FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 1-9340
REEBOK INTERNATIONAL LTD.
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2678061
- ------------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Technology Center Drive, Stoughton, Massachusetts 02072
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(781) 401-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of registrant's common stock, par value $.01
per share, at November 6, 1998, was 56,444,900 shares.
<PAGE>
REEBOK INTERNATIONAL LTD.
INDEX
PART I. FINANCIAL INFORMATION:
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1998 and 1997, and
December 31, 1997 . . . . . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Income - Three
and Nine Months Ended September 30, 1998 and 1997. 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 . . . 6-7
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . 8-11
Item 2
Management's Discussion and Analysis of Results
Of Operations and Financial Condition . . . . . . . 12-21
Part II. OTHER INFORMATION:
Items 1-4 Not Applicable . . . . . . . . . . . . . . . . . . . 22
Item 5 Other Information . . . . . . . . . . . . . . . . . . 22
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . 22-23
2
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1997
---- ---- ----
(Unaudited) (See Note 1)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 99,021 $ 139,906 $ 209,766
Accounts receivable, net
of allowance for doubtful
accounts (September 1998,
$51,678; September 1997,
$47,597; December 1997,
$44,003) 617,353 744,660 561,729
Inventory 535,734 562,829 563,735
Deferred income taxes 79,183 79,078 75,186
Prepaid expenses and other
current assets 50,971 48,378 54,404
Refundable income taxes 36,078
Total current assets 1,382,262 1,610,929 1,464,820
--------- --------- ---------
Property and equipment, net 174,286 169,022 156,959
Non-current assets:
Intangibles, net of
amortization 62,344 67,187 65,784
Deferred income taxes 21,037 9,022 19,371
Other 41,643 52,339 49,163
125,024 128,548 134,318
--------- --------- ---------
Total Assets $1,681,572 $1,908,499 $1,756,097
========= ========= =========
</TABLE>
3
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1997
---- ---- ----
(Unaudited) (See Note 1)
<S> <C> <C> <C>
Current liabilities:
Notes payable to banks $ 45,541 $ 85,886 $ 40,665
Current portion of
long-term debt 60,572 104,704 121,000
Accounts payable 190,412 193,196 192,142
Accrued expenses 207,617 241,367 219,386
Income taxes payable 20,381 52,632 4,260
---------- ---------- ----------
Total current liabilities 524,523 677,785 577,453
---------- ---------- ----------
Long-term debt, net of
current portion 578,614 683,012 639,355
Minority interest 34,706 38,820 32,132
Commitments and contingencies
Outstanding redemption value
of equity put options 16,559
Stockholders' equity:
Common stock, par value
$.01; authorized 250,000
shares; issued
September 30, 1998,
93,161; issued
September 30, 1997, 93,001;
issued December 31, 1997,
93,116 932 930 931
Retained earnings 1,162,019 1,139,008 1,145,271
Less 36,716 shares
in treasury at cost (617,620) (617,620) (617,620)
Unearned compensation (41) (172) (140)
Foreign currency translation
adjustment (18,120) (13,264) (21,285)
---------- ---------- ----------
527,170 508,882 507,157
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,681,572 $1,908,499 $1,756,097
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 878,335 $1,009,053 $2,519,026 $2,780,153
Other expense (6,280) (3,141) (11,869) (2,828)
872,055 1,005,912 2,507,157 2,777,325
Costs and expenses:
Cost of sales 546,341 638,842 1,592,651 1,730,202
Selling, general and
administrative expenses 267,623 259,129 786,495 805,526
Special charge 33,161 35,000 33,161
Amortization of intangibles 846 856 2,588 2,476
Interest expense 15,939 16,111 50,164 48,329
Interest income (3,737) (2,311) (11,962) (6,803)
--------- ---------- ---------- ----------
827,012 945,788 2,454,936 2,612,891
--------- ---------- ---------- ----------
Income before income taxes
and minority interest 45,043 60,124 52,221 164,434
Income tax expense 14,500 (18,150) 16,811 19,550
--------- ---------- ---------- ----------
Income before minority
interest 30,543 78,274 35,410 144,884
Minority interest 2,314 4,306 4,392 10,410
--------- ---------- ---------- ----------
Net income $ 28,229 $ 73,968 $ 31,018 $ 134,474
========= ========== ========== ==========
Basic earnings per share $ .50 $ 1.31 $ .55 $ 2.40
========= ========== ========== ==========
Diluted earnings per share $ .50 $ 1.26 $ .54 $ 2.30
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 31,018 $ 134,474
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 35,981 33,735
Minority interest 4,393 10,410
Deferred income taxes (5,141) (10,828)
Special charge 35,000 33,161
Changes in operating assets and
liabilities:
Accounts receivable (36,844) (175,071)
Inventory 36,732 (36,129)
Prepaid expenses 4,122 (22,489)
Other 6,150 16,042
Accounts payable (7,611) 6,288
Accrued expenses (50,314) 47,676
Income taxes payable 15,341 (12,887)
Refundable income taxes (36,078)
---------- ----------
Total adjustments 37,809 (146,170)
---------- ----------
Net cash provided by (used for)
operating activities 68,827 (11,696)
---------- ----------
Cash flows from investing activity:
Payments to acquire property and
equipment (45,610) (23,215)
---------- ----------
Net cash used by investing activity (45,610) (23,215)
---------- ----------
</TABLE>
6
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net borrowings of notes
payable to banks $ 3,125 $ 67,659
Payments of long-term debt (121,049) (131,098)
Proceeds from issuance of common stock to
employees 3,470 11,971
Proceeds from premium on equity put options 2,002
Dividends to minority shareholders (6,649) (1,600)
Repurchases of common stock (3,181)
-------- --------
Net cash used for financing activities (122,282) (53,068)
-------- --------
Effect of exchange rate changes on cash
and cash equivalents (11,680) (4,480)
-------- --------
Net decrease in cash and cash equivalents (110,745) (92,459)
-------- --------
Cash and cash equivalents at beginning of
period 209,766 232,365
-------- ---------
Cash and cash equivalents at end of period $ 99,021 $ 139,906
======== =========
Supplemental disclosures of cash flow information:
1998 1997
---- ----
Cash paid during the period for:
Interest $ 35,551 $ 46,659
Income taxes 23,879 43,929
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
7
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation
- ---------------------
The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals, as well as
special charges) which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim period. The interim
financial information and notes thereto should be read in conjunction with the
Company's latest annual report to shareholders. The results of operations for
the nine months ended September 30, 1998 are not necessarily indicative of
results to be expected for the entire year.
Certain amounts in the prior year have been reclassified to conform to
the 1998 presentation.
Recently Issued Accounting Standards
- ------------------------------------
During 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("Statement 130"). The Company will
adopt the provisions of Statement 130 for fiscal year end 1998. Comprehensive
income is generally defined as all changes in stockholders' equity exclusive of
transactions with owners such as capital investments and dividends.
Comprehensive income for the quarters ended September 30, 1998 and September 30,
1997 was $33,267 and $68,413 respectively. Comprehensive income for the nine
months ended September 30, 1998 and 1997 was $34,183 and $115,562, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"). The Company will adopt the provisions of Statement 131 for
fiscal year end 1998.
8
<PAGE>
NOTE 2 - SPECIAL CHARGE
- -----------------------
In the first quarter of 1998, the Company recorded a special charge of
$35,000, amounting to approximately $23,700 after taxes, or $0.42 per share in
connection with the Company's ongoing business re-engineering efforts. The
charge was for personnel related expenses and certain other expenses associated
with the restructuring or adjustment of underperforming marketing contracts. The
business re-engineering, which will result in the termination of approximately
485 full-time positions, should enable the Company to achieve greater operating
efficiencies by reducing management layers, combining business units and
centralizing various business functions. The underperforming marketing contracts
are being terminated or restructured to focus the Company's spending on those
key athletes and teams who are more closely aligned with its brand positioning.
The charge covers certain one-time expenses, substantially all of which will
affect cash.
