. Lee, Sr. Director /s/ RICHARD G. LESSER - -------------------------------------------- Richard G. Lesser Director - 29 - 30 /s/ WILLIAM M. MARCUS - -------------------------------------------- William M. Marcus Director /s/ GEOFFREY NUNES - -------------------------------------------- Geoffrey Nunes Director Dated: March 25, 1998 - 30 - 31 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS REEBOK INTERNATIONAL LTD (Amounts in thousands)
Balance at end of Balance at Charged to Charged to Deductions Balance at description Beginning Costs and Other From End of period of Period Expenses Accounts Allowances(A) Period - ----------- ---------- ---------- ---------- ------------ ---------- YEAR ENDED DECEMBER 31, 1997 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $43,527 $16,471 $15,995 $44,003 YEAR ENDED DECEMBER 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $46,401 $10,225 $13,099 $43,527 YEAR ENDED DECEMBER 31, 1995 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $44,862 $13,151 $11,612 $46,401
(A) Uncollectible accounts written off, net of recoveries F-1 32 EXHIBIT INDEX EXHIBIT LOCATION 3.1 Restated Articles of Organization Incorporated by of the Company, as amended reference 3.2 By-laws, as amended Incorporated by reference 3.3 By-law Amendment dated Filed herewith February 24, 1998 4.1 Indenture, dated as of September 15, Incorporated by 1988. as amended and restated by the reference First Supplemental Indenture, dated as of January 22, 1993, between Reebok International Ltd. and Citibank N.A., as Trustee 4.2 Common Stock Rights Agreement dated Incorporated by as of June 14, 1990 between the reference Company and The First National Bank of Boston, as Rights Agent, as amended 10.1 Distributorship Agreement between Incorporated by Reebok International Limited and reference the Company 10.2 Trademark License Agreement between Incorporated by Reebok International Limited and the reference Company 10.3 Lease Agreement, dated March 1, 1988, Incorporated by as amended, between Reebok reference International Ltd. and North Stoughton Industrial Park Development Trust 10.4 Purchase and Sale Agreement between Incorporated by Reebok International Ltd. and Pentland reference Group plc dated March 8, 1991 10.5 Agreements with various banks in Hong Incorporated by Kong reflecting arrangements for letter reference of credit facilities 10.6 Credit Agreement, dated August 23, Incorporated by 1996, among the Company, the Lenders reference and Co-Agents named therein and Credit Suisse, as Administrative Agent, as amended by the First Amendment dated as of August 23, 1996 10.7 Amended and Restated Credit and Incorporated by Guarantee Agreement, dated as of reference July 1, 1997, among Reebok International Ltd., Reebok Inter- national Limited, the Lenders and Co-Agents named therein, Citibank N.A. as Documentation Agent and Credit Suisse, as Administrative Agent 10.8 Reebok International Ltd. 1994 Equity Incorporated by Incentive Plan, as amended reference 33 10.9 Reebok International Ltd. Equity and Incorporated by Deferred Compensation Plan for reference Directors 10.10 Amendments to Reebok International Filed herewith Ltd. Equity and Deferred Compensation Plan for Directors adopted February 1997 and February 1998 10.11 Reebok International Ltd. 1985 Stock Incorporated by Option Plan, as amended reference 10.12 Reebok International Ltd. 1987 Stock Incorporated by Option Plan for Directors, as amended reference 10.13 Reebok International Ltd. 1987 Stock Incorporated by Bonus Plan reference 10.14 Reebok International Ltd. Excess Incorporated by Benefits Plan reference 10.15 Reebok International Ltd. Supplemental Incorporated by Executive Retirement Plan reference 10.16 Reebok International Ltd. Executive Incorporated by Performance Incentive Plan, as reference amended 10.17 Stock Option Agreement with Paul Incorporated by B. Fireman reference 10.18 Split-Dollar Life Insurance Agreement Incorporated by with Paul B. Fireman reference 10.19 Change of Control Agreement with Incorporated by Paul R. Duncan reference 10.20 Letter Agreement with Paul R. Filed herewith Duncan dated December 29, 1997 10.21 Employment Agreement with Kenneth Incorporated by Watchmaker reference 10.22 Change of Control Agreement with Incorporated by Kenneth Watchmaker reference 10.23 Supplemental Retirement Program for Incorporated by Kenneth Watchmaker reference 10.24 Change of Control Agreement with Incorporated by Angel Martinez reference 10.25 Lease with Angel Martinez, as amended Incorporated by reference 10.26 Quitclaim Deed between Reebok Filed herewith International Ltd. and Angel Martinez 10.27 Employment Agreement dated April 17, Incorporated by 1996 with Roger Best reference 10.28 Employment Agreements dated Filed herewith September 11, 1997 with Roger Best 10.29 Change of Control Agreement with Incorporated by Robert Meers reference 34 10.30 Change of Control Agreement with Incorporated by James R. Jones, III reference 10.31 Change of Control Agreement with Incorporated by Barry Nagler reference 10.32 Form of Non-Competition Agreements Filed herewith signed by Arthur Carver, James R. Jones, III, Angel Martinez, Robert Meers, Barry Nagler, William Sweeney and Kenneth Watchmaker 12. Statement Re Computation of Ratio Filed herewith of Earnings to Fixed Charges 13.1 Selected Portions of Registrant's Filed herewith 1997 Annual Report to Shareholders 21.1 List of Subsidiaries of the Company Filed herewith 23.1 The consent of Ernst & Young LLP Filed herewith 27. Financial Data Schedule 27.1 Financial Data Schedule Filed herewith for fiscal year ended 12/31/97 27.2 Restated Financial Data Schedule Filed herewith for quarter ended 9/30/97 27.3 Restated Financial Data Schedule Filed herewith for quarter ended 6/30/97 27.4 Restated Financial Data Schedule Filed herewith for quarter ended 3/31/97 27.5 Restated Financial Data Schedule Filed herewith for fiscal year ended 12/31/96 27.6 Restated Financial Data Schedule Filed herewith for quarter ended 9/30/96 27.7 Restated Financial Data Schedule Filed herewith for quarter ended 6/30/96 27.8 Restated Financial Data Schedule Filed herewith for quarter ended 3/31/96 27.9 Restated Financial Data Schedule Filed herewith for fiscal year ended 12/31/95 EX-3.3 2 BY LAWS AMENDMENT DATED 2/24/1998 1 EXHIBIT 3.3 AMENDMENT TO BYLAWS DATED FEBRUARY 24, 1998 2.5. NOTICE OF MEETINGS. A written notice of each meeting of stockholders, stating the place, date and hour and the purposes of the meeting, shall be given at least twenty-one days before the meeting to each stockholder entitled to vote thereat and to each stockholder who, by law, by the articles of organization or by these bylaws, is entitled to notice, by leaving such notice with him or at his residence or usual place of business, or by mailing it, postage prepaid, addressed to such stockholder at his address as it appears in the records of the corporation. Such notice shall be given by the clerk or an assistant clerk or by an officer designated by the directors. Whenever notice of a meeting is required to be given to a stockholder under any provision of the Business Corporation Law of the Commonwealth of Massachusetts or of the articles of organization or these bylaws, a written waiver thereof, executed before or after the meeting by such stockholder or his attorney thereunto authorized and filed with the records of the meeting, shall be deemed equivalent to such notice. No business may be transacted at a special meeting of the stockholders except as specified in the notice of meeting thereof. No business may be transacted at an annual meeting of the stockholders except that (a) specified in the notice thereof, or in a supplemental notice given also in compliance with the provisions hereof, (b) brought before the meeting by or at the direction of the Board of Directors or the presiding officer, or (c) otherwise properly brought before the meeting by or on behalf of any stockholder who shall have been a stockholder of record at the time of giving of notice provided for in this paragraph and who shall continue to be entitled to vote thereat and who complies with the notice procedures set forth in this paragraph or, with respect to the election of directors, the notice procedures set forth in Section 3.2 of these by-laws. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder (other than a stockholder proposal included in the corporation's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), the stockholder must have given timely notice thereof in writing to the clerk of the corporation. In order to be timely given, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation (a) not less than 75 nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the corporation or (b) in the event that the meeting is called for a date (including any change in date determined by the board pursuant to Section 2.1) more than 75 days prior to such anniversary date, notice by the stockholder to be timely given must be so received no later than the close of business on the 10th day following the day on which notice of the date of such 2 meeting was mailed or public disclosure of the date of such meeting was made, whichever first occurs. Such stockholder's notice to the clerk shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and record address of the stockholder proposing such business, (c) the class and number of shares of capital stock of the corporation held of record, owned beneficially and represented by proxy by such stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice by the stockholder, (d) any material interest of the stockholder in such business and (e) all other information which would be required to be included in a proxy statement or other filings required to be filed with the Securities and Exchange Commission if, with respect to any such item of business, such stockholder were a participant in a solicitation subject to Regulation 14A under the Exchange Act (the "Proxy Rules"). Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any meeting except in accordance with the procedures set forth in this Section 2.5; PROVIDED, HOWEVER, that nothing in this Section 2.5 shall be deemed to preclude discussion by any stockholder of any business properly brought before such meeting. The chairman of the board or other presiding officer of the meeting may, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the foregoing procedures, and if he or she should so determine, he or she shall so declare to the meeting and that business shall be disregarded. 3.2. TENURE AND NOMINATIONS FOR DIRECTOR. Except as otherwise provided by law, by the articles of organization or by these bylaws, each director shall hold office until the next annual meeting of the stockholders and until his successor is duly elected and qualified, or until he sooner dies, resigns, is removed or becomes disqualified. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the board of directors may be made at a meeting of stockholders (a) by or at the direction of the board of directors or any appropriate committee thereof or (b) by any stockholder of record who is entitled to vote for the election of directors at the meeting and complies with the notice procedures set forth in this Section 3.2. Nominations by stockholders shall be made only after timely notice in writing to the clerk of the corporation. In order to be timely given, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than 75 nor more than 120 days prior to the anniversary date of 3 the immediately preceding annual meeting of stockholders of the corporation; provided, however in the event that the meeting is called for a date, including any change in a date determined by the board pursuant to Section 2.1, more than 75 days prior to such anniversary date, notice by the stockholder to be timely given must be so received no later than the close of business on the 10th day following the day on which notice of the date of such meeting was mailed or public disclosure of the date of such meeting was made, whichever first occurs. Such stockholder's notice to the clerk shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation, if any, which are beneficially owned by the person, (iv) any other information regarding the nominee as would be required to be included in a proxy statement or other filings required to be filed pursuant to the Proxy Rules, and (v) the consent of each nominee to serve as a director of the corporation if so elected; and (b) as to the stockholders giving the notice, (i) the name and record address of the stockholder, (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice, (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iv) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder, and (v) such other information regarding such stockholder as would be required to be included in a proxy statement or other filings required to be filed pursuant to the Proxy Rules. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as director. No person shall be eligible for election as a director unless nominated in accordance with the provisions set forth herein. The Chairman of the Board or other presiding officer of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. EX-10.10 3 AMENDMENTS TO COMPENSATION PLAN 1 EXHIBIT 10.10 VOTED: That the Equity and Deferred Compensation Plan for Directors (the "Plan") be and hereby is amended by replacing Section 7(h) of the Plan with the following: "If a director's service with the Company terminates for any reason other than death, all options held by the director that are not then exercisable shall terminate, provided, however, that in the case of a director who has retired from the Board after twelve or more years of service and in the case of a director who retires from the Board at or after age 70, all options held by that director shall continue to vest during the three years following that director's last day of service (the "Extended Vesting Period"). Options that are exercisable on the date of termination shall continue to be exercisable for a period of three months after the last day of service or, in the case of directors retiring after twelve or more years of services or at or after age 70, for three months following termination of the Extended Vesting Period (all subject, however, to the limitations of Section 6(c) regarding the maximum exercise period for such options). After completion of the applicable three-month period, such options shall terminate to the extent not previously exercised, expired or terminated. EX-10.20 4 LETTER AGREEMENT 1 EXHIBIT 10.20 December 29, 1997 Paul Duncan 76 Washington Drive Sudbury, MA 01776 Re: Reebok Supplemental Executive Retirement Plan ("SERP") Dear Paul: As you know, Reebok would like to retain you as a part-time employee during 1998. In order to induce you to remain as a part-time employee and insure that the compensation you will receive from Reebok's SERP will not be negatively affected by you remaining a part-time employee, Reebok hereby agrees with you that for purposes of determining your Final Average Total Compensation (as defined in Section 4(e)(1) of the SERP) under the SERP plan, we will use the average of your Total Compensation (as such term is defined in the SERP) for the three calendar years during the period 1993 thorough 1997 (inclusive) in which you had the highest Total Compensation. This letter agreement shall constitute an amendment of the SERP with respect to your participation therein. If the foregoing reflects your agreement, please sign below. Very truly yours, REEBOK INTERNATIONAL LTD. By:/s/ BARRY NAGLER Agreed to by: /s/ PAUL R. DUNCAN Paul Duncan EX-10.26 5 QUITCLAIM DEED 1 EXHIBIT 10.26 QUITCLAIM DEED REEBOK INTERNATIONAL LTD., a duly organized Massachusetts corporation, with a principal place of business at 100 TECHNOLOGY CENTER DRIVE, STOUGHTON, NORFOLK COUNTY, MASSACHUSETTS in consideration of EIGHT HUNDRED EIGHTY-TWO THOUSAND NINE HUNDRED TWENTY-SIX AND 00/100 ($882,926.00) DOLLARS grant to ANGEL MARTINEZ and FRANCES MARION MARTINEZ, Husband and Wife, as Tenants by the Entirety of 326 MATTISON DRIVE, CONCORD, MASSACHUSETTS 01742 WITH QUITCLAIM COVENANTS The land in Concord, Middlesex County, Massachusetts, being bounded and described as follows: A certain lot of land in Concord, Middlesex County, Massachusetts, being shown as Lot 2 on a plan of land entitled "Arrowhead Definitive Subdivision of Land in Concord, Mass., prepared for Overview Development Corporation, Scale: 1"-100' February, 1986, general revision June 12, 1986, general revision June 18, 1986, Charles A. Perkins Co., Inc., Civil Engineers and Surveyors, P.O. Box 234, Clinton, Mass. 01510", which plan is recorded with Middlesex South District Registry of Deeds as Plan No. 1180 of 1986 on September 3, 1986, in Book 17362, Page 247, reference to which plan may be had for a more particular description of said Lot 2. Together with the right to use the streets and ways as shown on the aforementioned plan, in common with others entitled thereto, for all purposes for which streets and ways are commonly used in the Town of Concord. Subject to easements, agreements, restrictions and rights of way of record, if any there be, insofar as the same are now in force and applicable. The premises are conveyed with the further restriction that any structures to be built upon said Lot 2 shall be built within that area designated as building envelope on the plan entitled "Plan of Land Showing Building Envelopes for Lots 1, 2 &4 in Concord, Mass., Prepared for Overview Development Corporation, Scale: 1"=40', September 1986, Charles A. Perkins Co., Inc., Civil Engineers & Surveyors, P.O. Box 234, Clinton, Mass. 01510", which plan is recorded with Middlesex South District Registry of Deeds as Plan No. 1635 of 1986 in Book 17585, Page 560. 