The components of the first quarter 1998 charge are presented below
with additional information concerning the activities affecting the reserve for
special charges:
<TABLE>
<CAPTION>
Balance Q1 98 Nine Months Balance
12/31/97 Additions Payments/ 9/30/98
Utilization
-------- --------- ----------- -------
<S> <C> <C> <C> <C>
Marketing contracts $ 25.0 M $ 18.5 M $(24.2) M $ 19.3 M
Fixed asset write-downs 6.9 (.1) 6.8
Employee severance 8.4 14.8 (13.3) 9.9
Termination of leases
and other 6.8 1.7 (4.2) 4.3
------ ------- -------- -------
$ 47.1 M $ 35.0 M $(41.8) M $ 40.3 M
======== ========= ========= ========
</TABLE>
9
<PAGE>
NOTE 3 - EARNINGS PER SHARE
- ---------------------------
The following table sets forth the computation of basic and diluted
earnings per share (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $ 28,229 $ 73,968 $ 31,018 $134,474
------- ------- ------- -------
Denominator for basic
earnings per share:
Weighted average shares 56,445 56,258 56,376 56,115
Dilutive employee stock
options and equity put
options 445 2,483 696 2,318
------- ------- ------- -------
Denominator for diluted
earnings per share:
Weighted average shares
and assumed conversions 56,890 58,741 57,072 58,433
======= ======= ======= =======
Basic earnings per share $ .50 $ 1.31 $ .55 $ 2.40
Diluted earnings per
share $ .50 $ 1.26 $ .54 $ 2.30
</TABLE>
NOTE 4 - CONTINGENCIES
- ----------------------
The Company is involved in various legal proceedings generally
incidental to its business. While it is not feasible to predict or determine the
outcome of these proceedings, management does not believe that they should
result in a materially adverse effect on the Company's financial position,
results of operations or liquidity. Included in these proceedings is a lawsuit
filed by a former distributor in Brazil in which the plaintiff asserted a claim
for
10
<PAGE>
damages in excess of $50,000. In April 1998, a court of first instance in Brazil
awarded this distributor damages of approximately $15,000, plus interest and
attorney's fees. The Company appealed the ruling to a three-judge panel of the
appellate court which upheld the trial court's decision by a vote of two to one.
Because the appellate decision was not unanimous, the case is now being referred
to a new panel of five appellate judges from the same court, who will decide the
case on a de novo basis which means that the appellate panel will not have any
obligation to defer to the factual or legal conclusions of the trial court or
the first appellate panel, but the amount awarded must be within the parameters
established by the minority and majority decisions of the prior appellate panel
(a range from $72 to $15,000, plus interest and attorney's fees). The Company
continues to believe the trial court's decision is in error and will
aggressively pursue all rights of appeal available to it.
NOTE 5 - EQUITY PUT OPTIONS
- ---------------------------
From time to time the Company issues equity put options as part of its
ongoing share repurchase programs. The redemption value of the options, which
represents the option price multiplied by the number of shares under option, is
presented in the accompanying condensed consolidated balance sheet as
"Outstanding redemption value of equity put options." At September 30, 1998, 625
shares of outstanding common stock are subject to repurchase at prices ranging
from $26.173 to $26.975 under the terms and conditions of these options. The
outstanding options expire in January 1999.
NOTE 6 - STOCK OPTION EXCHANGE AND RESTRUCTURING PROGRAM
- --------------------------------------------------------
On October 6, 1998, the Board of Directors approved a stock option
exchange and restructuring program pursuant to which certain current employees
of the Company that held stock options with exercise prices above market could
elect to exchange all or none of their then outstanding employee stock options
for a smaller number of new options, with a new four year vesting schedule. The
number of existing outstanding option shares to be exchanged for the new option
shares is at a ratio of 1.25:1. The new options have an exercise price of
$12.625 per share, the closing price of Reebok common stock on October 6, 1998.
Executive officers of the Company who are also directors and various other
option holders were not eligible to participate in this program. Of the 9,932
option shares outstanding under the Company's stock option programs as of
October 6, 1998, approximately 3,900 option shares (or approximately 40%) were
eligible for this exchange and restructuring program. Substantially all of these
options were exchanged by employees under the program.
11
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion contains forward-looking statements about the
Company's revenues, earnings, spending, margins, orders, products, plans,
strategies and objectives. Any such statements are subject to risks and
uncertainties that could cause the Company's actual results to differ materially
from those discussed in such forward-looking statements. Prospective information
is based on management's then current expectations or forecasts. Such
information is subject to the risk that such expectations or forecasts, or the
assumptions underlying such expectations or forecasts, become inaccurate.
Factors that could affect the Company's actual results and could cause such
results to differ materially from those contained in forward-looking statements
made by or on behalf of the Company include, but are not limited to, those
discussed below and those described in Exhibit 99 - Issues and Uncertainties
filed with this quarterly report on Form 10-Q.
Operating Results
- -----------------
Third Quarter 1998 Compared to Third Quarter 1997
- ---------------------------------------------------
Net sales for the quarter ended September 30, 1998 were $878.3 million,
a decrease of 13.0% from 1997's third quarter net sales of $1.009 billion. The
Reebok Division's worldwide sales (which includes sales of the Greg Norman
Division) were $731.1 million, a 15.1% decrease from sales of $861.1 million in
the third quarter of 1997. Reebok Brand's U.S. footwear sales decreased 8.8% to
$278.3 million in the third quarter of 1998 from $305.3 million in the third
quarter of 1997. U.S. footwear sales of the Reebok Brand continued to be
adversely impacted by over- capacity in the market due to significant retail
expansion in the past few years and by changing consumer preferences. This has
resulted in inventory backups for various brands and heavy promotional activity
to sell the excess inventory. U.S. footwear categories that generated sales
increases in the third quarter of 1998 were running, led by the Company's
leadership DMX product, classics, children's and outdoor. These increases were
offset by declines in most other categories principally men's and women's
cross-training and walking. U.S. apparel sales decreased in the third quarter by
25.0% to $92.0 million from $122.7 million in the third quarter of 1997.
Increased sales of apparel in the Company's
12
<PAGE>
retail outlet stores and its Greg Norman Division were more than offset by
declines in Reebok branded and licensed apparel. The Company is in the process
of repositioning the U.S. apparel business by upgrading its product offerings
and exiting many of its unprofitable licensed apparel contracts.
International sales of the Reebok Division (including footwear and
apparel) were $360.8 million in the third quarter of 1998, a decrease of 16.7%
from $433.1 million in the third quarter of 1997. The European region reported a
sales increase during the quarter whereas all other International regions
reported sales declines. The Company's sales performance is being adversely
affected by economic conditions in Asia Pacific, Latin America and Russia. As
compared with 1997's third quarter, sales in Asia Pacific declined 60% or $52
million in the quarter, and footwear sales to unconsolidated Latin American
distributors declined by 65% or approximately $30 million. Another factor
affecting International sales comparisons is currency; particularly in Russia
and Asia Pacific. Fluctuations in foreign currency exchange rates account for
approximately a 3% decline in sales in the quarter. During the quarter,
International sales of footwear declined while International apparel sales
increased. Most of the Reebok Division's International footwear categories
declined during the quarter, however, the outdoor category had sales increases.
During the third quarter of 1998, apparel sales accounted for 46.7% of Reebok's
International Division's sales, as compared with 36.1% of sales in the third
quarter of 1997.
Rockport's third quarter sales were $147.2 million approximately the
same as in the third quarter of 1997. Domestic sales for the Rockport brand
decreased by 9.4% while International sales increased by 32.1%. The Company
believes the domestic sales decline was due to a generally weak month of
September at retail for department stores which impacted Rockport's fill-in
business as retailers managed their inventories down. During the quarter,
Rockport continued to expand its retail presence and is planning additional
expansion for the fourth quarter. For the period from September to December, the
Company's current plans call for installing an additional 241 powershop doors.
This is in addition to the 178 installed from January through August. The Ralph
Lauren Footwear Division, which is included in Rockport's reported sales, had a
sales increase of 2.3% in the third quarter of 1998, as compared to the third
quarter of 1997. In Spring 1999, the Company expects to expand the Polo Sport
segment of the Ralph Lauren/Polo Sport footwear business and in the Fall of 1999
expects to debut a separate Lauren product segment.
During the third quarter, the Company's overall gross margin was 37.8%
of sales which is an increase from the second quarter
13
<PAGE>
rate of 36.9%, and an improvement from 1997's third quarter gross margin of
36.7%. This improving trend which began in the second quarter of 1998 is the
result of manufacturing efficiencies the Company is achieving with technology
products and from sourcing changes initiated to take advantage of currency
opportunities in the Far East. Much of the improvement was offset by a greater
percentage of the Company's business being off-price due to the promotional
activity in the market. International margins continue to be adversely affected
by the strong U.S.dollar.