2 There is hereby specifically excluded from this conveyance the fee in the streets and ways shown on the above-mentioned plan. Being the same premises conveyed to Grantor by Deed of Richard F. Fordyce and R. Renee Fordyce, dated October 30, 1992, and recorded in Middlesex South District Registry of Deeds in Book _______________, Page _______________. This is not a sale of all or substantially all of the Grantor's assets, and this Grant is being made in the usual course of business. Executed as a sealed instrument this 26th day of March 1997. REEBOK INTERNATIONAL LTD. by:/s/ KENNETH I. WATCHMAKER KENNETH I. WATCHMAKER its Executive Vice President and Chief Financial Officer COMMONWEALTH OF MASSACHUSETTS NORFOLK, SS MARCH 26, 1997 Before me personally appeared the above-named KENNETH I. WATCHMAKER, Executive Vice President and Chief Financial Officer of REEBOK INTERNATIONAL LTD., and acknowledged the foregoing to be the free act and deed of the REEBOK INTERNATIONAL LTD. /s/ KERRIE K. HANLEY Notary Public My Commission Expires: Kerrie K. Hanley, Notary Public My Commission Expires February 3, 2000 PROPERTY ADDRESS: 326 MATTISON DRIVE, CONCORD, MASSACHUSETTS 01742 EX-10.28 6 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.28 PRIVATE AND CONFIDENTIAL Roger Best Stanner House Preston Road Grimsargh Preston PR2 5JE 11th September 1997 Dear Roger Re: OFFER OF EMPLOYMENT I am writing to confirm formally the following terms of employment between you and Reebok International Limited, ("RIL"). If you accept the terms and conditions as set out herein, this will form your contract of employment with RIL. I. PRIOR AGREEMENTS This letter is intended to confirm your terms of employment in your new position, it having been agreed that these terms, when combined with the terms of your Dutch employment, will not in any circumstance result in your total compensation and benefits, nor the terms of any severance, being less in net value than the compensation and benefits provided to you in the letter agreement between RIL(US) and yourself dated 17th April 1996. That letter agreement will remain in effect insofar as it deals with stock options and other matters not specifically dealt with herein. You accept that the pension and insurance benefits provided hereunder are an equitable substitute for those provided for in the 12 April 1996 letter. A copy of that agreement is attached hereto and is incorporated herein by reference. II. JOB TITLE/GRADE You have accepted the position of Senior Vice President Marketing Europe in which capacity you will report to the Managing Director of RIL or such person as the President of RIL (US) shall so designate. III. COMPENSATION AND BENEFITS A. Your base salary will be one hundred and thirty thousand pounds (130,000 pounds sterling) per annum to be paid in twelve equal instalments (or pro rata where you are employed hereunder during part of a month), into your bank account by credit transfer. 2 B. Your salary will be reviewed in March of 1998 and each year thereafter. The decision with regard to reviewing salary will be entirely at RIL's discretion. C. You will be responsible for the payment of your own taxes save that in the event that the vesting or exercise of any share options results in a total tax liability greater than the tax liability which you would have incurred had you been solely resident and employed in the UK, RIL will pay to you an amount equivalent to any additional tax. Further, recognising that the vesting of previously granted stock options may create an additional Dutch tax liability, RIL agrees in such event to advance to you in the form of a loan and upon the receipt of appropriate documentation, an additional sum of money to cover this incremental tax burden. You will repay this sum of money back to RIL at such time as the excess Dutch foreign tax credits created by this tax liability are utilised on your UK return. D. You will be entitled to participate in RIL's senior management bonus scheme. The target incentive compensation is agreed to be 50% of your base salary with the actual amount of the award to be determined in line with the terms and conditions of the company scheme. Payment of any bonus is dependent upon your individual performance and the overall financial position of the company. IV. PENSION You will be entitled to a non-contributory pension allowance equivalent to sixteen percent (16%) of your total base salary and any bonuses earned both pursuant to this Agreement and that paid to you as a result of your employment by Reebok Europe BV. The maximum permitted by UK law will be paid tax free into RIL's Pension Scheme which you are expected to join and any amount above this limit will be subject to tax and paid into a funded scheme to be mutually agreed. V. HOLIDAY ENTITLEMENT Your annual holiday entitlement will be 25 days per calendar year (or pro-rata where you are employed hereunder during part of the calendar year). In addition you will receive normal public and religious holiday entitlement. Any entitlement to holiday remaining at the end of any calendar year shall lapse without entitlement to payment in lieu thereof. You will be entitled on the termination of your employment to pay in respect of any accrued but untaken holiday on a pro-rata basis. This holiday entitlement is to be taken at the same time as any holiday entitlement taken pursuant to your role as an employee of Reebok Europe BV. VI. MEDICAL AND HEALTH INSURANCE RIL operates a private medical insurance scheme (currently BUPA), which you will be invited to join. This provides you and 3 your family with cover at RIL's expense. You will also be provided with critical illness and disability insurance in line with company policy. For further details please contact the Human Resources Department. VII. LIFE INSURANCE You will receive life insurance cover of three times your combined base salaries from RIL and Reebok Europe BV. VIII. TAX ADVICE It is expected that Ernst and Young will assist you at the Company's expense in the filing of your UK and Dutch tax returns as well as any US returns required as a result of your recent US posting. RIL will also reimburse you on a one time basis for fees incurred in your obtaining your own tax advice at the outset of this assignment up to a maximum of UK 5,000 pounds sterling. IX. TERMINATION OF EMPLOYMENT Should you wish to terminate your employment at any time you will be expected to give RIL twelve (12) months' written notice to that effect. Similarly, should RIL wish to terminate your employment, it will give you twelve (12) months' notice in writing. Under no circumstances except for "justified cause" may your employment be terminated prior to 31st January 1999, unless RIL pay you the equivalent of the greater of twelve months' compensation and allowances or the total compensation and allowances due through 31st January 1999. In the event of your death your employment will cease with immediate effect. X. TERMINATION OF EMPLOYMENT FOR JUSTIFIED CAUSE WITHOUT NOTICE Your employment may be terminated by RIL without notice or payment in lieu of notice for, amongst other matters, serious or repeated misconduct or breaches of this Contract, mental or long-term illness or if you are convicted of a felony or a misdemeanour involving moral turpitude. XI. CONFIDENTIALITY You will be aware that RIL operates in a highly competitive industry. RIL regards all of the information to which you will have access as being of a confidential nature and you are required to sign the separate Confidentiality Declaration attached hereto which forms part of your terms and conditions of employment. XII. NON-COMPETITION You further agree that during the period of your employment by RIL and for a period of one year thereafter you will not (without the Company's written consent) accept any position with 4 any organization which competes anywhere in the world where Reebok products are sold, with the Reebok Brands Division or with other businesses of RIL 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 further acknowledge and agree that the options granted to you by RIL (US) are granted in part to ensure your compliance with the non-compete restrictions provided herein, and you thus agree that if you violate the provisions of this clause that any such options held by you at such time shall automatically terminate and be cancelled, and to the extent that you have exercised any such options, you will transfer and deliver to the Company any profits made by you as a result of such exercise and sale. You agree that the provisions with respect to the duration, geographic, and product scope of the restrictions set forth in this Section are reasonable to protect the legitimate interests of the Company and the good will of the Company. XIII. START DATE Your employment by RIL commenced on 7th July 1997. XIV. GOVERNING LAW AND JURISDICTION A. This contract shall be governed by and construed in accordance with the Laws of England. B. You agree with RIL to submit to the exclusive jurisdiction of the English courts as regards any claim, dispute or matter arising out of or relating to this contract. XV. ACCEPTANCE I would be grateful if you would confirm your acceptance of this offer by signing the acceptance copy of this letter and the Confidentiality Declaration and return these to me as soon as possible. (Copies are enclosed for you to retain.) Yours sincerely /s/ M L STEPHENS M L Stephens Company Secretary 5 I have read and understand the offer of employment, and confirm my acceptance of the same. Signed /s/ ROGER BEST Date 18/9/97 Name: Roger Best 6 ROGER BEST EMPLOYMENT AGREEMENT THIS AGREEMENT is made this 11th day of September, 1997, by and between Roger Best, residing at Stanner House, Preston Road, Grimsargh, Preston PR2 5JE, (hereinafter BEST), and Reebok Europe BV, a Dutch corporation, with its registered office at Moret Ernst & Young, Marten Meesweg 51, 306a AV Rotterdam, The Netherlands (hereinafter REEBOK). WITNESSETH WHEREAS REEBOK wishes to employ BEST as its Managing Director; and WHEREAS REEBOK is a wholly owned subsidiary of Reebok International Ltd (US) (hereinafter RIL); and WHEREAS BEST has agreed to accept the position of Managing Director and as a statutory Director of REEBOK; and WHEREAS the shareholders of REEBOK will appoint BEST as Director ("bestuurder") of REEBOK with effect from this date; NOW THEREFORE, in consideration of the mutual covenants and obligations contained herein, and intending to be legally bound, the parties, subject to the terms and conditions set forth herein, agree as follows: 1. EMPLOYMENT BEST, subject to the rights of termination contained herein, has been employed as from 7th July 1997 in the position of Managing Director of REEBOK and such employment will continue for an indefinite period. BEST will report to RIL's Senior Vice President International or such person as the President of RIL may from time to time direct. 2. DUTIES During the term of his employment BEST shall devote his time, skill and efforts to the performance of his duties which shall include, without limitation, the duties as are customarily performed by the Managing Director of such companies. In his capacity as Managing Director of REEBOK he shall have such power and authority as shall reasonably be required to enable him to perform his duties hereunder in an efficient manner; provided that in exercising such power and authority and performing such duties, he shall at all times be subject to the authority and control of the President of RIL and shall at all times adhere to the financial controls and other policies of RIL. BEST shall have the power as Managing Director to bind REEBOK and act solely in its behalf in accordance with the law and the Articles of 7 Association of REEBOK. 3. COMPENSATION REEBOK shall pay BEST, and BEST hereby agrees to accept, as compensation for all services rendered hereunder, the gross yearly sum of one hundred and thirty thousand pounds sterling (130,000 pounds sterling) as base salary. Included in the gross annual base salary is an eight per cent (8%) holiday allowance and full compensation for any overtime worked by BEST. This compensation shall be paid in arrears in equal monthly installments. This compensation will be reviewed annually thereafter. It is REEBOK's intention that thirty five per cent (35%) of this shall be paid to BEST as a tax free allowance, subject to the approval of the Dutch tax authorities. 4. PERFORMANCE BONUS BEST will be entitled to participate in RIL's International Bonus Scheme. BEST's target bonus rate shall be fifty per cent (50%) of his base salary. 5. HOLIDAY ENTITLEMENT BEST shall be entitled to 25 days paid holiday per annum, excluding public holidays. The exact dates of such holiday must be agreed by BEST's immediate superior. This holiday shall be taken at the same time as holiday entitlement from Reebok International Limited. 6. EXPENSES REEBOK shall pay or reimburse BEST for all reasonable travel and other expenses incurred by him in connection with the performance of his services under this Agreement.(1) Payment shall be made upon presentation of expense statements or vouchers and such other supporting information as REEBOK may from time to time request. - ----------- (1) It has been agreed that REEBOK will reimburse BEST for his accommodation expenses in the Netherlands as well as a weekly return flight to the United Kingdom. 7. OWNERSHIP OF WORK All concepts and ideas, drawings, patents, patent applications and other product development programs and campaigns developed by BEST in the performance of this Agreement shall be the sole and exclusive property of REEBOK, and, upon its request at any time, or from time to time, during the term of or after the termination of his employment, BEST shall deliver to REEBOK all drawings, sketches and other material and records relating 8 to such concepts, ideas, programs and campaigns that may be in his possession or otherwise available to him. 8. CONFIDENTIALITY Both during the term of his employment by REEBOK and thereafter, BEST shall not, without the prior written consent of REEBOK, divulge to any third party or use for his own benefit, or for any purpose other than the exclusive benefit of REEBOK, any confidential information concerning its business affairs obtained by him during the term of his employment, including, but not limited to, information relating to advertising and marketing campaigns and to REEBOK's relationship with actual or potential clients or customers and the needs and requirements of any such actual or potential customers; it being the intent hereof that he shall not so divulge or use any such information which is unpublished or not readily available to the general public; provided that nothing provided herein shall restrict his ability to make such disclosures during the course of his office as may be necessary or appropriate to the effective or efficient discharge of his duties to REEBOK. 9. NON-COMPETITION BEST agrees that for a period of one (1) year following termination of his employment with REEBOK, BEST will not engage in or have interest in, either directly or indirectly, any of the companies listed below, whether as a principal, partner, director, officer, employee, consultant, agent, distributor, security holder or otherwise (except ownership of one percent (1%) or less of the equity securities of any publicly traded company): Adidas, Asaki, Asics, Bata, British knights, Brooks, Champion, Converse, Diadora, Dunlop, Ellesse, Etonic, Fila, Footjoy, Head, Hi-Tec, Hyde, Kappa, Kangaroo, K-Swiss, LA Gear, Le Coq Sportif, Lotto, Mitre, Mizuno, New Balance, Nike, Pentland, Prince, Puma, Ryka, Saucony, Sergio Tacchini, Spalding, Timberland, Tretorn or Umbro. BEST further agrees that for a period of two (2) years following termination of his employment with REEBOK, BEST will not directly or indirectly: (a) solicit the employment of any person employed by REEBOK, RIL, Reebok International Limited or any of their subsidiaries, affiliates, joint ventures, distributors, etc. as of the date of such termination, or attempt to persuade any such person to leave the employment of those entities, or (b) solicit a contractual relationship with any third party currently under contract with RIL as a distributor, joint venture partner, licensee or footwear supplier or attempt to persuade any such party to terminate its relationship with RIL or REEBOK. 