Selling, general and administrative expenses for the third quarter of
1998 were $267.6 million, or 30.5% of sales, as compared to $259.1 million, or
25.7% of sales in 1997's third quarter. The increased spending is attributable
to the expansion of retail presence for all the Company's brands and investments
in advertising, research, design and development. In addition, in the third
quarter of 1998, the Company incurred start-up expenses for its European
logistics and shared service companies as well as its global information system
re-engineering efforts. These start-up expenses, which are mostly redundant in
nature, amounted to approximately $10.0 million for the third quarter. Of this
amount, $8.6 million is included in selling, general and administrative expenses
and $1.4 million is included in cost of sales. These start-up expenses are
expected to aggregate approximately $40-$50 million for the full year 1998. The
Company expects to incur additional start-up expenses during most of 1999 until
such time as these business re-engineering efforts are fully implemented. The
Company has benefited from the various cost reduction programs initiated last
year as all other selling, general and administrative expenses declined from
last year's level by approximately $17 million.
Net interest expense decreased for the third quarter of 1998 as
compared to the third quarter of 1997 as a result of debt repayments. Other
expense was $6.3 million for the quarter, an increase of $3.1 million from last
year's third quarter. The increase is primarily due to the currency devaluation
in Russia and the Company's share of losses in certain Latin American joint
ventures.
The effective income tax rate was approximately 32% in the third
quarter of 1998 as compared to 36% in the third quarter of 1997 and 33% for the
full year 1997 (exclusive of certain one-time tax benefits received in 1997).
Looking forward, dependent on the geographic mix of earnings in 1998, the
Company expects the third quarter 1998 rate to be indicative of the full year
1998 rate.
14
<PAGE>
First Nine Months 1998 Compared to First Nine Months 1997
- -------------------------------------------------------
Net sales for the nine month period ended September 30, 1998 were
$2.519 billion, a decrease of 9.4% from 1997's net sales of $2.780 billion. The
Reebok Division's worldwide sales (which includes sales of the Greg Norman
Division) were $2.116 billion, an 11.7% decrease from sales of $2.395 billion in
1997. Reebok Brand's U.S. footwear sales decreased 11.3% to $840.8 million in
the first nine months of 1998 from $948.4 million in the 1997 period. U.S.
footwear sales of the Reebok Brand continued to be adversely impacted by
over-capacity in the market due to significant retail expansion in the past few
years and by changing consumer preferences. This has resulted in inventory
backups for various brands and heavy promotional activity to sell the excess
inventory. U.S. footwear categories that generated sales increases in the nine
month period of 1998 were running, led by the Company's leadership DMX product,
classics, children's and outdoor. These increases were offset by declines in
most other categories, principally men's and women's cross-training and walking.
U.S. apparel sales decreased in the first nine months by 13.0% to $268.6 million
from $308.6 million in 1997. Increased sales of apparel in the Company's retail
outlet stores and its Greg Norman Division were more than offset by declines in
Reebok branded and licensed apparel. The Company is in the process of
repositioning the U.S. apparel business by upgrading its product offerings and
existing many of its unprofitable licensed apparel contracts.
International sales of the Reebok Division (including footwear and
apparel) were $1.007 billion in the first nine months of 1998, a decrease of
11.6% from $1.138 billion in the first nine months of 1997. The European region
reported a sales increase during the nine months, whereas all other
International regions reported sales declines. The Company's sales performance
is being adversely affected by economic conditions in Asia Pacific, Latin
America and Russia. As compared to the first nine months of 1997, sales in Asia
Pacific declined 45% or approximately $105 million in the first nine months and
footwear sales to unconsolidated Latin American distributors declined by 53% or
approximately $48 million. Another factor affecting International sales
comparisons is currency; particularly in Russia and Asia Pacific. Fluctuations
in foreign currency exchange rates account for approximately a 5% decline in
sales in the nine month period. During the nine month period, International
sales of footwear declined, and apparel sales increased slightly. Most of the
Reebok Division's International footwear categories declined during the nine
month period, however, the classics and children's categories
15
<PAGE>
had sales increases. During the first nine months of 1998, apparel sales
accounted for approximately 40.6% of Reebok's International Division's sales, as
compared with 35.5% of sales in the first nine months of 1997.
Rockport's sales for the first nine months increased by 4.7% to $403.1
million from $384.9 million in the first nine months of 1997. Domestic sales of
the Rockport brand were flat while its International sales increased by 12.2%.
During the nine months, Rockport continued to expand its retail presence and is
planning additional expansion for the fourth quarter. For the period from
September to December, the Company's current plans call for installing an
additional 241 powershop doors. This is in addition to the 178 installed from
January through August. The Ralph Lauren Footwear Division, which is included in
Rockport's reported sales, had a sales increase of 13.9% in the first nine
months of 1998 as compared to the first nine months of 1997, with all of the
increase coming from the Polo Sport segment. In Spring 1999, the Company expects
to expand the Polo Sport segment of the Ralph Lauren/Polo Sport footwear
business and in the Fall of 1999, expects to debut a separate Lauren product
segment.
During the first nine months of 1998, the Company's overall gross
margin was 36.8% of sales which is down from last year's rate of 37.8% but an
improvement when compared to the first six months of 1998, when the rate was
36.2%. This improving trend is the result of manufacturing efficiencies the
Company is achieving with technology products and from sourcing changes
initiated to take advantage of currency opportunities in the Far East. Much of
the improvement was offset by a greater percentage of the Company's business
being off-price due to the promotional activity in the market. International
margins continue to be adversely affected by the strong U.S. dollar.
Selling, general and administrative expenses for the first nine months
of 1998 were $786.5 million, or 31.2% of sales, as compared to $805.5 million,
or 29.0% of sales in the first nine months of 1997. The increased spending as a
percentage of sales is attributable to the expansion of retail presence for all
the Company's brands and investments in advertising, research, design and
development. In addition, in the first nine months of 1998 the Company incurred
start-up expenses for its European logistics and shared service companies as
well as its global information system re-engineering efforts. These start-up
expenses, which are mostly redundant in nature, amounted to approximately $32.7
million for the 1998 nine month period. Of this amount, $23.3 million is
included in selling, general and administrative and $9.4 million is included in
cost of sales. These expenses are expected to aggregate approximately $40-$50
million for the full
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year. The Company expects to incur additional start-up expenses during most of
01999 until such time as these business re-engineering efforts are fully
implemented. The Company has benefited from the various cost reduction programs
initiated last year, as all other selling, general and administrative expenses
declined from last year's level by approximately $57 million.
Net interest expense decreased for the first nine months of 1998 as
compared to the first nine months of 1997 as a result of debt repayments. Other
expense was $11.9 million for the first nine months, an increase of $9.0 million
from last year's first nine months. This increase is primarily due to the
currency devaluation in Russia and the Company's share of losses in certain
Latin American joint ventures as well as foreign exchange losses on various
unhedged positions.
The effective income tax rate was approximately 32% for the first nine
months of 1998 as compared to 36% in the first nine months of 1997 and 33% for
the full year 1997 (exclusive of certain one-time tax benefits received in
1997). Looking forward, dependent on the geographic mix of earnings in 1998, the
Company expects that the full year 1998 rate will approximate the rate during
the first nine month period.
Reebok Brand Backlog of Open Orders
- -----------------------------------
The Reebok Brand backlog of open customer orders for the period October
1 through March 31, 1999 decreased 14.7% as compared to the same period last
year. North American backlog, which includes the U.S. and Canada, decreased
22.9%, whereas, the International backlog increased 2.5%. On a constant dollar
basis, International backlog decreased 2.8%. U.S. footwear backlog decreased
22.6% and U.S. apparel backlog decreased 30.7% as compared to the same period
last year. U.S. backlog comparisons are against a period last year which was not
significantly impacted by the industry slowdown which began in the
back-to-school period of 1997. That retail slowdown has continued during 1998
and has resulted in higher retail cancellations and returns. In addition, the
Company believes retailers are leaving more open-to-buy dollars available for
at-once business. These changes in business conditions suggest that these
percentage decreases in open backlog in the U.S. are not necessarily indicative
of future sales trends. In addition, many orders are cancelable, sales by
Company-owned retail stores can vary from year to year, many markets in South
America and Asia Pacific are not included in the open orders since sales are
made by independent distributors and the ratio of orders booked early to at-once
shipments can vary from period to period.
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Liquidity and Sources of Capital
- --------------------------------
The Company's financial position remains strong. Working capital was
$857.7 million at September 30, 1998 and $933.1 million at September 30, 1997.
The current ratio at September 30, 1998 was 2.6 as compared to 2.4 to 1 at
September 30, 1997 and 2.5 to 1 at December 31, 1997.
Accounts receivable decreased from September 30, 1997 by $127.3
million, a decrease of 17.1%. The decrease is partially due to the sales decline
and partially due to improved cash collections in the U.S. as compared to the
first nine months of 1997. Inventory decreased $27.1 million or 4.8% from
September 30, 1997. In the U.S., the Company's footwear inventories are down
16%, a little less than the corresponding backlog decline. U.S. apparel
inventories are down 20% and retail inventories are down 8% from last year.
Inventories outside the U.S. are down slightly, but the quality of these
inventories has improved, with much more of the inventory being current product.
Cash provided by operations during the first nine months of 1998 was
$68.6 million, as compared to cash used for operations of $11.7 million during
the first nine months of 1997, an $80.3 million improvement despite lower
earnings. Because of the improvement in cash flow, the Company elected to
pre-pay its scheduled fourth quarter debt amortization in September. In
addition, in cooperation with its bank group, the Company has amended certain of
its credit arrangements to relax its debt to operating cash flow ratio covenant
through December 31, 1999, at no additional cost to the Company. All other
material terms and conditions of the credit arrangements remain unchanged. Cash
generated from operations during the balance of 1998, together with the
Company's existing credit lines and other financial resources, is expected to
adequately finance the Company's current and planned 1998 cash requirements.
However, the Company's actual experience may differ from the expectations set
forth in the preceding sentence. Factors that might lead to a difference
include, but are not limited to, the matters discussed in Exhibit 99 - Issues
and Uncertainties filed herewith, as well as future events that might have the
effect of reducing the Company's available cash balances (such as unexpected
operating losses or increased capital or other expenditures, as well as
increases in the Company's inventory or accounts receivable) or future events
that might reduce or eliminate the availability of external financial resources.
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Year 2000 Readiness Disclosure
- --------------------
The year 2000 issue, which is common to most corporations, concerns the
inability of information technology (IT) systems, including computer software
programs, as well as non-IT systems, to properly recognize and process date
sensitive information related to the year 2000 and beyond. This could
potentially cause a system failure or miscalculation that could disrupt
operations.
In order to determine the Company's readiness for the year 2000, the
Company has conducted a global review of both its IT and non-IT systems to
identify the systems that could be affected by the technical problems associated
with the year 2000. As part of this review, a management team was selected to
inventory all IT (mainframe, network and desktop hardware and software), and
non-IT embedded systems (security, fire prevention, elevators, climate control
systems, etc.) to address the year 2000 issue, including an assessment of the
costs required to effect such a plan. The team is currently in the process of
evaluating these inventoried items to determine a remediation method and
implementation plan. A significant portion of the IT evaluation is complete and
the non-IT evaluation is in process and is expected to be complete by December
1998.
In 1993 the Company developed a strategic information systems plan
which provided for the adoption of a new global information systems
infrastructure which would substantially improve the Company's systems
capability. This new global system will replace substantially all legacy systems
with year 2000 compliant software and will thus also address the year 2000
issue. The Company began investments in this new global strategic system in
1994, with investments continuing each year thereafter and expected to continue
through the year 2000. The global SAP system being adopted by the Company did
not previously have an appropriate application for the footwear and apparel
industry. Thus the Company, together with its software vendor and another
company in the apparel industry, developed a new software application for the
footwear and apparel industry which is now being implemented by the Company.
The Company believes that, with modifications to existing software and
converting to SAP software and other packaged software, the year 2000 will not
pose significant operational problems for the Company's computer systems.
However, if the modifications and conversions are not implemented or completed
in a timely or effective manner, the year 2000 problem could have a material
adverse impact on the operations and financial condition of the Company. In
addition, in converting to SAP software, the Company is relying on its software
partner to develop and support new software applications and there could be
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problems in successfully developing and implementing such new applications. The
Company is the first in the apparel and footwear industry to implement this new
software application and, because of the year 2000 time restraints, the schedule
for implementation is accelerated. Thus there are substantial risks that
problems could arise in implementation or that the system may not be fully
effective by the end of 1999. The SAP system has been installed and
implementation has been substantially completed in one of the Company's business
units, as well as in certain other functional areas. The system is now being
configured for rollout to other operating units. The Company also plans to do
testing of its year 2000 readiness during 1999.
Because the Company's conversion to SAP software will replace much of
the Company's software with year 2000 compliant systems, it is difficult to
segregate the incremental costs associated with the year 2000 issue. The Company
expects that the total costs of converting to the global SAP system will be
approximately $75 million, of which approximately $50 million has been spent to
date. Capitalized costs which are included in this estimate are expected to be
approximately $30 million. These costs do not include internal staffing costs.
These estimates assume that the Company will not incur significant year 2000
related costs on behalf of its suppliers, customers or other third parties.
The Company is also focusing on major suppliers and customers to
assess their compliance with the year 2000. This effort is being handled
internally and is currently in process. The Company will be assessing its
largest customers and vendors to determine that their operations are year 2000
compliant. The Company is also developing plans to test year 2000 compliance
with significant suppliers during 1999 and will use the results of such tests to
determine if contingency plans are necessary and to prepare such plans. The
Company is dependent on its suppliers, joint venture partners, independent
distributors and customers to implement appropriate changes to their computer
systems to address the year 2000 issue. The failure of such third parties to
effectively address such an issue could have a material adverse effect on the
Company's business.
Contingency plans for year 2000-related interruptions are being
developed and will include, but not be limited to, the development of emergency
backup and recovery procedures, remediation of existing systems parallel with
implementation of the new systems, and replacing electronic applications with
manual processes. These contingency plans are, however, subject to variables and
uncertainties. There can be no assurance that the Company will correctly
anticipate the level, impact or duration of potential non-compliance or that its
contingency plans will be sufficient to mitigate the impact of any potential
failures.
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Estimates of time and cost and risk assessments are based on currently
available information. Developments that could affect such estimates and
assessments include, but are not limited to, the ability to hold to the schedule
defined for SAP and other package conversion; the ability to remediate all
relevant computer code for those limited applications targeted to be remediated;
cooperation and remediation success of the Company's suppliers and customers;
and the ability to implement suitable contingency plans in the event of year
2000 system failures at the Company or its suppliers or customers.
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<PAGE>
PART II - OTHER INFORMATION
Item 1 - 4
Not applicable
Item 5
Advance Notice Provision and Discretionary Voting Authority
Under the Company's bylaws, stockholders who wish to make a proposal at
the 1999 Annual Meeting - other than one that will be included in the Company's
proxy materials - must notify the Company no earlier than January 5, 1999 and no
later than February 19, 1999, or if the meeting is called for a date which is
more than 75 days prior to the anniversary date of the 1998 Annual Meeting, not
later than the close of business on the 10th day following the date notice of
such meeting is mailed or made public, whichever is earlier. Under recent
changes to the Federal proxy rules, if a stockholder who wishes to present such
a proposal fails to notify the Company by the date required by the Company's
bylaws, then the proxies that management solicits for the 1999 Annual Meeting
will include discretionary authority to vote on the stockholder's proposal in
the event it is properly brought before the meeting notwithstanding the
Company's bylaws.
Item 6
(a) Exhibits:
10.1 Letter Agreement dated July 14, 1998 between Robert Meers and Reebok
International Ltd.
10.2 Employment Agreement dated September 8, 1998 between Carl J. Yankowski
and Reebok International Ltd.
10.3 Promissory Note dated September 11, 1998 by Carl J. Yankowski to Reebok
International Ltd.
27. Financial Data Schedule
99. Issues and Uncertainties
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<PAGE>
(b) Reports on Form 8-K:
A report on Form 8-K was filed by the Company on October 7, 1998
to report the Company's stock option exchange and restructuring program.
A report on Form 8-K was filed by the Company on October 22, 1998
to report amendments to the Company's Amended and Restated Credit
Agreement and Guarantee Agreement and its Participation Agreement.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1998
REEBOK INTERNATIONAL LTD.