10. CESSATION OF DUTIES 9 Without prejudice to BEST's right to salary and other benefits under this Agreement, REEBOK may at any time require BEST not to attend the premises of REEBOK and not to perform his duties under this Agreement for all or any part of the notice period set out in Paragraph 12 below, or in the event that REEBOK decides to request rescission of the employment agreement until a court has rendered its decision to this request, without prejudice to the right of REEBOK to suspend BEST. 11. SEVERANCE PAY If REEBOK terminates this Agreement (other than for "justified cause") prior to 31st January 1999, as a result of notice being given by REEBOK or rescission requested by REEBOK, BEST shall be entitled to compensation equal to the greater of his full salary and allowances through 31st January 1999 or twelve (12) months' gross base salary and allowances as described in Paragraph 3 above. If Reebok terminates this Agreement (other than for "justified cause") after 31st January 1999, then BEST shall be entitled in lieu of the notice provided for in Paragraph 12 below, to the equivalent of twelve months gross salary and allowances. This agreement shall be deemed terminated by REEBOK if it is rescinded by a Court following a request from REEBOK as provided in article 7A: 1639w NCI. The compensation shall only be due if the termination is not due to a "justified cause." The parties hereto agree that the dismissal of BEST shall not be obviously unreasonable if the above compensation is paid to BEST and that the compensation is regarded as being appropriate for the purposes of a proceeding as described in article 7A: 1639w NCI. 12. NOTICE/TERMINATION Subject to the laws of the Netherlands regarding employees and directors, BEST and REEBOK may terminate this Agreement by mutual consent at any time, or unilaterally by providing to the other party twelve (12) months' notice in writing. In the case of justified cause, REEBOK may terminate this Agreement with immediate effect. Should BEST be incapacitated or otherwise unable to fulfill his duties as Managing Director, then REEBOK may, at its discretion, terminate this Agreement by notice in writing, after such period as required by Dutch law. In the event of BEST's death, this Agreement shall terminate with immediate effect. In the event of "justified cause" REEBOK may terminate this Agreement with immediate effect and without compensation. "Justified cause" shall mean amongst other things serious or repeated misconduct or breaches of this Agreement or if you are convicted of a felony or misdemeanor involving moral turpitude. 13. SUCCESSORS AND ASSIGNEES 10 This Agreement shall not be assignable by BEST and shall enure to the benefit of and be binding upon him and REEBOK, its successors and assignees. 14. WAIVER The waiver of the breach of any term or provision of this Agreement shall not operate as or be construed to be a waiver of any other or subsequent breach of this Agreement. 15. GOVERNING LAW AND JURISDICTION This Agreement shall be construed and enforced in accordance with the laws of the Netherlands. The parties have agreed that the courts of the Netherlands shall have exclusive jurisdiction over any claims arising hereunder. /s/ M L STEPHENS /s/ ROGER BEST By: M L Stephens By: Roger Best Director Reebok Europe BV EX-10.32 7 NON COMPETITION AGREEMENT 1 EXHIBIT 10.32 NON-COMPETITION AGREEMENT This Agreement ("Agreement") is entered into on this _______ day of ____________, 1997, between Reebok International Ltd. ("Reebok") and _____________________("you") . WHEREAS, you have been made aware of or may hereafter be made aware of highly confidential and sensitive information owned or controlled by Reebok, and WHEREAS, Reebok desires to protect its highly confidential and sensitive information from use by or disclosure to parties other than Reebok; In consideration of the mutual promises contained herein, the parties agree as follows: I. NON-COMPETITION A. During Term of Employment. You agree that while employed by Reebok, you will not, directly or indirectly, own, manage, operate, control, invest in, make loans or advances to, be employed by, act as an officer, director, agent or consultant for, or be in any other way connected with, any enterprise anywhere in the world which is engaged in the athletic footwear business, athletic apparel business, or any other business which competes with Reebok or any of its subsidiaries or affiliates (the "Non-Competition Requirement"). B. After Termination of Employment. (1) In the event that you terminate your employment with Reebok for any reason or if Reebok terminates your employment, Reebok will have the right, in its sole discretion, to extend the duration of the Non-Competition Requirement described in Section I.A. for a period of up to one (1) year after termination by providing written notice to you within fourteen (14) days after your effective date of termination. The written notice will specify the length of time that Reebok desires to extend the Non- Competition Requirement. Except as otherwise provided in this Agreement, Reebok will provide you with the following benefits for the Non-Competition period specified in Reebok's written notice: (a) Reebok will pay to you an amount equal to one-half (1/2) of your base salary as of the date of your termination in accordance with Reebok's customary pay practices in effect at the time each payment is made; and (b) you will be able to keep your pre-existing medical coverage in effect, and Reebok will continue the contributions it had previously made towards your medical coverage; provided, however, that if Reebok terminates your employment without "cause" (as hereinafter defined), you shall be entitled under clause (a) above to 100% of your base salary as of the date of termination, which amount shall be reduced by the 2 amount of any severance you receive from Reebok. Reebok has the option, for whatever reason, to elect to waive all or any portion of the Non-Competition period by giving you written notice of such election at least thirty (30) days in advance. In such event, Reebok shall not be obligated to pay you the benefits specified above for any period for which the Non-Competition Requirement has been waived. (2) You agree that for a period of one (1) year following the date of termination of your employment at Reebok, you will inform Reebok, prior to the acceptance of any job or any work as an independent contractor, of the identity of any new employer or other entity to which you are providing consulting or other services, along with your starting date, title, job description and any other information which Reebok may reasonably request to confirm your compliance with the terms of this Agreement. (3) For the purposes of this Agreement, "cause" will be determined by Reebok in its discretion, and will include, but not be limited to, any acts, which in Reebok's opinion constitute (i) insubordination; (ii) dishonesty; (iii) something which would bring you into public disrepute, scandal or ridicule, tend to shock the moral conscience or reflect unfavorably upon Reebok or any of its products; (iv) a violation of your Reebok Employee Agreement (copy attached) or (v) a continual and repeated neglect of any other of your duties. II. NON-RECRUITMENT You agree that while employed by Reebok, and for a period of one (1) year following the termination of your employment with Reebok (regardless of who initiated the termination and the circumstances of the termination), you will not solicit, hire, attempt to hire, or assist in the hiring of any employee of Reebok or any of its subsidiaries or affiliates, or otherwise persuade or attempt to persuade any such employee to discontinue his/her employment relationship with Reebok or any of its subsidiaries or affiliates. This requirement is independent of the Non-Competition Requirement set forth in Section I of this Agreement and is not dependent on pay or benefit continuation of any kind. III. GENERAL A. In the event that you violate Section I or Section II of this Agreement, the time period during which that Section remains in effect will be extended during the time that you are in breach. B. It is acknowledged that the provisions of this Agreement are reasonable and a condition of your employment by Reebok. However, should any provision of this Agreement be found unreasonable or invalid by any court of competent jurisdiction, the parties agree to accept, in its stead, any lesser 3 restrictions which the court deems reasonable. In the event of your breach of this Agreement, it is agreed that Reebok may cease making payments to you under this Agreement and that you will be obligated to refund to Reebok all payments made to you or on your behalf under this Agreement. In addition, you agree that the remedy at law for any breach of the provisions of this Agreement will be inadequate and that, in the event of breach, Reebok will be entitled to injunctive relief in addition to any other remedy it may have. C. This Agreement supplements, and does not supersede, your Reebok Employee Agreement. This Agreement will be construed under and governed by the laws of the Commonwealth of Massachusetts. The Massachusetts courts (state and federal) will have exclusive jurisdiction of any controversy between you and Reebok, and no court action may be brought by either party against the other outside of Massachusetts. This Agreement does not create an obligation on the part of Reebok or any other person to continue your employment. This Agreement may not be modified or amended except by a written amendment signed by you and an authorized officer of Reebok. A breach of any provision of this Agreement may only be waived by an authorized officer of Reebok and such a waiver will not be construed as a waiver of any later breach. Accepted by: Agreed to: Reebok International Ltd. By:______________________ ________________________ Signature Signature of Employee _________________________ ________________________ Title Employee's Typed or Printed Name _________________________ Dated: _________________ Date EX-12 8 COMPUTATION OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 REEBOK INTERNATIONAL LTD. (Amounts in Thousands) Exhibit 12 -- Statement Re: Computation of Ratio of Earnings to Fixed Charges
December December 1997 1996 -------- -------- Earnings Pretax Income ............................. $147,609 $223,033 Add: Interest on indebtedness ................ 64,365 42,246 Amortization of debt discount and issuance costs ........................ 399 394 Interest on Letters of Credit included in cost of goods sold ................. Portions of rent representative of the interest factor ................... 15,123 15,424 -------- -------- Income as adjusted ...................... $227,496 $281,097 ======== ======== Fixed Charges Interest on indebtedness ................ $ 64,365 $ 42,246 Amortization of debt discount and issuance costs ........................ 399 394 Interest on Letters of Credit included in cost of goods sold ................. Portions of rent representative of the interest factor ................... 15,123 15,424 -------- -------- Fixed charges ............................. $ 79,887 $ 58,064 ======== ======== Ratio of earnings to fixed charges ........ 2.85 4.84
EX-13.1 9 SELECTED PORTIONS OF 1997 ANNUAL REPORT 1 EXHIBIT 13.1 FINANCIAL RESULTS AND CORPORATE INFORMATION FINANCIAL DATA SELECTED FINANCIAL DATA 19 QUARTERLY RESULTS OF OPERATIONS 38 MD&A MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 20 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 25 CONSOLIDATED STATEMENTS OF INCOME 26 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 27 CONSOLIDATED STATEMENTS OF CASH FLOWS 28 NOTES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29 REPORTS REPORT OF INDEPENDENT AUDITORS 37 REPORT OF MANAGEMENT 37 CORPORATE INFORMATION DIRECTORS AND OFFICERS 39 SHAREHOLDER INFORMATION 40
SELECTED FINANCIAL DATA
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 ===================================================================================================== Net sales $3,643,599 $3,478,604 $3,481,450 $3,280,418 $2,893,900 Income before income taxes and minority interest 158,085 237,668 275,974 417,368 371,508 Net income 135,119 138,950 164,798 254,478 223,415 Basic earnings per share 2.41 2.06 2.10 3.09 2.58 Diluted earnings per share 2.32 2.03 2.07 3.02 2.53 Cash dividends per common share -- .225 .300 .300 .300 ------------------------------------------------------------------
DECEMBER 31, 1997 1996 1995 1994 1993 ===================================================================================================== Working capital $ 887,367 $ 946,127 $ 900,922 $ 831,856 $ 730,757 Total assets 1,756,097 1,786,184 1,651,619 1,649,461 1,391,711 Long-term debt 639,355 854,099 254,178 131,799 134,207 Stockholders' equity 507,157 381,234 895,289 990,505 846,617 ------------------------------------------------------------------
The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." For further discussion regarding the calculation of earnings per share, see Note 1 to the Consolidated Financial Statements. On June 7, 1996, Reebok completed the sale of substantially all of the operating assets and business of its subsidiary, Avia Group International, Inc. ("Avia"); accordingly, subsequent to that date, the operations of Avia are no longer included in the Company's financial results. 1997 results include an income tax benefit of $40,000 related to the conclusion in 1997 of outstanding tax matters associated with the sale of Avia. 1997 also includes total special after-tax charges of $39,161 relating to restructuring activities in the Company's global operations. Financial data for 1995 includes total special after-tax charges of $44,934, of which $33,699 relates to the sale of Avia and $11,235 relates to facilities consolidation, severance and other related costs associated with the streamlining of certain segments of the Company's operations. Financial data for 1993 includes a special after-tax charge of $7,037 related to the sale of Ellesse U.S.A., Inc. and Boston Whaler, Inc. REEBOK INTERNATIONAL LTD. 19 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. PROSPECTIVE INFORMATION IS BASED ON MANAGEMENT'S THEN CURRENT EXPECTATIONS OR FORECASTS. SUCH INFORMATION IS SUBJECT TO THE RISK THAT SUCH EXPECTATIONS OR FORECASTS, OR THE ASSUMPTIONS 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 THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K UNDER THE HEADING "ISSUES AND UNCERTAINTIES". OPERATING RESULTS 1997 Net sales for the year ended December 31, 1997 were $3.644 billion, a 4.7% increase from the year ended December 31, 1996 sales of $3.479 billion, which included $49.4 million of sales from the Company's Avia subsidiary that was sold in June 1996. The Reebok Division's worldwide sales (including Greg Norman) were $3.131 billion in 1997, a 5.0% increase from comparable sales of $2.982 billion in 1996. The stronger U.S. dollar has adversely impacted Reebok Brand worldwide sales comparisons with the prior year. On a constant dollar basis, sales for the Reebok Brand worldwide increased 8.3% in 1997 as compared to 1996. The Reebok Division's U.S. footwear sales increased 3.0% to $1.229 billion in 1997 from $1.193 billion in 1996. The increase in the Reebok Division's U.S. footwear sales is attributed primarily to increases in the running, walking and men's cross-training categories. The increase in sales in these categories was partially offset by decreases in Reebok's basketball, outdoor and women's fitness categories. The underlying quality of Reebok footwear sales in the U.S. improved from last year. Sales to athletic specialty accounts increased approximately 31%, and the amount of off-price sales declined from 7.6% of total Reebok footwear sales in 1996 to 3.2% of total Reebok footwear sales in 1997. The Reebok Division's U.S. apparel sales increased by 37.2% to $431.9 million from $314.9 million in 1996. The increase resulted primarily from increases in branded core basics, licensed and graphic categories. The Reebok Division's International sales (including footwear and apparel) were $1.471 billion in 1997, approximately equal to the Division's International sales in 1996 of $1.474 billion. The International sales comparison was negatively impacted by changes in foreign currency exchange rates. On a constant dollar basis, for the year ended December 31, 1997, the International sales gain was 6.4%. All International regions generated sales increases over