BY: /s/ KENNETH WATCHMAKER
-------------------------
Kenneth Watchmaker
Executive Vice President and
Chief Financial Officer
24
EXHIBIT 10.1
To: Bob Meers
From: Paul Fireman
Date: July 14, 1998
This letter agreement (the "Agreement") will confirm the terms of your
employment relationship with Reebok International Ltd. (the "Company" or
"Reebok") from the date of this agreement forward. From the date of this
Agreement until your employment ends on December 31, 1999 (the "Employment
Period"), you will continue to be employed by Reebok under the following terms:
We have agreed that, effective immediately, you will move into a "special
assignments" role, taking on such responsibilities as may be requested by the
Chairman and C.E.O. of the Company. Your first assignment will be to drive Sales
Operations for the Reebok Brand. You will retain your title as President of the
Reebok Brand while in this role. You understand that your title will change as
your assignments change during the course of this agreement. You also agree to
resign your position as a Director of the Company when a new President of the
Reebok Brand is hired, or at such earlier time as requested by me. Future
assignments may include, at the Company's option, some or all of the following:
assisting the new President of the Reebok Brand and other executives of the
Company in transition matters, assistance in relationship-building with key
retailers, helping to facilitate the international expansion of the Greg Norman
brand, assisting with the rollout of Reebok concept stores, consultation in
building of a Reebok Classics brand, work in connection with developing
strategic alliances, and such other projects as may be requested by the Chairman
and C.E.O. of the Company.
You will continue to receive your current base salary of $750,000.00 per
year and the employee benefits which you currently receive from Reebok
throughout the Employment Period. Your salary will not be reviewed or adjusted
in March 1999. In addition, you will continue to be eligible to participate in
the Management Performance Incentive Plan for 1998, subject to the terms and
conditions of such plan, with a target bonus of 100% of your base salary. Your
eligibility for incentive compensation under the plan will depend on achievement
of the previously-established financial performance targets for the Company and
the Reebok Brand, as well as individual performance objectives which will be
established for your new "special assignments" role. There will be no bonus
eligibility for calendar year 1999. During the Employment Period, you will
continue to vest for purposes of the Supplemental Executive Retirement Plan and
the Reebok Profit Sharing and Retirement Plan. Your entitlement to the salary
continuation, bonus eligibility, vesting and all other benefits discussed in
this Agreement, of course, ceases if you voluntarily leave Reebok at any time
prior to expiration of the Employment Period.
Assuming you do not voluntarily leave the Company, you will continue the
normal vesting of your stock options throughout the Employment Period as
specified in your stock option grant certificates, as well as the Company's 1985
Stock Option Plan (for options granted prior to 1994) and its 1994 Equity
Incentive Plan (collectively, the "Plan Documents"). Assuming continued
employment through December 31, 1999, a summary of your options which will have
vested by that date appears on Schedule 1. Any unvested stock options held by
you will automatically be canceled on your last day of employment. The time
frame for exercising any vested options will be governed by the terms of your
applicable stock option grant certificates and the Plan Documents, including the
provisions on retirement, which provide a period of three years following
termination of employment for exercise of previously vested options.
Notwithstanding the foregoing, please note that if the Company terminates your
employment for "cause" (as defined below), you will have only a 90 day period
following the date of your separation in which to exercise your vested shares,
any unvested stock options held by you will automatically be canceled as of that
termination date, and the Company shall have no further obligations to you
pursuant to this Agreement.
For purposes of this Agreement, "cause" shall mean the following: (1) your
conviction of a felony or of a misdemeanor involving moral turpitude which has a
material adverse effect on Reebok or your ability to perform your obligations
hereunder; (2) any conduct on your part amounting to fraud or gross misconduct;
(3) violation of your non-competition or confidentiality obligations set forth
in your Non-Competition and Employee Agreements (attached as Schedule 2 to this
letter); or (4) your repeated failure (after notice) to act in good faith in the
performance of your obligations hereunder.
Your last day of employment will be considered your separation date
("Separation Date"). The only circumstance in which your Separation Date will be
different than December 31, 1999 will be in the event of termination for cause,
as discussed above. You will be eligible on the Separation Date for continuation
of health benefits under the federal law known as COBRA. You will receive
detailed information about COBRA, and how to elect coverage, on or about the
Separation Date. If you elect COBRA, your qualifying start date will be the
Separation Date. Your existing life, AD&D and supplemental life insurance will
remain in effect for 30 days from the Separation Date. During that period you
may elect to convert such insurance to an individual policy. You agree that,
with the exception of the foregoing, your participation in all other Company
benefit programs will terminate on the Separation Date. You acknowledge that, by
signing this agreement, you will waive your rights to any severance, or other
severance-related compensation or benefits, except as expressly set forth in
this Agreement.
You agree that you will comply with the obligations set forth in your
Reebok Employee Agreement and the Non-Competition Agreement, and that after the
Separation Date, you will comply with the post-termination obligations of both
agreements. Furthermore, you agree, as a condition of this Agreement, not to
discuss with any third party, other than prospective employers, your attorney or
other advisor or family members, anything related to your employment by the
Company, the termination of that employment or the terms of this Agreement. You
also agree that you will not disparage the Company or any of its employees,
products, policies, decisions, advertising, marketing or other programs. You
agree that the obligations described in this paragraph will survive the
termination of this Agreement.
Reebok wants to be certain that the payment and provision of the
compensation and benefits set forth in this Agreement will resolve any and all
dissatisfactions that you might have and, in that regard, requests that you
carefully consider the following Release of All Claims. The provision of these
financial and other benefits is conditioned upon your signing this Agreement,
which includes the following Release of All Claims.
RELEASE OF ALL CLAIMS
THIS AGREEMENT SHALL BE IN COMPLETE AND FINAL SETTLEMENT OF, AND RELEASES
THE COMPANY AND ALL THOSE CONNECTED WITH IT FROM ANY AND ALL CAUSES OF ACTION,
CLAIMS, DEMANDS OR LIABILITIES (WHETHER OR NOT CURRENTLY KNOWN OR SUSPECTED TO
EXIST BY YOU) THAT YOU HAVE HAD, NOW HAVE OR MAY NOW HAVE, IN ANY WAY RELATED TO
YOUR EMPLOYMENT, EVENTS OR ACTIONS OCCURRING DURING THE COURSE OF YOUR
EMPLOYMENT, AND THE TERMINATION OF YOUR EMPLOYMENT, OR PURSUANT TO ANY FEDERAL,
STATE OR LOCAL LAW OR REGULATION (INCLUDING WITHOUT LIMITATION, TITLE VII OF THE
CIVIL RIGHTS ACT OF 1964, THE FEDERAL AGE DISCRIMINATION IN EMPLOYMENT ACT AND
THE OLDER WORKERS BENEFIT PROTECTION ACT). YOU ALSO AGREE THAT YOU WILL NEVER
INSTITUTE ANY CLAIM, SUIT OR ACTION AGAINST THE COMPANY OR THOSE CONNECTED WITH
IT IN ANY COURT OR BEFORE ANY REGULATORY BODY OR AGENCY WHICH IN ANY WAY RELATES
TO YOUR EMPLOYMENT OR THE TERMINATION OF YOUR EMPLOYMENT. IF YOU VIOLATE THIS
PROVISION BY SUING REEBOK OR THOSE CONNECTED WITH IT, OR BY OTHERWISE
CHALLENGING THIS RELEASE OF ALL CLAIMS, YOU AGREE TO REFUND TO REEBOK ALL
AMOUNTS PAID HEREUNDER, AND TO PAY ALL COSTS AND EXPENSES INCURRED BY REEBOK OR
SUCH RELATED PARTY IN DEFENDING SUCH CLAIM, ACTION OR SUIT, INCLUDING REASONABLE
ATTORNEYS' FEES.
You agree to sign a similar release of all claims effective as of the
Separation Date.
This Agreement, with its attachments, will constitute the entire agreement
between you and the Company with respect to all matters discussed in this
Agreement, and will supersede any and all prior agreements (whether oral or
written) between you and the Company with respect to matters relating to your
employment by the Company, the termination of your employment, or any other
matters covered in this Agreement, except for the Employee Agreement and the
Non-Competition Agreement attached as SCHEDULE 2. You acknowledge that the May
29, 1997 Change of Control Agreement between you and the Company has been
superseded by this Agreement and is of no further force or effect.
Your employment and this Agreement shall be governed by the laws of the
Commonwealth of Massachusetts, U.S.A. Any dispute or claim arising out of your
employment during the Employment Period shall be submitted to the exclusive
jurisdiction of the state courts in the Commonwealth of Massachusetts or of the
U.S. District Court for the District of Massachusetts, and you hereby consent to
such exclusive jurisdiction. You further agree not to challenge the enforcement
in any jurisdiction of any relief obtained in such courts.
You acknowledge that you have been advised by Reebok to seek the advice of
an attorney before signing this Agreement, afforded sufficient time to do so,
and that you fully understand the terms of this Agreement. Your signature below
also certifies that your agreement is made voluntarily, knowingly and without
duress, and that neither Reebok nor its agents have made any statements or
representations inconsistent with the written provisions of this Agreement.
Should any provision of this Agreement be determined by any court or other body
to be illegal or invalid, the validity of the remaining provisions shall not be
affected thereby.
You have up to twenty-one (21) days to consider and accept the terms of
this Agreement. You will also have seven (7) days after signing this Agreement
to revoke your acceptance of its terms by delivering notice of the same in
writing to the attention of the General Counsel at Reebok. To be effective, such
notice must be hand delivered, or postmarked within the seven (7) day period and
sent by certified mail, return receipt requested, to General Counsel, Reebok
International Ltd., Legal Department, 100 Technology Center Drive, Stoughton, MA
02072. If the Agreement is not so revoked, its terms will become fully effective
and binding on the eighth day following your execution of the Agreement.
ROBERT MEERS REEBOK INTERNATIONAL LTD.
/s/ ROBERT MEERS /s/ PAUL FIREMAN
Signature Signature
Robert Meers Paul Fireman
Print Name Print Name
July 15, 1998 August 17, 1998
Date Date
SCHEDULE 1
OPTIONS WHICH WILL HAVE VESTED AS OF DECEMBER 31, 1999
(assuming continued employment)
Option Grant Date Number of Option Exercise Price
Shares Exercisable Per Share
12/05/89 20,000 $21.71
12/05/89 10,000 $21.28
12/14/90 50,000 $12.75
12/10/91 75,000 $27.125
12/15/93 25,000 $28.875
3/07/95 32,000 $35.375
10/18/95 80,000 $34.375
2/15/96 60,000 $26.875
7/26/96 150,000 $31.25
1/08/97 35,000 $41.00
EXHIBIT 10.2
September 8, 1998
Carl J. Yankowski
127 Farm Street
Dover, Massachusetts 02030
Dear Carl:
This letter will evidence the agreement between you and Reebok International
Ltd. ("Reebok" or the "Company") relating to your employment by Reebok. Our
agreement is as follows:
1. Your Position; Duties and Responsibilities. You will be designated during the
initial term of this Agreement as President and Chief Executive Officer, Reebok
Brands Division, and as an Executive Vice President of Reebok International Ltd.
In such assignment, you will have all responsibilities normally associated with
such positions (other than shared service functions which will be handled on the
basis previously discussed), including strategic and operating responsibility
for the business conducted in the Reebok Brands Division on a worldwide basis,
operating within corporate policies and guidelines, and mutually-agreed budgets
and capital authorization levels. In addition, as we have discussed, I will be
recommending you for election as a Director at the next Reebok Board meeting.
Although your responsibilities as of the date of this letter are as described
above, you should understand that changes may occur which result in some
operations being removed and some being added to your responsibility. On an
overall basis, however, your level of responsibility will be at least
commensurate with that of the prior President and C.E.O. of the Reebok Brands
Division and with the level of your responsibilities as of the date of this
letter.
You will devote your full business time and your best efforts to the businesses
of the Reebok Brands Division and will perform the duties required by such
position and such other duties as may be specified from time to time by the
Company's Board of Directors or Chief Executive Officer. You agree to comply in
all material respects with Company policies as in effect from time to time, as
such policies may be articulated by the Company's Board of Directors or Chief
Executive Officer.
You shall not be prevented from accepting positions of responsibility in outside
business and charitable organizations, such as directorships of outside business
corporations and public charities, subject to the limitation that such
activities shall not interfere with your discharge of your responsibilities to
Reebok hereunder and shall not include any involvement with any competing
enterprise. You agree to comply with whatever policies are in existence in this
regard, including the current policy, which limits senior executives to serving
on no more than two (2) for-profit Boards.
2. Term of Agreement. You and Reebok agree that, unless earlier terminated
pursuant to Section 10, this Agreement will be for an initial period of five
years beginning as of the date of this letter (the "Term"). Unless notice to the
contrary is given by you or Reebok prior to six (6) months before the end of the
Term or any extension thereof, the term of this Agreement shall be extended for
one (1) additional year beyond the end of the initial Term, or the end of any
extension term, as the case may be.
3. Base Salary. Your base salary will be at the annual rate of $800,000, payable
in accordance with Reebok's normal pay practices, to be reviewed for possible
increase (but not decrease) initially in March of 2000, and annually thereafter.
4. Annual Incentive Compensation. Your annual incentive compensation has been
targeted at 100% of your base salary. You will participate in the same incentive
compensation plan as the other senior executives of the Company, and to the
extent that you share either Reebok Brand or Company-wide financial performance
criteria with those other executives under the plan, your required level of
financial performance will be set at the same level as for those other
executives. Actual payment levels under the incentive compensation program will
be based on your achievement of financial and management performance goals, with
such goals to be established each year by the Company's Chief Executive Officer
or Board of Directors. In the event of any disagreement concerning whether such
goals have been achieved and/or the percentage bonus to be awarded, the decision
of the Company's Chief Executive Officer shall be final. If you believe that the
decision of the Company's Chief Executive Officer has not been made in good
faith, you may submit your position on the matter in writing to the Compensation
Committee of the Company's Board of Directors, which will consider your position
at its next regular meeting and revise the Chief Executive Officer's decision if
it determines that revision is appropriate.
5. Loan Amount. Reebok will lend you, on an interest-free basis, the sum of
$1,000,000 (the "Loan"), with the loan proceeds to be payable to you within
fourteen (14) days after your execution of a Promissory Note furnished by the
Company. Reebok will provide you with a Promissory Note for execution within
seven (7) days of your execution of this Agreement. The Company will also make
lump-sum payments sufficient, after giving effect to all federal, state and
other applicable taxes, to make you whole for any taxes that might be incurred
as a result of the making of, any imputation of interest on, or forgiveness of,
the Loan. You agree that in the event your employment with the Company is
terminated for any reason (other than as specified in Sections 10B and 10D
through 10G) prior to September 7, 2001, you will repay to the Company a pro
rata portion of the Loan based on the following formula:
Amount of Loan Repayment = $1,000,000
x
(1095 - Number of Days Employed by the Company) divided by 1095
Any repayment called for under this Section will be made to the Company within
fourteen (14) days of your last day of employment by the Company; alternatively,
at the Company's sole discretion, the loan repayment obligation may be
satisfied, in whole or in part, by the Company offsetting that obligation
against amounts owed to you by the Company. If your employment continues beyond
September 7, 2001, then the Company will forgive the Loan in its entirety.
Notwithstanding the foregoing, in the event this Agreement is terminated by you
for other than "good reason" at any time prior to the expiration of the initial
Term, you agree to repay the entire Loan amount.
6. Stock Options. Options will be granted to you to acquire 500,000 shares of
Reebok common stock, at the market price of Reebok's common stock upon the
opening of the market as of the date you execute this Agreement, which options
will be granted under the Company's 1994 Equity Incentive Plan (the "Plan"), or,
to the extent options cannot be so granted, outside the Plan. In the event that
options are granted outside the Plan, you will, except as otherwise provided in
this Agreement, have the same rights and obligations as an optionee under the
Plan, including, without limitation, with respect to a merger, consolidation,
sale or other change of control transaction or a recapitalization or other
change in the Company's capitalization, and the Company will register the shares
covered by such options on Form S-8 promptly after receipt of Board approval and
will include such shares in the next listing application to be filed by the
Company. As we have discussed, these options are intended as a megagrant, in
lieu of annual grants during the initial Term. These options will expire ten
(10) years after the date of grant and will otherwise be governed by the terms
prescribed in the Plan. The first 200,000 of your options will become
exercisable on the second anniversary of your first date of employment. The
remaining 300,000 options will vest in 100,000 share increments on each of the
third and fourth anniversaries of your first date of employment, and the final
100,000 share increment will vest on the day preceding the fifth anniversary of
the date of this letter. Certificates confirming the grant of such option will
be delivered to you no later than September 24, 1998.