the prior year on a constant dollar basis. For International sales, increases in the running, classic and walking categories were offset by decreases in the basketball and tennis categories. Generally in the industry there is a slowdown in branded athletic footwear and apparel at retail, and there is a significant amount of promotional product offered across all distribution channels. As a result of this situation and the expected ongoing negative impact from currency fluctuations, it will be difficult to increase reported sales for the Reebok Brand in 1998. Rockport's sales for 1997 increased by 14.5% to $512.5 million from $447.6 million in 1996. Exclusive of the Ralph Lauren footwear business, which was acquired in May 1996, Rockport's sales increased 7.3% in 1997. International revenues, which grew by 46.0%, accounted for approximately 21.0% of Rockport's sales (excluding Ralph Lauren Footwear) in 1997, as compared to 16.0% in 1996. Increased sales in the walking and men's categories were partially offset by decreased sales in the women's lifestyle category. The decrease in the women's lifestyle category was the result of a strategic initiative to re-focus the women's business around an outdoor, adventure and travel positioning and reduce the product offerings in the refined women's dress shoe segment. Rockport continues to attract younger customers to the brand with the introduction of a wider selection of dress and casual products. The Ralph Lauren footwear business performed well in 1997 and is beginning to generate sales growth in its traditional segments, reflecting the benefits of improved product design and development and increased distribution. Rockport plans to expand the current product line of Ralph Lauren Polo Sport athletic footwear during 1998 with additional products which will be available at retail during 1999. The Company's gross margin declined from 38.4% in 1996 to 37.0% in 1997. Margins are being negatively impacted by both start-up costs and initially higher manufacturing costs on the Company's new technology products (DMX 2000 and 3D Ultralite). In addition, the decline reflects a significant impact from currency fluctuations as a result of the stronger U.S. dollar and a decrease in full-margin at-once business as a result of an over-inventoried promotional retail environment. The Company estimates that 100 basis points of the margin decline is due to currency. Looking forward, the Company expects margins to continue to be under pressure through at least the first half of 1998. However, the Company believes that if the technology product line expands and gains greater critical mass and with improving production capabilities, the new technology products are capable of generating margin improvement. Selling, general and administrative expenses decreased as a percentage of sales from 30.6% in 1996 to 29.4% in 1997. The reduction is primarily due to the absence of certain advertising and marketing expenses associated with the 1996 Summer Olympics. In addition, non-brand building general and administrative infrastructure expenses declined. Research, design and development expenses increased 27.0% for the year and retail operating expenses increased in support of new store openings. At December 31, 1997, the Company operated 157 Reebok, Rockport and Greg Norman retail stores in the U.S. as compared to 141 at the end of 1996. As described in Note 2 to the Consolidated Financial Statements, the Company recorded special pre-tax charges of $58.2 million relating to restructuring activities in the Company's global operations. The restructuring should enable the Company to achieve operating efficiencies, including improved inventory management, credit management, purchasing power and customer service and should provide the organization with access to a single global data base of company, supplier and customer information. The restruc- 20 REEBOK INTERNATIONAL LTD. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION turing initiatives should also improve logistics, allow the Company to focus its spending on those key athletes and teams who are more closely aligned with its brand positioning and produce cost savings once completed during 1999. Interest expense increased as a result of the additional debt the Company incurred to finance the shares acquired during the 1996 Dutch Auction share repurchase. As described in Note 14 to the Consolidated Financial Statements, the Internal Revenue Service notified the Company in August 1997 that it had approved the Company's tax treatment of certain losses related to the sale of its Avia subsidiary. Accordingly, the Company recorded a tax benefit in the quarter ended September 30, 1997 totaling $40.0 million. Excluding the favorable impact of this special income tax credit, the Company's effective tax rate was 33.2% in 1997, as compared with 35.4% in 1996. The decrease in the rate is attributable to a change in the mix of the earnings between domestic and international subsidiaries. The Company expects its effective tax rate in 1998 to be further reduced to 31.0% - 32.0% as a result of the change in geographic mix of earnings and ongoing efforts to improve cash flow through various tax planning initiatives. The $10.5 million increase in other expense in 1997 relates primarily to currency losses due to the stronger U.S. dollar. Year-to-year earnings per share comparisons benefited from the Company's share repurchase programs including the Dutch Auction share repurchase which was completed in August 1996. Weighted average common shares outstanding (dilutive) for the year ended December 31, 1997 declined by 15.0% to 58.3 million shares, as compared to 68.6 million shares for the year ended December 31, 1996. The Company's footwear and apparel production operations are subject to the usual risks of doing business abroad, such as import duties, quotas and other threats to free trade, foreign currency fluctuations, labor unrest and political instability. The Company believes that it has the ability to develop, over time, adequate substitute sources of supply for the products obtained from present foreign suppliers. If, however, events should prevent the Company from acquiring products from its suppliers in Indonesia, China, Thailand or the Philippines, or significantly increase the cost to the Company of such products, the Company's operations could be seriously disrupted until alternative suppliers are found. For several years, imports from China to the U.S., including footwear, have been threatened with higher or prohibitive tariff rates, either through statutory action or intervention by the Executive Branch, due to concern over China's trade policies, human rights, foreign weapons sales practices and its foreign policy. Further debate on these issues is expected to continue in 1998. However, the Company does not currently anticipate that restrictions on imports from China will be imposed by the U.S. during 1998. If adverse action is taken with respect to imports from China, it could have an adverse effect on some or all of the Company's product lines, which could result in a negative financial impact. The Company has put in place contingency plans which should allow it to diversify some of its sourcing to countries other than China if any such adverse action occurred. In addition, the Company does not believe that it would be more adversely impacted by any such adverse action than its major competitors. The actual effect of any such action will, however, depend on a number of factors, including how reliant the Company, as compared to its competitors, is on production in China and the effectiveness of the contingency plans put in place. The European Union ("EU") imposed import quotas on certain footwear from China in 1994. The effect of such quota scheme on Reebok has not been significant because the quota scheme provides an exemption for certain higher-priced special technology athletic footwear, which exemption is available for most REEBOK products. This exemption does not, however, cover most of Rockport's products. Nevertheless, the volume of quota available to Reebok and Rockport in 1998 is expected to be sufficient to meet the anticipated sales for ROCKPORT products in EU member countries. If, however, such quota is not sufficient, there could be an adverse effect on Rockport's international sales. In addition, the EU has imposed antidumping duties against certain textile upper footwear from China and Indonesia. A broad exemption from the dumping duties is provided for athletic textile footwear which covers most REEBOK models. If the athletic footwear exemption remains in its current form, few REEBOK product lines will be affected by the duties; however, ROCKPORT products would be subject to these duties. Nevertheless, the Company believes that those REEBOK and ROCKPORT products affected by the duties can generally be sourced from other countries not subject to such duties. If, however, the Company was unable to implement such alternative sourcing arrangements, certain of its product lines could be adversely affected by these duties. The EU also has imposed antidumping duties on certain leather upper footwear from China, Thailand and Indonesia. These duties will apply only to low cost footwear, below the import prices of most Reebok and Rockport products. Thus the Company does not anticipate that its products will be impacted by such duties. The EU continues to review the athletic footwear exemption which applies to both the quota scheme and antidumping duties discussed above. The Company, through relevant trade associations, is working to prevent imposition of a more limited athletic footwear exemption. Should revisions be adopted narrowing such exemption, certain of the Company's product lines could be affected adversely, although the Company does not believe that its products would be more severely affected than those of its major competitors. Various other countries have taken or are considering steps to restrict footwear imports or impose additional customs duties or other impediments, which actions affect the Company as well as other footwear importers. The Company, in conjunction with other footwear importers, is aggressively challenging such restrictions. Such restrictions have in some cases had a significant adverse effect on the Company's sales in some of such countries, most notably Argentina, although they have not had a material adverse effect on the Company as a whole. REEBOK INTERNATIONAL LTD. 21 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OPERATING RESULTS 1996 Net sales for the year ended December 31, 1996 were $3.479 billion, approximately equal to the net sales for the year ended December 31, 1995 of $3.482 billion. Excluding Avia sales, net sales for the year ended December 31, 1996 were $3.429 billion, 2.3% higher than the $3.352 billion for the same period in 1995. The Reebok Division's worldwide sales were $2.982 billion in 1996 and $2.984 billion in 1995. Growth in this Division's U.S. apparel sales as well as growth in their International sales was offset by a decrease in U.S. footwear sales. U.S. footwear sales of the Reebok Division decreased 12.7% to $1.193 billion from $1.367 billion in 1995. The decrease was due primarily to decreases in substantially all categories other than walking and soccer which had increases in sales. U.S. apparel sales of the Reebok Division increased by 42.0% to $314.9 million from $221.7 million in 1995. The increase resulted from increases in licensed and branded apparel, particularly in T-shirts, all purpose bottoms, warm-ups, tops and outerwear. International sales of the Reebok Division (including footwear and apparel) were $1.474 billion in 1996, an increase of 5.7% from $1.395 billion in 1995. Strong apparel sales and increases in footwear sales of basketball, walking and classic products were partially offset by decreases in the running, cross-training and outdoor footwear categories. The stronger U.S. dollar adversely impacted sales comparisons with the prior year. On a constant dollar basis for the year ended December 31, 1996, the International sales gain was 8.8%. On a local currency basis, thereby eliminating the impact of changes in foreign currency exchange rates, the United Kingdom, Japan, Korea and South Africa had increases in sales whereas there were decreases in sales in France, Canada and Belgium and in the Division's sales to certain Latin American distributors. Rockport's sales for 1996 increased by 21.6% to $447.6 million from $368.1 million in 1995. This increase reflects an emphasis on Rockport's walking technology and the successful introduction of new products in 1996. Increased sales in the men's casual dress and performance walking categories were partially offset by decreased sales in the women's lifestyle and outdoor categories. Rockport's 1996 results include the Ralph Lauren footwear business. In May 1996, Rockport entered into a licensing arrangement for the North American license for Ralph Lauren footwear and also acquired Ralph Lauren Footwear, Inc., the former North American footwear licensee for Ralph Lauren. Rockport is expected to acquire the Ralph Lauren footwear licensing rights for the rest of the world over the next several years. Sales of Ralph Lauren footwear were $31.9 million in 1996 for the seven month period from May 1996 (the date of acquisition) through December 1996. Rockport's International business increased by 21.0% in 1996. Exclusive of sales of Ralph Lauren footwear, Rockport's International sales accounted for 16% of its total sales during 1996. For the year ended December 31, 1996, the Company's sales include $49.4 million of sales of Avia, a decrease of 61.9% from the $129.6 million of sales of Avia for 1995. On June 7, 1996, Reebok completed the sale of substantially all of the operating assets and business of Avia. Accordingly, subsequent to that date, the operations of Avia are no longer included in the Company's financial results. Gross margins declined from 39.3% in 1995 to 38.4% in 1996. The decline in margins includes the effect of costs incurred with respect to new products and technologies. These costs include the impact of start-up tooling, shorter production runs and increased air freight. The margin decline also reflects a substantial shift in the overall mix of the U.S. business due to increased apparel sales and decreased footwear sales. U.S. apparel sales in 1996 accounted for 20.8% of the Reebok business in the U.S. as compared to 14.0% in 1995. Since U.S. apparel sales contribute lower gross margins than the U.S. footwear business, the shift in domestic mix negatively impacts overall gross margins. International margins were negatively impacted in 1996 as compared with the prior year due to a strong U.S. dollar as against most international currencies. Selling, general and administrative expenses increased as a percentage of sales from 28.7% in 1995 to 30.6% in 1996. Advertising and marketing expenses increased by $66.2 million during 1996 with approximately $30.0 million of that increase attributable to Reebok's Olympic participation. Continued investment in brand-building expenses, including product development, retail presence, sports marketing and on-field presence also contributed to the increase. In addition, retail operating expenses increased in support of the U.S. retail store expansion. At December 31, 1996, the Company operated 141 U.S. Reebok, Rockport and Greg Norman retail stores as compared to 117 at the end of 1995. Primarily all of these U.S. retail stores are located in factory direct outlet malls. Amortization of intangibles decreased due to the write-down in the fourth quarter of 1995 of the carrying value of Avia to estimated fair value on sale. Minority interest represents the minority shareholders' proportionate share of the net income of certain of the Company's consolidated subsidiaries. Interest expense increased from $25.7 million in 1995 to $42.2 million in 1996 as a result of increased borrowings to fund the purchase of approximately 17.0 million shares of the Company's common stock in connection with the Company's Dutch Auction self-tender offer which was completed in August 1996. Year-to-year earnings per share comparisons benefited from the Company's share repurchase programs and the repurchase of shares pursuant to the Dutch Auction. Weighted average common shares outstanding (dilutive) for the year ended December 31, 1996 declined to 68.6 million, compared to 79.5 million shares for the year ended December 31, 1995. REEBOK BRAND BACKLOG The Reebok Brand backlog (including Greg Norman apparel) of open customer orders for the period January 1, 1998 through June 30, 1998 was essentially flat as compared to the same period last year. On a constant dollar basis, the Reebok Brand back- 22 REEBOK INTERNATIONAL LTD. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION log increased 3.4%. North American backlog for the Reebok Brand, which includes the U.S. and Canada, increased 2.8% and the International backlog decreased 5.7%. On a constant dollar basis, the International backlog increased 4.4%. Reebok U.S. footwear backlog increased 2.1% and Reebok U.S. apparel backlog (including Greg Norman apparel) decreased 1.7% as compared to the same period last year. Management believes the slowdown in the Reebok Division's domestic footwear and apparel bookings is the result of retailers becoming more cautious in placing future orders, given current market conditions. The Company continues to see improvement in the shape of the Reebok Brand U.S. footwear order book, with athletic specialty backlog up 57% for the next six months and the volume channel down 11%. The percentage changes in open backlog are not necessarily indicative of future sales trends. The reasons for this are that many orders are cancelable, sales by company-owned retail stores can vary from year-to-year and the ratio of orders booked early to at-once shipments can vary from period to period. For example, the percentage of Reebok U.S. footwear futures to total Reebok U.S. footwear sales was approximately 87% in 1997 as compared to 78% in 1996. LIQUIDITY AND SOURCES OF CAPITAL The Company's financial position remains strong. Working capital was $887.4 million at December 31, 1997 and $946.1 million at December 31, 1996. The current ratio at December 31, 1997 was 2.5 to 1 compared to 2.8 to 1 at December 31, 1996. The decline in the current ratio is primarily the result of the medium-term notes of $50.0 million due in 1998, which were previously classified as long-term debt, being classified as a current liability at December 31, 1997 and the pre-payment of $100.0 million of long-term debt during 1997. Accounts receivable decreased by $28.8 million from December 31, 1996, a decrease of 4.8%. This is the result of the Reebok Division reducing the average days sales outstanding in U.S. receivables by 7 days as compared to last year end. Inventory increased by $19.2 million, or 3.5% from December 31, 1996. U.S. footwear inventories of the Reebok Brand increased 24% at year end in dollars versus a year ago but only 5% in pairs, reflecting higher average per unit costs due to the inclusion of a greater percentage of technology products and a greater percentage of on-time delivery from the Far East factories as they began to catch up with demand, given the general slowdown in the industry. Reebok U.S. apparel inventories were down 23.7% and Reebok retail outlet inventories were down 12% despite adding ten additional stores over the course of the year and achieving same store sales increases of 7.3% in 1997. During the year ended December 31, 1997, cash and cash equivalents decreased $22.6 million and outstanding borrowings decreased by $138.7 million. The Company elected to make pre-payments of $50.0 million in February 1997 and $50.0 million in May 1997 on its long-term debt facility used to fund the Dutch Auction share repurchase in August 1996. Cash provided by operations during 1997 was $126.9 million, as compared to cash provided by operations of $280.3 million during 1996. The change in operating cash flow year-to-year is attributable to improved inventory management practices which had a significant impact in reducing 1996 inventory levels from the prior year thereby generating significant cash in that year. Cash generated from operations, together with the Company's existing credit lines and other financial resources, is expected to adequately finance the Company's current and planned 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, 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 future events that might reduce or eliminate the availability of external financial resources. As a result of the current industry conditions and the Company's near-term business outlook, the Company has announced plans to further restructure its operations in order to manage its business more efficiently in the near-term. Key initiatives will include simplifying and flattening the organizational structure by eliminating management layers, combining and redefining business units and centralizing operations. The intention is to focus the business on fewer near-term opportunities, postpone certain longer-term investments, and simplify the process flows to gain greater efficiencies. As a result of this effort, the Company expects to take a special charge in the first quarter of 1998 of between $25 million to $35 million on a pre-tax basis. The on-going effect of the restructuring will be to reduce operating costs to a level more commensurate with the anticipated short-term business outlook. The Company has conducted a comprehensive global review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and has developed an implementation plan to address the issue. During 1997, the Company started its global implementation of SAP software which will replace substantially all legacy systems. The Company presently believes that, with modifications to existing software and converting to SAP software, the year 2000 issue will not pose significant operational problems for the Company's computer systems as so modified and converted. The Company expects the global implementation of SAP to be substantially completed by 1999 and the implementation is currently on schedule. However, if such modifications and conversions are not completed timely or effectively, the year 2000 problem could have a material impact on the operations of the Company. Lawsuits arise during the normal course of business. The Company does not expect the outcome of any existing litigation to have a significant impact on its financial position or future results of operations. 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. Realized and unrealized gains and losses on these contracts are included in net income except that gains and losses on contracts which hedge specific foreign currency commitments are deferred and accounted for as a part of the transaction. REEBOK INTERNATIONAL LTD. 23 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company also uses forward currency exchange contracts and options to hedge significant intercompany assets and liabilities denominated in other than the functional currency. Contracts used to hedge intercompany balances are marked to market and the resulting transaction gain or loss is included in the determination of net income. Foreign currency losses realized from settlements of transactions included in net income for the year ended December 31, 1997 were $8.1 million. Realized gains and losses from settlements of transactions for the years ended December 31, 1996 and 1995 were not significant. The Company has used forward exchange contracts and options as an element of its risk management strategy for several years. At December 31, 1997, the Company had forward currency exchange contracts and options, all having maturities of less than one year, with a notional amount aggregating $357.9 million. The contracts involved twelve different foreign currencies. No single currency represented more than 20% of the aggregate notional amount. The notional amount of the contracts intended to hedge merchandise purchases was $165.3 million. Deferred gains (losses) on these contracts were not material at December 31, 1997 and 1996. The Company uses interest rate swap agreements to manage its exposure to interest rate movements by effectively converting a portion of its variable rate long-term debt from floating to fixed rates. These agreements involve the exchange of variable rate payments for fixed rate payments without the effect of leverage and without the exchange of the underlying principal amount. Interest rate differentials paid or received under these swap agreements are recognized over the life of the contracts as adjustments to interest expense. At December 31, 1997, the notional amount of interest rate swaps outstanding was $245.0 million. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and hedging instruments. The Company places cash equivalents with high credit major financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. The Company is exposed to credit-related losses in the event of non-performance by counterparties to hedging instruments. The counterparties to these contracts are major financial institutions. The Company continually monitors its positions and the credit ratings of its counterparties and places dollar and term limits on the amount of contracts it enters into with any one party. 24 REEBOK INTERNATIONAL LTD. 7 CONSOLIDATED BALANCE SHEETS AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31 1997 1996 ================================================================================================ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 209,766 $ 232,365 Accounts receivable, net of allowance for doubtful accounts (1997, $44,003; 1996, $43,527) 561,729 590,504 Inventory 563,735 544,522 Deferred income taxes 75,186 69,422 Prepaid expenses and other current assets 54,404 26,275 --------------------------- Total current assets 1,464,820 1,463,088 --------------------------- Property and equipment, net 156,959 185,292 NON-CURRENT ASSETS: Intangibles, net of amortization 65,784 69,700 Deferred income taxes 19,371 7,850 Other 49,163 60,254 --------------------------- 134,318 137,804 --------------------------- Total Assets $ 1,756,097 $ 1,786,184 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable to banks $ 40,665 $ 32,977 Current portion of long-term debt 121,000 52,684 Accounts payable 192,142 196,368 Accrued expenses 219,386 169,344 Income taxes payable 4,260 65,588 --------------------------- Total current liabilities 577,453 516,961 --------------------------- Long-term debt, net of current portion 639,355 854,099 Minority interest 32,132 33,890 STOCKHOLDERS' EQUITY: Common stock, par value $.01; authorized 250,000,000 shares; issued 93,115,835 shares in 1997, 92,556,295 shares in 1996 931 926 Retained earnings 1,145,271 992,563 Less 36,716,227 shares in treasury at cost (617,620) (617,620) Unearned compensation (140) (283) Foreign currency translation adjustment (21,285) 5,648 --------------------------- 507,157 381,234 --------------------------- Total Liabilities and Stockholders' Equity $ 1,756,097 $ 1,786,184 ===========================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. REEBOK INTERNATIONAL LTD. 25 8 CONSOLIDATED STATEMENTS OF INCOME AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31 1997 1996 1995 =============================================================================================== Net sales $ 3,643,599 $ 3,478,604 $ 3,481,450 Other income (expense) (6,158) 4,325 3,126 ------------------------------------------- 3,637,441 3,482,929 3,484,576 ------------------------------------------- COSTS AND EXPENSES: Cost of sales 2,294,049 2,144,422 2,114,084 Selling, general and administrative expenses 1,069,433 1,065,792 999,731 Special charges 58,161 72,098 Amortization of intangibles 4,157 3,410 4,067 Interest expense 64,366 42,246 25,725 Interest income (10,810) (10,609) (7,103) ------------------------------------------- 3,479,356 3,245,261 3,208,602 ------------------------------------------- Income before income taxes and minority interest 158,085 237,668 275,974 Income taxes 12,490 84,083 99,753 ------------------------------------------- Income before minority interest 145,595 153,585 176,221 Minority interest 10,476 14,635 11,423 ------------------------------------------- Net income $ 135,119 $ 138,950 $ 164,798 =========================================== Basic earnings per share $ 2.41 $ 2.06 $ 2.10 =========================================== Diluted earnings per share $ 2.32 $ 2.03 $ 2.07 =========================================== Dividends per common share $ -- $ 0.225 $ 0.300 ===========================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 26 REEBOK INTERNATIONAL LTD. 9 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DOLLAR AMOUNTS IN THOUSANDS
--------------------------------------------------------------- Foreign Common Stock Additional Currency ------------------------ Paid-in Retained Treasury Unearned Translation Shares Par Value Capital Earnings Stock Compensation Adjustment ==================================================================================================================================== ------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1994 117,155,611 $1,172 $ 167,953 $1,428,058 $(603,241) $(2,598) $ (839) ------------------------------------------------------------------------------------------ Net income 164,798 Adjustment for foreign currency translation 12,475 Issuance of shares to certain employees 43,545 1,558 (1,558) Amortization of unearned compensation 1,008 Shares repurchased and retired (6,639,600) (66) (182,569) (42,835) Shares retired (67,200) (1) (1,385) (554) 1,940 Shares issued under employee stock purchase plans 161,377 2 4,253 Shares issued upon exercise of stock options 361,400 4 6,004 Put option contracts outstanding (15) (39,108) Premium received from unexercised equity put options 3,233 Income tax reductions relating to exercise of stock options 953 Dividends declared (23,353) ------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1995 111,015,133 1,096 0 1,487,006 (603,241) (1,208) 11,636 ------------------------------------------------------------------------------------------ Net income 138,950 Adjustment for foreign currency translation (5,988) Treasury shares repurchased (14,379) Issuance of shares to certain employees 43,278 1,505 (55) Amortization of unearned compensation 292 Shares repurchased and retired (18,931,403) (190) (672,900) 688 Shares issued under employee stock purchase plans 157,134 2 4,042 Shares issued upon exercise of stock options 272,153 3 6,930 Put option contracts expired 15 39,825 Income tax reductions relating to exercise of stock options 2,385 Dividends declared (15,180) ------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1996 92,556,295 926 0 992,563 (617,620) (283) 5,648 ------------------------------------------------------------------------------------------ Net income 135,119 Adjustment for foreign currency translation (26,933) Issuance of shares to certain employees 9,532 431 (431) Amortization of unearned compensation 566 Shares repurchased and retired (313) 8 Shares issued under employee stock purchase plans 151,210 1 4,362 Shares issued upon exercise of stock options 399,111 4 10,040 Income tax reductions relating to exercise of stock options 2,756 ------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1997 93,115,835 $ 931 $ 0 $1,145,271 $(617,620) $ (140) $(21,285) ------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. REEBOK INTERNATIONAL LTD. 27 10 CONSOLIDATED STATEMENTS OF CASH FLOWS AMOUNTS IN THOUSANDS YEAR ENDED DECEMBER 31 1997 1996 1995 ===================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 135,119 $ 138,950 $ 164,798 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 47,423 42,927 39,579 Minority interest 10,476 14,635 11,423 Deferred income taxes (17,285) (6,333) (1,573) Special charges 55,697 62,743 Changes in operating assets and liabilities, exclusive of those arising from business acquisitions: Accounts receivable (13,915) (107,082) 16,157 Inventory (47,937) 77,286 (29,531) Prepaid expenses (28,613) 22,650 7,841 Other 24,458 11,042 (18,830) Accounts payable and accrued expenses 20,759 67,769 (25,327) Income taxes payable (59,257) 18,419 (55,553) ------------------------------------- Total adjustments (8,194) 141,313 6,929 ------------------------------------- Net cash provided by operating activities 126,925 280,263 171,727 ------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments to acquire property and equipment (23,910) (29,999) (63,610) Proceeds from business divestitures 6,887 ------------------------------------- Net cash used for investing activities (23,910) (23,112) (63,610) ------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) of notes payable to banks 27,296 (36,947) 2,426 Proceeds from issuance of common stock to employees 17,163 13,362 11,216 Dividends paid (20,922) (23,679) Repayments of long-term debt (156,966) (1,290) (112,445) Net proceeds from long-term debt 632,108 230,000 Proceeds from premium on equity put options 717 3,233 Dividends to minority shareholders (3,900) (7,426) (2,885) Repurchases of common stock (686,266) (225,470) ------------------------------------- Net cash used for financing activities (116,407) (106,664) (117,604) ------------------------------------- Effect of exchange rate changes on cash (9,207) 1,485 5,944 ------------------------------------- Net increase (decrease) in cash and cash equivalents (22,599) 151,972 (3,543) Cash and cash equivalents at beginning of year 232,365 80,393 83,936 ------------------------------------- Cash and cash equivalents at end of year $ 209,766 $ 232,365 $ 80,393 ------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 59,683 $ 38,738 $ 23,962 Income taxes paid 115,985 77,213 152,690 -------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 28 REEBOK INTERNATIONAL LTD. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITY The Company and its subsidiaries design and market sports and fitness products, including footwear and apparel, as well as footwear and apparel for non-athletic "casual" use, under various trademarks, including REEBOK, the GREG NORMAN Logo and ROCKPORT and footwear under RALPH LAUREN and POLO SPORT. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts are eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECOGNITION OF REVENUES Sales are recognized upon shipment of products. ADVERTISING Advertising production costs are expensed the first time the advertisement is run. Media (TV and print) placement costs are expensed in the month the advertising appears. Advertising expense (including cooperative advertising) amounted to $164,870, $201,584 and $157,573 for the years ended December 31, 1997, 1996 and 1995, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION In 1996, the Company adopted Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"). As permitted by Statement 123, the Company continues to account for its stock-based plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and provides pro forma disclosures of the compensation expense determined under the fair value provisions of Statement 123. CASH EQUIVALENTS Cash equivalents are defined as highly liquid investments with maturities of three months or less at date of purchase. INVENTORY VALUATION Inventory, substantially all finished goods, is recorded at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed principally on the straight line method over the assets' estimated useful lives. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. INTANGIBLES Excess purchase price over the fair value of assets acquired is amortized using the straight line method over periods ranging from 5 to 40 years. Other intangibles are amortized using the straight line method over periods ranging from 3 to 40 years. FOREIGN CURRENCY TRANSLATION Assets and liabilities of most of the Company's foreign subsidiaries are translated at current exchange rates. Revenues, costs and expenses are translated at the average exchange rates for the period. Translation adjustments resulting from changes in exchange rates are reported as a separate component of stockholders' equity. Other foreign currency transaction gains and losses are included in the determination of net income. For those foreign subsidiaries operating in a highly inflationary economy or having the U.S. dollar as their functional currency, net nonmonetary assets are translated at historical rates and net monetary assets are translated at current rates. Translation adjustments are included in the determination of net income. INCOME TAXES The Company accounts for income taxes in accordance with FASB Statement No. 109, "Accounting for Income Taxes" ("Statement 109"). Tax provisions and credits are recorded at statutory rates for taxable items included in the consolidated statements of income regardless of the period for which such items are reported for tax purposes. Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities. NET INCOME PER COMMON SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and have been restated, to conform to Statement 128 requirements. 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 during fiscal 1998. At that time, the Company will be required to disclose comprehensive income. Comprehensive income is generally defined as all changes in stockholders' equity exclusive of transactions with owners such as capital investments and dividends. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("Statement 131"), which is required to be adopted for years beginning after December 15, 1997. Management of the Company does not expect the adoption of Statement 131 to have a material impact on the Company's financial statement disclosures. 29 REEBOK INTERNATIONAL LTD. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA RECLASSIFICATION Certain amounts in prior years have been reclassified to conform to the 1997 presentation. 2 SPECIAL CHARGES The financial results for 1997 include special pre-tax charges of $58,161 ($39,200 after tax or $0.67 per diluted share) relating to restructuring activities in the Company's global operations. The restructuring charge relates to facilities consolidation and elimination, asset write-downs, personnel related expenses and the termination or restructuring of certain underperforming marketing contracts that no longer reflect the Company's brand positioning. The restructuring activities include reducing the number of European warehouses from 19 to 3; establishing a shared services company that will centralize European administrative operations; and implementing a global management information system. The charge will cover certain one-time costs, of which approximately 70% will affect cash. In connection with the plan, the Company may incur other additional costs that are not recognizable at this time or cannot be reasonably estimated. The components of the charge are as follows:
1997 BALANCE ORIGINAL UTILIZATION DEC. 31, 1997 -------- ----------- ------------- Marketing contracts $ 25,000 $ -- $ 25,000 Fixed asset write-downs 16,500 (9,600) 6,900 Employee retention and severance 9,200 (800) 8,400 Termination of leases 6,500 (700) 5,800 Other 961 -- 961 --------- ---------- --------- $ 58,161 ($ 11,100) $ 47,061 ========= ========== =========
The fixed asset write-downs relate to assets that will be abandoned or sold. The restructuring should enable the Company to achieve operating efficiencies, including improved inventory management, credit management, purchasing power and customer service and should provide the organization with access to a single global data base of company, supplier and customer information. The restructuring initiative should also improve logistics, allow the Company to focus its spending on those key athletes and teams who are more closely aligned with its brand positioning and produce cost savings once completed during 1999. In 1995, the Company recorded a special pre-tax charge of $72,098 ($44,934 after tax or $0.56 per diluted share) principally related to the adjustment of the carrying value of Avia to its estimated fair value on sale. Actual amounts recorded in 1996 did not differ materially from the Company's estimates. 3 DUTCH AUCTION SELF-TENDER STOCK REPURCHASE On July 28, 1996, the Board of Directors authorized the purchase by the Company of up to 24.0 million shares of the Company's common stock pursuant to a Dutch Auction self-tender offer. The tender offer price range was from $30.00 to $36.00 net per share in cash. The self-tender offer commenced on July 30, 1996 and expired on August 27, 1996. As a result of the self-tender offer, the Company repurchased approximately 17.0 million common shares at a price of $36.00 per share. Concurrent with the Dutch Auction share repurchase, the Company's Board of Directors elected to suspend subsequent declarations of quarterly cash dividends on the Company's stock. Accordingly, the last dividend declared was for shareholders of record as of September 11, 1996. Suspension of the dividend will conserve substantial cash which the Company plans to utilize to reduce debt incurred as a result of the share repurchase. 4 PROPERTY AND EQUIPMENT PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
DECEMBER 31 1997 1996 - ----------- ---- ---- Land $ 9,037 $ 29,283 Buildings 75,380 75,044 Machinery and equipment 221,114 204,354 Leasehold improvements 48,663 48,757 ---------- ----------- 354,194 357,438 Less accumulated depreciation and amortization 197,235 172,146 ---------- ----------- $ 156,959 $ 185,292 ========== ===========
5 INTANGIBLES INTANGIBLES CONSIST OF THE FOLLOWING:
DECEMBER 31 1997 1996 - ----------- ---- ---- Excess of purchase price over fair value of assets acquired (net of accumulated amortization of $8,098 in 1997 and $6,326 in 1996) $ 25,481 $ 27,696 Other intangible assets: Purchased technology 52,827 52,827 Company tradename and trademarks 47,254 49,092 Other 13,699 13,693 ---------- ----------- 113,780 115,612 Less accumulated amortization 73,477 73,608 ---------- ----------- 40,303 42,004 ---------- ----------- $ 65,784 $ 69,700 ========== ===========
30 REEBOK INTERNATIONAL LTD. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 6 SHORT-TERM BORROWINGS The Company has various arrangements with numerous banks which provide an aggregate of approximately $1,053,000 of uncommitted facilities, substantially all of which are available to the Company's foreign subsidiaries. Of this amount, $407,328 is available for short-term borrowings and bank overdrafts, with the remainder available for letters of credit for inventory purchases. In addition to amounts reported as notes payable to banks, approximately $317,718 was outstanding for open letters of credit for inventory purchases at December 31, 1997. On August 23, 1996, in conjunction with the repurchase of its shares pursuant to the Dutch Auction self-tender offer, the Company entered into a new credit agreement underwritten by a syndicate of major banks. The agreement included a $750,000 revolving credit facility, expiring on August 31, 2002 which replaced the Company's previous $300 million credit line. The balance of the facility was a $640,000 six-year term loan (see Note 8). On July 1, 1997, the Company amended and restated the credit agreement. The amendment reduced the revolving credit portion of the facility from $750,000 to $400,000. The revolving credit facility is available to finance the short-term working capital needs of the Company as well as support the issuance of letters of credit for inventory purchases, if required. At December 31, 1997 and December 31, 1996, there were no borrowings outstanding under the revolving credit portion of this agreement. As part of the agreement, the Company is required to pay certain commitment fees on the unused portion of the revolving credit facility as well as comply with various financial and other covenants. As part of the amendment, the commitment fees the Company is required to pay on the unused portion of the revolving credit facility as well as the borrowing margins over the London Interbank Offer Rate on the used portion of the revolving credit facility were reduced. The amendment further removed or relaxed various covenants. All other material terms and conditions of the credit agreement remained unchanged. The Company utilizes a commercial paper program under which it can borrow up to $200,000 for periods not to exceed 270 days. This program is supported, to the extent available, by the unused portion of the $400,000 revolving credit facility. At December 31, 1997, the Company had no commercial paper obligations outstanding. The weighted average interest rate on notes payable to banks was 7.1% and 5.5% at December 31, 1997 and 1996, respectively. 7 LEASING ARRANGEMENTS The Company leases various offices, warehouses, retail store facilities and certain of its data processing and warehouse equipment under lease arrangements expiring between 1998 and 2007. Minimum annual rentals under operating leases for the five years subsequent to December 31, 1997 and in the aggregate are as follows: 1998 $ 35,809 1999 30,196 2000 20,319 2001 12,268 2002 8,308 2003 and thereafter 15,756 ----------- Total minimum lease obligations $ 122,656 ===========
Total rent expense for all operating leases amounted to $45,827, $46,751 and $40,602 for the years ended December 31, 1997, 1996 and 1995, respectively. 8 LONG-TERM DEBT LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
DECEMBER 31 1997 1996 - ----------- ---- ---- Variable Rate Term Loan due August 31, 2002 with interest payable quarterly $ 497,398 $ 640,000 Medium-term notes, bearing interest at rates approximating 6.75%, due May 15, 2000, with interest payable semiannually on May 15 and November 15 100,000 100,000 6.75% debentures due September 15, 2005, with interest payable semiannually on March 15 and September 15 98,953 98,803 Medium-term notes, bearing interest at rates approximating 6%, due July 15, 1998, with interest payable semiannually on February 15 and August 15 30,000 30,000 Medium-term notes, bearing interest at rates approximating 6%, due February 11, 1998, with interest payable semiannually on February 15 and August 15 20,000 20,000 Bank and other notes payable 14,004 17,980 ----------- ----------- 760,355 906,783 Less current portion 121,000 52,684 ----------- ----------- $ 639,355 $ 854,099 =========== ===========
31 REEBOK INTERNATIONAL LTD. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA On August 23, 1996, the Company entered into a $1,700,000 credit agreement underwritten by a syndicate of major banks of which $950,000 was available in the form of a six-year term loan facility for the purpose of financing the Company's acquisition of common stock pursuant to the Dutch Auction self-tender offer (see Note 3). Based on the number of shares tendered, the Company borrowed $640,000 from this facility. The undrawn portion of $310,000 was immediately canceled upon funding of the share repurchase. The credit agreement included various covenants including restrictions on asset acquisitions, capital expenditures and future indebtedness, and the requirement to maintain a minimum interest coverage ratio. Under the terms of the agreement there are various options under which the interest is calculated. On July 1, 1997, the Company amended and restated the credit agreement. This amendment left the remaining portion of the six-year term loan of $522,398 (as of December 31, 1997) on substantially the same payment schedule, after adjusting for the $100,000 in optional prepayments made in 1997. The amendment also removed or relaxed covenants pertaining to restrictions on asset acquisitions and sales, capital expenditures, future indebtedness and investments and reduced the borrowing margins charged by the banks on the variable rate term loan. All other material terms and conditions of the credit agreement remain unchanged. At December 31, 1997 and December 31, 1996, the effective rate of interest on the variable term loan was approximately 6.19% and 6.20%, respectively. In addition, the Company is amortizing fees and expenses associated with the credit agreement over the life of the agreement. Maturities of long-term debt during the five-year period ending December 31, 2002 are $121,000 in 1998, $95,576 in 1999, $185,000 in 2000, $110,000 in 2001 and $147,398 in 2002. 9 EMPLOYEE BENEFIT PLANS The Company sponsors defined contribution retirement plans covering substantially all of its domestic employees and certain employees of its foreign subsidiaries. Contributions are determined at the discretion of the Board of Directors. Aggregate contributions made by the Company to the plans and charged to operations in 1997, 1996 and 1995 were $13,696, $11,755 and $11,644, respectively. 10 STOCK PLANS The Company has stock plans which provide for the grant of options to purchase shares of the Company's common stock to key employees, other persons or entities who make significant contributions to the success of the Company, and eligible members of the Company's Board of Directors. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, as long as the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Under the 1994 Equity Incentive Plan, options may be incentive stock options or "non-qualified options" under applicable provisions of the Internal Revenue Code. The exercise price of any stock option granted may not be less than fair market value at the date of grant except in the case of grants to participants who are not executive officers of the Company and in certain other limited circumstances. The exercise period cannot exceed ten years from the date of grant. The vesting schedule for options granted under the 1994 Equity Incentive Plan is determined by the Compensation Committee of the Board of Directors. The 1994 Equity Incentive Plan also permits the Company to grant restricted stock to key employees and other persons or entities who make significant contributions to the success of the Company. The restrictions and vesting schedule for restricted stock granted under this Plan are determined by the Compensation Committee of the Board of Directors. The Company also has an option plan for its Directors. Under this plan, a fixed amount of options are granted annually to all non-employee Directors. Grants of options under the Directors plan vest in equal annual installments over three years. The Company has two employee stock purchase plans. Under the 1987 Employee Stock Purchase Plan, eligible employees are granted options to purchase shares of the Company's common stock through voluntary payroll deductions during two option periods, running from January 1 to June 30 and from July 1 to December 31, at a price equal to the lower of 85% of market value at the beginning or end of each period. Under the 1992 Employee Stock Purchase Plan, for certain foreign-based employees, eligible employees are granted options to purchase shares of the Company's common stock during two option periods, running from January 1 to June 30 and from July 1 to December 31, at the market price at the beginning of the period. The option becomes exercisable 90 days following the date of grant and expires on the last day of the option period. Accordingly, no options are outstanding at December 31, 1997 and 1996. During 1997, 1996 and 1995, respectively, 151,210, 157,134 and 161,377 shares were issued pursuant to these plans. In June 1990, the Company adopted a shareholders' rights plan and declared a dividend distribution of one common stock purchase right ("Right") for each share of common stock outstanding. Each Right entitles the holder to purchase one share of the Company's common stock at a price of $60 per share, subject to adjustment. The Rights will be exercisable only if a person or group of affiliated or associated persons acquires beneficial ownership of 10% or more of the outstanding shares of the Company's common stock or commences a tender or exchange offer that would result in a person or group owning 10% or more of the outstanding common stock, or in the event that the Company is subsequently acquired in a merger or other business combination. When the Rights become exercisable, each holder would have the right to purchase, at the then-current exercise price, common stock of the surviving company having a market value of two times the exercise price of the Right. The Company can redeem the Rights at $.01 per Right at any time prior to expiration on June 14, 2000. At December 31, 1997, 13,705,700 shares of common stock were reserved for issuance under the Company's various stock plans and 70,105,308 shares were reserved for issuance under the shareholders' rights plan. 32 REEBOK INTERNATIONAL LTD. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA THE FOLLOWING SCHEDULE SUMMARIZES THE CHANGES IN STOCK OPTIONS DURING THE THREE YEARS ENDED DECEMBER 31, 1997:
NUMBER OF SHARES UNDER OPTION ----------------------------- WEIGHTED AVERAGE NON-QUALIFIED OPTION EXERCISE STOCK OPTIONS PRICE PER SHARE PRICE ------------- --------------- ----- Outstanding at December 31, 1994 5,879,575 $ 8.75 - $39.77 $ 22.83 Granted 1,361,502 28.75 - 36.75 34.90 Exercised (361,400) 8.75 - 33.25 16.75 Canceled (722,760) 11.38 - 39.77 30.57 ---------- ----------------- --------- Outstanding at December 31, 1995 6,156,917 8.75 - $38.88 24.96 Granted 4,436,947 26.75 - 41.63 31.32 Exercised (272,153) 8.75 - 37.02 25.41 Canceled (406,005) 11.38 - 37.02 31.10 ---------- ----------------- --------- Outstanding at December 31, 1996 9,915,706 8.75 - $41.63 27.54 Granted 1,205,704 33.75 - 49.25 35.51 Exercised (399,111) 8.75 - 36.75 25.72 Canceled (534,680) 24.00 - 41.63 33.14 ---------- ----------------- --------- Outstanding at December 31, 1997 10,187,619 $ 10.63 - $49.25 $ 28.26 ========== ======== ====== =========
At December 31, 1997, the exercise prices for outstanding options ranged from $10.63 - $49.25. Within that range, 2,771,254 options were outstanding between $10.63 and $19.37. All of these options were exercisable at December 31, 1997. The weighted average exercise price and average remaining contractual life of these options is $17.43 and 2.5 years, respectively. Additionally, 7,416,365 options were outstanding between $20.46 and $49.25. Included in this range are 1,552,954 options exercisable at a weighted average exercise price of $30.23. The weighted average exercise price and average remaining contractual life of these outstanding options is $32.33 and 8 years, respectively. Shares granted in 1996 include a July grant to certain senior executives made in conjunction with the Dutch Auction. The options do not begin to vest until the end of 1998, and vesting extends for a period of up to five years ending in December 2002. These option grants provide that if an optionee sells before the end of 1998 any shares acquired through the exercise of options which were held prior to the Dutch Auction, the optionee will forfeit an identical number of shares subject to option under the July 1996 grant. In addition, during 1996 the Company reinstituted December as the month in which it grants its annual stock options to employees. The 1995 and 1994 annual employee option grants were issued in February 1996 and March 1995, respectively. At December 31, 1997, 1996 and 1995, options to purchase 4,324,208, 3,983,278 and 3,956,545 shares of common stock were exercisable, and 3,032,790, 1,225,051 and 3,369,311 shares, respectively, were available for future grants under the Company's stock equity plans. Pro forma information regarding net income and earnings per share is required by Statement 123, which requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates ranging from 5.2% to 7.7%; dividend yields of .89%, .68% and .0%; volatility factors of the expected market price of the Company's common stock of .27 in 1995 and 1996 and .35 in 1997; and a weighted-average expected life of the option of 4.2 years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. THE COMPANY'S PRO FORMA INFORMATION FOLLOWS (IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE INFORMATION):
1997 1996 1995 ---- ---- ---- Pro forma net income $ 127,506 $ 134,017 $ 163,404 Pro forma basic earnings per share $ 2.31 $ 2.03 $ 2.09 Pro forma diluted earnings per share $ 2.23 $ 2.00 $ 2.07
The weighted average fair value of options granted in 1997, 1996 and 1995 is $13.09, $10.76 and $11.63, respectively. Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 2001. 11 ACQUISITION OF COMMON STOCK On October 19, 1995, the Board of Directors authorized the repurchase of up to an additional $200,000 in Reebok common stock in open market or privately-negotiated transactions. This authorization was in addition to the share repurchase programs of $200,000 each adopted by the Company in July 1992, July 1993 and October 1994. As of December 31, 1997, the Company had approximately $129,800 available for future repurchases of common stock under these programs. During 1996 and 1995, the Company issued equity put options as part of its share repurchase program. These options provided the Company with an additional source to supplement open market purchases of its common stock. At December 31, 1997 and 1996, no shares of outstanding common stock are subject to repurchase under the terms and conditions of these options. 33 REEBOK INTERNATIONAL LTD. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 12 BUSINESS ACQUISITIONS AND DIVESTITURES On May 23, 1996, the Company finalized a long-term exclusive footwear licensing arrangement with Ralph Lauren to design, develop, manufacture, market and distribute men's, women's and children's footwear under the Ralph Lauren label. The agreement requires payment of certain annual minimum amounts for royalties and other compensation. The territory for the license initially includes North America and is expected to expand worldwide as existing Ralph Lauren licenses expire subject to reaching agreement with Ralph Lauren as to business plans for the additional territories. In conjunction with the licensing arrangement, Reebok's subsidiary, The Rockport Company, Inc., acquired Ralph Lauren's prior licensee for the U.S. and Canada, Ralph Lauren Footwear, Inc. On June 7, 1996, Reebok completed the sale of substantially all of the operating assets and business of its subsidiary, Avia Group International, Inc. 13 FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments: Cash and cash equivalents and notes payable to banks: the carrying amounts reported in the balance sheet approximate fair value. Long-term debt: the fair value of the Company's medium-term notes and debentures is estimated based on quoted market prices. The fair value of other long-term debt is estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. Unrealized gains or losses on foreign currency exchange contracts and options: the fair value of the Company's foreign currency exchange contracts is estimated based on current foreign exchange rates. Fair market value of interest rate swaps: the fair value of the Company's interest rate swaps is estimated based on current interest rates. THE CARRYING AMOUNTS AND FAIR VALUE OF THE COMPANY'S FINANCIAL INSTRUMENTS ARE AS FOLLOWS:
CARRYING AMOUNT FAIR VALUE --------------- ---------- DECEMBER 31 1997 1996 1997 1996 - ----------- ---- ---- ---- ---- Long-term debt $760,355 $ 906,783 $ 759,049 $881,372 Unrealized gains on foreign currency exchange contracts and options 4,619 173 6,256 1,394 Interest rate swaps 0 0 344 1,420
FOREIGN EXCHANGE FORWARDS AND OPTIONS 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. Realized and unrealized gains and losses on these contracts are included in net income except that gains and losses on contracts which hedge specific foreign currency commitments are deferred and accounted for as a part of the transaction. The Company also uses forward currency exchange contracts and options to hedge significant intercompany assets and liabilities denominated in other than the functional currency. Contracts used to hedge intercompany balances are marked to market and the resulting transaction gain or loss is included in the determination of net income. Foreign currency losses realized from settlements of transactions included in net income for the year ended December 31, 1997 were $8.1 million. Realized gains and losses from settlements of transactions for the years ended December 31, 1996 and 1995 were not significant. The Company has used forward exchange contracts and options as an element of its risk management strategy for several years. At December 31, 1997, the Company had option and forward currency exchange contracts, all having maturities of less than one year, with a notional amount aggregating $357,913. The contracts involved 12 different foreign currencies. No single currency represented more than 20% of the aggregate notional amount. The notional amount of contracts intended to hedge merchandise purchases was $165,324. Deferred gains (losses) on these contracts were not material at December 31, 1997 and 1996. INTEREST RATE SWAPS The Company uses interest rate swap agreements to manage its exposure to interest rate movements by effectively converting a portion of its variable rate long-term debt from floating to fixed rates. These agreements involve the exchange of variable rate payments for fixed rate payments without the effect of leverage and without the exchange of the underlying principal amount. Interest rate differentials paid or received under these swap agreements are recognized over the life of the contracts as adjustments to interest expense. During the fourth quarter of 1996, the Company entered into several amortizing interest rate swaps with a group of financial institutions having an initial notional value of $320,000 and expiring on December 31, 2000. The notional amount of the swaps is reduced each year in accordance with the expected repayment schedule of the Company's variable rate term loan. The terms of the swaps require the Company to make fixed rate payments on a quarterly basis whereas the Company will receive variable rate payments based on the three month U.S. dollar LIBOR. At December 31, 1997 and 1996, the notional amount of interest rate swaps outstanding was $245,000 and $320,000, respectively. In January 1998, the Company entered into additional interest rate swaps in the amount of $150,000 with respect to the variable rate term loan. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and hedging instruments. The Company places cash equivalents with high credit financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. The Company is exposed to credit-related losses in the event of non-performance by counterparties to hedging instruments. The counterparties to these contracts are major financial institutions. The Company continually monitors its positions and the credit ratings of its counterparties and places dollar and term limits on the amount of contracts it enters into with any one party. 34 REEBOK INTERNATIONAL LTD. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 14 INCOME TAXES THE COMPONENTS OF INCOME BEFORE INCOME TAXES AND MINORITY INTEREST ARE AS FOLLOWS:
1997 1996 1995 ---- ---- ---- Domestic $ (32,783) $ (12,720) $ 14,292 Foreign 190,868 250,388 261,682 ---------- ----------- ----------- $ 158,085 $ 237,668 $ 275,974 ========== =========== ===========
THE PROVISION FOR INCOME TAXES CONSISTS OF THE FOLLOWING:
1997 1996 1995 ---- ---- ---- CURRENT: Federal $ (34,314) $ 1,961 $ 3,998 State (324) 4,534 13,878 Foreign 64,413 83,921 83,450 ---------- ----------- ----------- 29,775 90,416 101,326 ========== =========== =========== DEFERRED: Federal (8,940) (1,705) (1,594) State (1,900) (689) (3,112) Foreign (6,445) (3,939) 3,133 ----------- ------------ ----------- (17,285) (6,333) (1,573) ----------- ------------ ----------- $ 12,490 $ 84,083 $ 99,753 =========== ============ ===========
During 1992, the Company recorded a write-down in the carrying value of its Avia subsidiary in the amount of $100,000 with no corresponding tax benefit recognized in that year due to the uncertainty concerning the ultimate deductibility of the charge. In June 1996, substantially all of the operating assets and business of Avia were sold. After the sale, in December 1996, the Company requested a pre-filing determination from the Internal Revenue Service ("IRS") regarding the deductibility of certain losses pertaining to the sale of Avia. In August 1997, the IRS notified the Company that it had approved the Company's tax treatment concerning the deductibility of the Avia losses and accordingly, a corresponding reduction in income taxes totaling $40,000 was recorded in the third quarter of 1997 and is reflected in the current federal and state provisions. Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $405,265, $517,309 and $410,402 at December 31, 1997, 1996 and 1995, respectively. Those earnings are considered to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends or otherwise, a portion would be subject to both U.S. income taxes and foreign withholding taxes, less an adjustment for applicable foreign tax credits. Determination of the amount of U.S. income tax liability that would be incurred is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce some portion of any U.S. income tax liability. INCOME TAXES COMPUTED AT THE FEDERAL STATUTORY RATE DIFFER FROM AMOUNTS PROVIDED AS FOLLOWS:
1997 1996 1995 ---- ---- ---- Tax at statutory rate 35.0% 35.0% 35.0% State taxes, less federal tax effect 1.5 1.7 2.7 Effect of tax rates of foreign subsidiaries and joint ventures (4.3) (1.6) (2.0) Tax benefit from Avia losses (25.3) Amortization of intangibles 0.4 0.4 0.4 Other, net 0.6 (0.1) 0.1 ---- ---- ---- Provision for income taxes 7.9% 35.4% 36.2% ==== ==== ====
Net deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. DEFERRED TAX ASSETS ARE ATTRIBUTABLE TO THE FOLLOWING TEMPORARY DIFFERENCES AT
DECEMBER 31 1997 1996 - ----------- ---- ---- Inventory $ 30,238 $ 35,212 Accounts receivable 24,973 23,085 Liabilities 26,714 9,661 Depreciation 6,117 5,528 Other, net 6,515 3,786 --------- --------- Total $ 94,557 $ 77,272 ========= =========
35 REEBOK INTERNATIONAL LTD. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 15 EARNINGS PER SHARE THE FOLLOWING TABLE SETS FORTH THE COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE:
1997 1996 1995 ---- ---- ---- NUMERATOR: Net Income $ 135,119 $ 138,950 $ 164,798 ---------- ----------- ----------- DENOMINATOR: Denominator for basic earnings per share -- weighted- average shares 56,162 67,370 78,317 Dilutive employee stock options 2,147 1,247 1,170 ---------- ----------- ----------- Denominator for diluted earnings per share -- adjusted weighted- average shares and assumed conversions 58,309 68,617 79,487 ---------- ----------- ----------- Basic earnings per share $ 2.41 $ 2.06 $ 2.10 ---------- ----------- ----------- Diluted earnings per share $ 2.32 $ 2.03 $ 2.07 ========== =========== ===========
16 OPERATIONS BY GEOGRAPHIC AREA NET SALES TO UNAFFILIATED CUSTOMERS, NET INCOME AND IDENTIFIABLE ASSETS BY GEOGRAPHIC AREA ARE SUMMARIZED BELOW:
1997 1996 1995 ---- ---- ---- NET SALES: United States $ 2,000,883 $ 1,935,724 $ 2,027,080 United Kingdom 661,358 566,196 492,843 Europe 510,981 623,209 642,622 Other countries 470,377 353,475 318,905 ------------ ------------- ------------ $ 3,643,599 $ 3,478,604 $ 3,481,450 ============ ============= ============ NET INCOME: United States $ 83,894 $ 41,522 $ 52,314 United Kingdom 50,441 60,050 74,175 Europe (567) 21,854 28,138 Other countries 1,351 15,524 10,171 ------------ ------------- ------------ $ 135,119 $ 138,950 $ 164,798 ============ ============= ============ IDENTIFIABLE ASSETS: United States $ 938,027 $ 887,217 $ 813,935 United Kingdom 372,526 391,865 291,825 Europe 278,606 282,057 311,903 Other countries 166,938 225,045 233,956 ------------ ------------- ------------ $ 1,756,097 $ 1,786,184 $ 1,651,619 ============ ============= ============
There are various differences between income before income taxes and minority interest for domestic and foreign operations as shown in Note 14 and net income shown above. Sales or transfers between geographic areas are not material. 17 CONTINGENCIES The Company is involved in various legal proceedings generally incidental to its business. These include a lawsuit filed by a former distributor in Brazil in which the plaintiff has asserted a claim for damages in excess of $50,000. 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. 36 REEBOK INTERNATIONAL LTD. 19 REPORTS REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS REEBOK INTERNATIONAL LTD. STOUGHTON, MASSACHUSETTS We have audited the accompanying consolidated balance sheets of Reebok International Ltd. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Reebok International Ltd. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP - --------------------- BOSTON, MASSACHUSETTS FEBRUARY 2, 1998 REPORT OF MANAGEMENT FINANCIAL STATEMENTS The management of Reebok International Ltd. and its subsidiaries has prepared the accompanying financial statements and is responsible for their integrity and fair presentation. The statements, which include amounts that are based on management's best estimates and judgments, have been prepared in conformity with generally accepted accounting principles and are free of material misstatement. Management has also prepared other information in the annual report and is responsible for its accuracy and consistency with the financial statements. INTERNAL CONTROL SYSTEM Reebok International Ltd. and its subsidiaries maintain a system of internal control over financial reporting, which is designed to provide reasonable assurance to the Company's management and Board of Directors as to the integrity and fair presentation of the financial statements. Management continually monitors the system of internal control for compliance, and actions are taken to correct deficiencies as they are identified. Even an effective internal control system, no matter how well designed, has inherent limitations -- including the possibility of the circumvention or overriding of controls -- and therefore can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control system effectiveness may vary over time. The Company maintains an internal auditing program that monitors and assesses the effectiveness of the internal control system and recommends possible improvements thereto. The Company's accompanying financial statements have been audited by Ernst & Young LLP, independent auditors, whose audit was made in accordance with generally accepted auditing standards and included a review of the system of internal accounting controls to the extent necessary to determine the audit procedures required to support their opinion on the consolidated financial statements. Management believes that, as of December 31, 1997, the Company's system of internal control is adequate to accomplish the objectives discussed herein. REEBOK INTERNATIONAL LTD., /s/ Paul Fireman /s/ Kenneth Watchmaker - ------------------- ---------------------- PAUL FIREMAN KENNETH WATCHMAKER CHAIRMAN, EXECUTIVE VICE PRESIDENT PRESIDENT AND CHIEF AND CHIEF FINANCIAL OFFICER EXECUTIVE OFFICER 37 REEBOK INTERNATIONAL LTD. 20 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
FIRST SECOND THIRD FOURTH YEAR ENDED DECEMBER 1997 QUARTER QUARTER QUARTER QUARTER - ------------------------ ------- ------- ------- ------- Net sales $ 930,041 $841,059 $1,009,053 $ 863,446 Gross profit 356,229 323,511 370,211 299,599 Net income 40,184 20,322 73,968 645 Basic earnings per share .72 .36 1.32 .01 Diluted earnings per share .69 .35 1.26 .01 --------- -------- ---------- --------- YEAR ENDED DECEMBER 1996 - ------------------------ Net sales $ 902,923 $817,572 $ 970,080 $ 788,029 Gross profit 351,132 312,268 380,530 290,252 Net income 48,415 19,813 50,612 20,110 Basic earnings per share .65 .27 .76 .36 Diluted earnings per share .64 .27 .75 .35 Cash dividends per common share .075 .075 .075 .000 --------- -------- ---------- ---------
Net income for the fourth quarter of 1997 includes a special charge of $18,000 after taxes, or $0.31 per diluted share, for the restructuring of a number of marketing contracts. Net income for the third quarter of 1997 includes a tax credit of $40,000, or $0.68 per diluted share, as well as a special charge of $21,161 after taxes, or $0.36 per diluted share, for facilities consolidation and elimination, asset adjustments and personnel-related expenses associated with global restructuring activities. On June 7, 1996, Reebok completed the sale of substantially all of the operating assets of its subsidiary Avia. Accordingly, subsequent to that date, the operations of Avia are no longer included in the Company's financial results. The earnings per share amounts are presented to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." For further discussion regarding the calculation of earnings per share, see Note 1 to the Consolidated Financial Statements. 38 REEBOK INTERNATIONAL LTD. 21 DIRECTORS & OFFICERS BOARD OF DIRECTORS PAUL FIREMAN Chairman, President & Chief Executive Officer Reebok International Ltd. PAUL R. DUNCAN Executive Vice President Reebok International Ltd. M. KATHERINE DWYER President Revlon Consumer Products, USA Revlon, Inc. WILLIAM F. GLAVIN President Emeritus Babson College MANNIE L. JACKSON Chairman & Chief Executive Officer Harlem Globetrotters International, Inc. BERTRAM M. LEE, SR. Chairman of the Board Albimar Communications, Inc. RICHARD G. LESSER Executive Vice President & Chief Operating Officer TJX Companies, Inc. WILLIAM M. MARCUS Executive Vice President & Treasurer American Biltrite, Inc. ROBERT MEERS Executive Vice President Reebok International Ltd. President & Chief Executive Officer Reebok Division GEOFFERY NUNES Retired Senior Vice President & General Counsel Millipore Corporation CORPORATE OFFICERS PAUL FIREMAN Chairman, President & Chief Executive Officer PAUL R. DUNCAN Executive Vice President ANGEL R. MARTINEZ Executive Vice President President & Chief Executive Officer The Rockport Company, Inc. ROBERT MEERS Executive Vice President President & Chief Executive Officer Reebok Division KENNETH WATCHMAKER Executive Vice President Chief Financial Officer BARRY NAGLER Senior Vice President General Counsel LEO S. VANNONI Treasurer 39 REEBOK INTERNATIONAL LTD. 22 SHAREHOLDER INFORMATION INDEPENDENT AUDITORS Ernst & Young LLP 200 Clarendon Street Boston, MA 02116 TRANSFER AGENT AND REGISTRAR BankBoston, N.A. is the Transfer Agent and Registrar for the Company's common stock and maintains the shareholder accounting records. The Transfer Agent should be contacted on questions of changes in address, name or ownership, lost certificates and consolidation of accounts. When corresponding with the Transfer Agent, shareholders should state the exact name(s) in which the stock is registered and certificate number as well as old and new information about the account. BankBoston, N.A. c/o Boston EquiServe Post Office Box 8040 Boston, MA 02266-8040 Phone: (781) 575-3400 Facsimile: (781) 828-8813 Toll-free number outside Massachusetts: (800) 733-5001 http://www.equiserve.com FORM 10-K For a copy of the Form 10-K Annual Report, filed with the Securities and Exchange Commission, write to: Office of Investor Relations Reebok International Ltd. 100 Technology Center Drive Stoughton, MA 02072 WEB SITE http://www.reebok.com CORPORATE HEADQUARTERS Reebok International Ltd. 100 Technology Center Drive Stoughton, MA 02072 ANNUAL MEETING The Annual Meeting of Stockholders will be held at 10:00 a.m., local time, on Tuesday, May 5, 1998 at BankBoston, Second Floor Long Lane Conference Room, 100 Federal Street, Boston, Massachusetts. Shareholders of record on March 11, 1998 are entitled to vote at the meeting. STOCK INFORMATION The Company's common stock is quoted on the New York Stock Exchange under the symbol RBK. The following table, derived from data supplied by the NYSE, sets forth the quarterly high and low sales prices during 1997 and 1996.
1997 1996 ---- ---- HIGH LOW HIGH LOW ---- --- ---- --- First 52 7/8 40 5/8 31 3/8 25 3/8 Second 49 7/8 37 1/8 33 3/4 26 Third 52 1/4 43 5/8 36 7/8 29 1/4 Fourth 49 1/2 27 5/8 45 1/4 32 1/2
The number of record holders of the Company's common stock at February 20, 1998 was 7,050. REEBOK, the Vector Logo [REEBOK LOGO], THE PUMP, DMX, the Human Rights Logo and HEXALITE are registered trademarks, and HYDROMOVE, ATTACK LIFE, PRO FUNCTION and 3D ULTRALITE are trademarks of Reebok. ROCKPORT is a registered trademark and UNCOMPROMISE is a trademark of The Rockport Company, Inc. GREG NORMAN is a registered trademark and the Greg Norman Logo is a trademark of Great White Shark Enterprises, Inc. RALPH LAUREN and POLO SPORT are registered trademarks of Polo/Ralph Lauren Corporation. (C)1998 Reebok International Ltd. All Rights Reserved. [RECYCLE LOGO] Portions of this Annual Report are printed on recycled paper. DESIGN: BELK MIGNOGNA ASSOCIATES, NEW YORK PHOTOGRAPHY: (PAGES 1 - 5) DAVIES + STARR, (PAGES 14, 16) ROB HOWARD QUOTE OPPOSITE PAGE 12: (C)1997 THE ECONOMIST NEWSPAPER GROUP, INC. REPRINTED WITH PERMISSION. FURTHER REPRODUCTION PROHIBITED. 40 REEBOK INTERNATIONAL LTD. EX-21.1 10 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF REEBOK INTERNATIONAL LTD. Jurisdiction of Incorporation or Name Organization Ralph Lauren Footwear Co., Inc. Massachusetts RBK Thailand, Inc. Massachusetts Reebok Aviation, Inc. Massachusetts Reebok CHC, Inc. Massachusetts Reebok Eastern Territories, Inc. Massachusetts Reebok Foundation, Inc. Massachusetts Reebok International Securities Corp. Massachusetts Reebok Securities Holdings Corp. Massachusetts The Reebok Worldwide Trading Company, Ltd. Massachusetts The Rockport Company, Inc. Massachusetts Avintco, Inc. Delaware RFC, Inc. Delaware Reebok Austria GmbH Austria Rockport Gmbh Austria Reebok Belgium SA Belgium Reebok Do Brasil Servicos Brazil a Participacoes Ltda Rockport do Brasil - Comercio, Servicos Brazil e Participacoes Ltda. R.C. Investments Ltd. Canada Reebok Canada Inc. Canada Reebok France S.A. France Rockport France S.a.r.L. France 2 EXHIBIT 21.1 - Page 2 SUBSIDIARIES OF REEBOK INTERNATIONAL LTD. Jurisdiction of Incorporation or Name Organization American Sports and Leisure Germany Vertriebs GMBH Reebok Deutschland GmbH Germany Reebok (China) Services Limited Hong Kong Reebok Far East Ltd. Hong Kong Reebok Trading (FAR EAST) Limited Hong Kong Reebok India Company India Reebok Technical Services Private Limited India Reebok Ireland Limited Ireland Reebok Italia S.r.l. Italy Rockport International Trading Italy Co. Italy S.r.l. Reebok Japan Inc. Japan Rockport Japan Inc. Japan Reebok Korea Limited Korea Reebok Korea Technical Services Korea Company, Ltd. Reebok (Mauritius) Company Limited Mauritius Rockport Mexico S.A. DE C.V. Mexico Reebok Distribution B.V. The Netherlands Reebok (Europe) B.V. The Netherlands Reebok International Finance B.V. The Netherlands Reebok Nederland B.V. The Netherlands Rockport (Europe) B.V. The Netherlands 3 EXHIBIT 21.1 - Page 3 SUBSIDIARIES OF REEBOK INTERNATIONAL LTD. Jurisdiction of Incorporation or Name Organization Rockport (Nederland) B.V. The Netherlands Reebok (Philippines) Services Co., Inc. Philippines Reebok Poland SA Poland Reebok Portugal Artigos Desportives Lda Portugal Reebok Russia (Retail), Inc. Russia Reebok Leisure SA Spain Reebok (South Africa) (Proprietary) Limited South Africa Reebok (Switzerland) Ltd. Switzerland Reebok (Taiwan) Services Company Taiwan Subsidiary enterprise Reebok Ukraine Ukraine J.W. Foster & Sons United Kingdom (Athletic Shoes) Limited RBK Holdings plc United Kingdom Reebok Eastern Trading Limited United Kingdom Reebok International Limited United Kingdom Reebok Sports Limited United Kingdom Reebok UK Limited United Kingdom The Rockport Company Limited United Kingdom Rockport International Limited United Kingdom EX-23.1 11 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Reebok International Ltd. of our report dated February 2, 1998, included in the 1997 Annual Report to Shareholders of Reebok International Ltd. Our audits also included the financial statement schedule of Reebok International Ltd. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 33-24114, 33-32664, 33-62301 and 333-17955) and Form S-8 (File Nos. 33-6989, 33-15729, 33-53954, 33-14698, 33-15089, 33-32663, 33-54562, 33-53523, 33-53525 and 33-53537) and related prospectuses of our report dated February 2, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Reebok International Ltd. /S/ ERNST & YOUNG LLP Boston, Massachusetts March 23, 1998 EX-27.1 12 FDS FOR FY ENDING 31-DEC-1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1997 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 209,766 0 605,132 44,003 563,735 1,464,820 354,194 197,235 1,756,097 577,453 671,487 0 0 931 506,226 1,756,097 3,643,599 3,637,441 2,294,049 2,294,049 1,131,417 0 64,366 147,609 12,490 135,119 0 0 0 135,119 2.41 2.32
EX-27.2 13 RESTATED FDS FOR 9-MOS ENDING 30-SEP-1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1997 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 139,906 0 792,257 47,597 562,829 1,610,929 363,611 194,589 1,908,499 677,785 721,832 0 0 930 507,952 1,908,499 2,780,153 2,777,325 1,730,202 1,730,202 851,573 0 41,526 154,024 19,550 134,474 0 0 0 134,474 2.40 2.30
EX-27.3 14 RESTATED FDS FOR 6-MOS ENDING 30-JUN-1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1997 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 122,307 0 708,251 51,419 580,933 1,470,817 370,501 187,705 1,785,378 578,788 768,228 0 0 929 438,362 1,785,378 1,771,100 1,771,413 1,091,360 1,091,360 554,121 0 27,726 98,206 37,700 60,506 0 0 0 60,506 1.08 1.04
EX-27.4 15 RESTATED FDS FOR 3-MOS ENDING 31-MAR-1997
5 THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1997 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 U.S. DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 174,617 0 775,223 48,584 518,101 1,521,921 359,280 178,039 1,835,698 644,533 777,155 0 0 928 413,082 1,835,698 930,041 931,137 573,182 573,182 342,042 0 15,913 65,884 25,700 40,184 0 0 0 40,184 .72 .69
EX-27.5 16 RESTATED FDS FOR FY ENDING 31-DEC-1996
5 THIS SCHEDUEL CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1996 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 232,365 0 634,031 43,527 544,522 1,463,088 357,438 172,146 1,786,184 516,961 887,989 0 0 926 380,308 1,786,184 3,478,604 3,482,929 2,144,422 2,144,422 1,073,228 0 42,246 223,033 84,083 138,950 0 0 0 138,950 2.06 2.03
EX-27.6 17 RESTATED FDS FOR 9-MOS ENDING 30-SEP-1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1996 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 U.S. DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 143,899 0 771,798 46,683 540,807 1,496,830 355,139 167,104 1,831,352 574,161 922,298 0 0 917 333,976 1,831,352 2,690,575 2,692,250 1,646,645 1,646,645 838,400 0 16,450 190,755 71,915 118,840 0 0 0 118,840 1.68 1.65
EX-27.7 18 RESTATED FDS FOR 6-MOS ENDING 30-JUN-1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1996 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 U.S. DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 109,062 0 703,957 49,408 607,080 1,470,703 352,499 160,566 1,796,094 579,234 326,334 1,082 0 0 889,444 1,810,929 1,720,495 1,722,023 1,057,095 1,057,095 542,064 0 13,336 109,528 41,300 68,228 0 0 0 68,228 .93 .92
EX-27.8 19 RESTATED FDS FOR 3-MOS ENDING 31-MAR-1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1996 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 U.S. DOLLARS 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 1 64,844 0 734,509 50,513 579,726 1,456,921 340,343 150,838 1,766,622 523,126 341,568 1,086 0 0 900,842 1,766,622 902,923 903,685 551,791 551,791 267,654 0 6,528 77,712 29,297 48,415 0 0 0 48,415 .65 .64
EX-27.9 20 RESTATED FDS FOR FY ENDING 31-DEC-1995
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1995 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000770949 REEBOK INTERNATIONAL LTD. 1,000 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 80,393 0 552,964 46,401 635,012 1,332,870 335,844 143,811 1,651,619 431,948 285,259 0 0 1,096 894,193 1,651,619 3,481,450 3,484,576 2,114,084 2,114,084 1,080,216 0 25,725 264,551 99,753 164,798 0 0 0 164,798 2.10 2.07
-----END PRIVACY-ENHANCED MESSAGE-----