7. Fringe Benefits. You will participate in all benefits that are provided
generally by Reebok to other senior executives of the Company. In addition, the
Company will provide to you during your employment a car allowance of $2,500 per
month and life insurance in the amount of two (2) times your annual base salary,
subject only to your insurability at standard rates. You will also have the
opportunity to purchase additional insurance coverage under the terms of the
Company's Flexible Benefits Plan. Furthermore, the Company will arrange for
insurance coverage for your spouse's current medical condition, regardless of
any pre-existing condition limitation in its medical insurance, but subject to
any applicable caps under its existing medical plan. We have agreed that you
will be eligible for participation in the Company's Supplemental Executive
Retirement Plan ("SERP"), with vesting backdated to September 8, 1998, provided
that your employment extends beyond the initial Term of this Agreement. It is
understood that the SERP is currently being reviewed and that if you become
eligible for participation in the SERP pursuant to the preceding sentence, you
will be enrolled in whatever version is next adopted by the Company; provided
however that if no amendment to the SERP is adopted prior to September 8, 2003,
then you would be eligible for the version in effect as of the date of this
Agreement.
8. Vacation. You will be entitled to vacation in accordance with normal Reebok
policy for senior executives, with any additional amount to be determined by the
Company's Chief Executive Officer.
9. Confidentiality and Non-Competition. You agree that during the Term and
thereafter you will maintain the confidentiality of all confidential information
learned by you while at Reebok. The standard Reebok Employee Agreement is
attached hereto and incorporated herein as Exhibit A. You further agree that
during the period of your employment by Reebok and for a period of one year
thereafter you will not accept any position with any organization which competes
anywhere in the world where Reebok products are sold, with the Reebok Brands
Division or with other businesses of Reebok as it shall be constituted at the
time of your termination, whether as officer, director, employee, agent,
consultant, partner, shareholder or otherwise. You acknowledge and agree that,
because the legal remedies of the Company would be inadequate in the event of
your breach of, or other failure to perform, any of your obligations set forth
in this Section, the Company may, in addition to obtaining any other remedy or
relief available to it (including without limitation damages at law), enforce
the provisions of this Section by injunction and other equitable remedies. You
agree that the provisions with respect to duration and geographic scope and
product scope of the restrictions set forth in this Section are reasonable to
protect the legitimate interests of the Company and the goodwill of the Company.
The provisions of this Section will continue to apply after termination of this
Agreement or your employment by the Company.
10. Termination. Notwithstanding the provisions of Section 2 above,
this Agreement may be terminated prior to the end of the Term in any of the
following cases:
A. Voluntary Termination Without Good Reason. You may terminate this Agreement,
without "good reason," upon ninety (90) days prior written notice to the
Company.
B. Voluntary Termination With Good Reason. You may terminate this Agreement with
"good reason" upon fourteen (14) days prior written notice to the Company,
provided however that you must first provide written notice of the "good reason"
to the Company, and the Company must fail to cure such "good reason" within
thirty (30) days. For purposes of this Agreement, "good reason" will mean the
following:
(i) failure by the Company to maintain you in the positions of President
and C.E.O. of the Reebok Brand and Executive Vice President of
Reebok International Ltd.;
(ii) a material diminution in the overall level of your responsibilities or
authority;
(iii) a change in your reporting relationship so that you no longer report to
the Chief Executive Officer of Reebok International Ltd.;
(iv) a failure to elect you to the Board of Directors of Reebok International
Ltd. prior to December 31, 1998 or to nominate you for membership on the Board
at such time as your term as a Director expires;
(v) relocation of your principal place of business more than thirty (30) miles
from the current location;
(vi) a failure, by December 31, 1998, to have the Compensation Committee of the
Board of Directors approve a Change in Control Agreement for you in a form
substantially similar to the May 29, 1997 Change in Control Agreement signed by
other senior executives, with the only substantive changes being as follows: (a)
elimination of the second sentence of section 4.b.(i) of the Change in Control
Agreement; and (b) addition of language making it clear that a "Change in
Control" would not be deemed to occur under the last paragraph of Section 3 of
the Change in Control Agreement in the case of a leveraged buy-out or
recapitalization of the Company so long as you retained all the benefits of this
Agreement and continued future coverage under your Change in Control Agreement
following the leveraged buyout or recapitalization, and your existing stock
options were converted to equity or replacement options on a basis no less
favorable than that generally adopted for other senior executives of the
Company. Any benefits provided to you under the Change in Control Agreement (in
the event that such agreement applies) will be in substitution for benefits
provided pursuant to Section 11 of this Agreement; or
(vii) failure to make timely payment of material compensation or benefits
required to be provided under this Agreement, or to provide for assumption of
this Agreement as required by Section 12 (a).
C. Cause. The Company may terminate this Agreement for cause, upon
written notice to you. For purposes of this Agreement, "cause" will
mean:
(i) fraud, embezzlement, or other intentional misappropriation from the Company;
(ii) your material breach of any material written policies, rules or regulations
of employment which may be adopted or amended from time to time by the Company
and which have been communicated to you in writing prior to the conduct giving
rise to the alleged breach;
(iii) your conviction of a felony or a misdemeanor (excluding traffic offenses)
involving moral turpitude;
(iv) any other conduct on your part involving fraud, gross negligence or willful
misconduct, or other action which materially damages the reputation of the
Company;
(v) your refusal to perform material duties assigned in accordance with the
terms of this Agreement (provided that such duties are not unlawful) or your
failure to act in good faith in the performance of your employment duties; or
(vi) your default of any material obligations under this Agreement, which
default is not cured within thirty (30) days after the date on which the Company
gives you written notice of such default.
It is understood and agreed that a failure to achieve financial or other
business results is not a basis for a "for cause" termination. No termination of
your employment for cause shall be deemed to have occurred unless you have been
given notice of the reason therefore including the allegations which may
constitute reason for such termination and after (a) you have been provided an
opportunity to be heard by the Board of Directors of the Company or the
Executive Committee thereof, and (b) such decision has been upheld by the Board
or Executive Committee.
D. Death. This Agreement will terminate immediately upon your death. However,
upon your death, all outstanding stock options will become immediately
exercisable pursuant to the provisions of the Plan.
E. Incapacity. Upon written notice to you, the Company may terminate this
Agreement in the event of your incapacity, subject, however, to any legal
obligations that mandate continued employment. For purposes of this Agreement,
"incapacity" will mean such incapacity or disability as would qualify you for
long-term disability coverage under the Company's long-term disability insurance
plan. In addition, in the event your employment is terminated as a result of
your disability (as that term is defined in the Plan), all outstanding stock
options will become immediately exercisable pursuant to the provisions of the
Plan.
F. Non-Performance. On or after February 1, 2001, the Company may, subject to
the provisions of Section 11C, upon written notice to you, terminate your
employment for non-performance. For purposes of this Agreement,
"non-performance" will mean your material failure to satisfy any of your annual
management objectives (beginning with your calendar year 2000 objectives),
provided however that (i) such objectives must have been approved by the
Compensation Committee of the Board of Directors or the Board of Directors
itself; and (ii) to the extent that the failure to meet an objective is the
result of specific direction received from the Chief Executive Officer, your
objectives will, for purposes of this Section, be adjusted to eliminate the
effect of the Chief Executive Officer's decision.
G. Other Reasons. Subject to the terms of Section 11D, the Company may
terminate your employment for any other reason, upon written notice to
you.
11. Payment Obligation in the Event of Termination. In the event of any
termination pursuant to Section 10, Reebok shall have the following payment
obligations.
A. Voluntary Termination Without Good Reason, and Terminations for Cause, Death,
or Incapacity. In the event of any termination of this Agreement pursuant to
Sections 10A and C-E, you will be entitled to payment of your base salary only
until the last day of your employment, and no further payments of any kind will
be due you from the Company, except as may be payable pursuant to the Company's
employee benefit plans (other than the Company's severance plan), the Change in
Control Agreement referenced in Section 10B.(vi) hereof (if applicable), and
Section 12(f) hereof.
B. Voluntary Termination With Good Reason. In the event that you terminate this
Agreement with "good reason" pursuant to Section 10B, you will be entitled to
collect your base salary at the times and in the amounts that would have been
paid had you remained in the employ of the Company for the balance of the Term,
provided, however, that in no event will you receive less than twelve (12)
months or more than thirty-six (36) months of base salary continuation. You will
also be entitled to your annual incentive compensation for the year in which
termination occurs, such incentive compensation, if any, to be payable to you no
later than sixty (60) days after the end of the year in which termination
occurs. (The amount of incentive compensation to be paid pursuant to the
foregoing sentence will be based on the average percentage of target paid to
other senior executives of the Reebok Brand operating unit.) In addition, any
stock options set forth in Section 6 that would have become exercisable during
the Term will become immediately exercisable as of your last day of employment,
and the Company will continue any medical coverage in effect for you and your
family as of the date of termination until such date as you become eligible for
or receive other medical coverage, but in no event any longer than eighteen (18)
months following the date of termination. The foregoing payments and benefits
will be contingent upon your execution of a Release acceptable to the Company,
and will be in lieu of payments and other benefits, if any, to which you may be
entitled under any other severance agreement or severance plan of the Company.
C. Termination for Non-Performance. In the event of any termination by Company
of this Agreement pursuant to Section 10F, you will be entitled to collect as
severance your base salary at the times and in the amounts that would have been
paid had your employment continued for a period of eighteen (18) months
following the date of termination. The foregoing payments will be contingent
upon your execution of a Release acceptable to the Company, and will be in lieu
of payments and other benefits, if any, to which you may be entitled under any
other severance agreement or severance plan of the Company.
D. Termination for Other Reasons. In the event of any termination by Company of
this Agreement pursuant to Section 10G, you will be entitled to collect your
base salary at the times and in the amounts that would have been paid had you
remained in the employ of the Company for the balance of the Term, provided
however that in no event will you receive less than twelve (12) months of base
salary continuation. You will also be entitled to your annual incentive
compensation for the year in which termination occurs, such incentive
compensation, if any, to be payable to you no later than sixty (60) days after
the end of the year in which termination occurs. (The amount of incentive
compensation to be paid pursuant to the foregoing sentence will be based on the
average percentage of target paid to other senior executives of the Reebok Brand
operating unit.) In addition, any stock options set forth in Section 6 that
would have become exercisable during the Term will become immediately
exercisable as of your last day of employment, and the Company will continue any
medical coverage in effect for you and your family as of the date of termination
until such date as you become eligible for or receive other medical coverage,
but in no event any longer than eighteen (18) months. The foregoing payments and
benefits will be contingent upon your execution of a Release acceptable to the
Company, and will be in lieu of payments and other benefits, if any, to which
you may be entitled under any other severance agreement or severance plan of the
Company.
E. Payments provided by the Company under this Agreement will not be subject to
mitigation or, other than amounts required to be paid to the Company pursuant to
Section 5, offset.
12. Miscellaneous
(a) Successors, Assigns, Amendment, etc.. This Agreement shall be binding upon
and shall inure to the benefit of Reebok and its successors and assigns. Unless
such assumption would otherwise occur by operation of law, the Company shall not
enter into any agreement for the merger, consolidation, restructuring, sale of
assets or other reorganization of the Company, without providing for the express
assumption of this Agreement by the Company's successor. This Agreement shall be
binding upon you and shall inure to the benefit of your heirs, executors,
administrators and legal representatives, but shall not be assignable by you.
This Agreement may be amended or altered only by the written agreement of Reebok
and you.
(b) Notice. All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be hand delivered or mailed by
certified mail, postage prepaid, addressed as follows: If to Reebok, to 100
Technology Center Drive, Stoughton, MA 02072 with a copy to General Counsel at
the same address, or to such other address as may have been furnished to you in
writing as herein provided; or, if to you, to the address set forth above, with
a copy to Stephen Lindo, Esq., Willkie Farr & Gallagher, 787 Seventh Avenue, New
York New York 10019, or to such other address as may have been furnished to
Reebok by you as herein provided in writing. Any notice or other communication
so addressed and so mailed shall be deemed to have been given three days after
said mailing.
(c) Applicable Law. This Agreement has been executed and delivered by both
parties in the Commonwealth of Massachusetts and shall be governed by and
construed in accordance with the internal laws of the Commonwealth of
Massachusetts.
(d) Severability. Each provision of this Agreement is severable from the others,
and if any provision hereof shall be to any extent unenforceable, it and the
other provisions hereof shall continue to be enforceable to the full extent
allowable by any court of competent jurisdiction, as if such offending provision
had not been a part of this Agreement.
(e) Entire Agreement. This agreement, together with Exhibit A hereto,
constitutes the entire agreement between the parties concerning its subject
matter, and supersedes any and all prior agreements between the parties.
(f) Legal Fees. The Company will promptly reimburse you for reasonable and
customary legal fees and expenses incurred by you in connection with the
negotiation of this Agreement. In addition, the Company will promptly reimburse
you for reasonable and customary legal fees incurred by you in connection with
efforts to enforce the provisions of this Agreement (provided such efforts
result in your recovery of any sum from the Company, whether through court award
or settlement).
(g) Background Check. This Agreement, and the parties' obligations hereunder,
are contingent upon Reebok's satisfaction with the results of a background check
to which you hereby consent. It is expected that the background check will be
completed by August 27, 1998, and Reebok will communicate to you whether it is
satisfied with its results by no later than August 28, 1998.
If you accept and agree to the foregoing, please signify by signing and
returning a counterpart of this letter, whereupon this letter will become a
binding agreement between you and the Company as of the date first above
written.
Very truly yours,
REEBOK INTERNATIONAL LTD.
By: /s/ PAUL FIREMAN
Paul Fireman
Chief Executive Officer
Accepted and agreed to:
/S/ CARL J. YANKOWSKI
Carl J. Yankowski
EXHIBIT 10.3
PROMISSORY NOTE
$1,000,000.00 STOUGHTON, MASSACHUSETTS
September 11, 1998
FOR VALUE RECEIVED, the undersigned Carl J. Yankowski (hereinafter
"Yankowski") hereby promises to pay to the order of Reebok International Ltd.,
100 Technology Center Drive, Stoughton, Massachusetts 02072 (hereinafter called
"Reebok") the principal amount of ONE MILLION DOLLARS ($1,000,000.00), without
interest, in the manner set forth herein.
This Note and the indebtedness evidenced hereby are being provided
pursuant to the terms of the letter agreement dated September 8, 1998 between
Yankowski and Reebok (the "Employment Agreement").
Subject to the terms and conditions herein, if Yankowski (i) is
employed by Reebok for the full period from September 8, 1998 through and
continuing beyond September 7, 2001 and (ii) does not terminate his employment
with Reebok prior to September 7, 2003 for other than "good reason" (as defined
in the Employment Agreement), then on September 8, 2003 the indebtedness
evidenced by this Note shall be forgiven by Reebok in full as of September 8,
2001 and this Note shall be marked cancelled.
In the event Yankowski's employment with Reebok is terminated prior to
September 7, 2001, the following shall apply:
A. If Yankowski's employment with Reebok is terminated
pursuant to Section 10C of the Employment Agreement, Yankowski will
repay to Reebok within fourteen (14) days of such termination date a
pro rata portion of the sums advanced to him pursuant to this Note
based on the following formula:
Amount of principal to be repaid = $1,000,000
multiplied by
(1,095 minus the number of days Yankowski was
employed by Reebok) divided by 1,095.
B. In the event Yankowski's employment with Reebok is
terminated pursuant to Sections 10B or 10D, E, F or G of the Employment
Agreement, the indebtedness evidenced by this Note shall be forgiven by
Reebok in full as of the date of such termination and this Note shall
be marked cancelled.
In the event Yankowski terminates his employment with Reebok prior to
September 7, 2003 for other than "good reason" (as defined in the Employment
Agreement), Yankowski shall repay the full principal amount evidenced by this
Note within fourteen (14) days of such termination date. The repayment
obligation referenced in the preceding sentence shall not apply in the event of
a termination of the Employment Agreement pursuant to Section 10B, 10D or 10E of
the Agreement.
Reebok shall have the right to set off any amounts which Yankowski owes
Reebok hereunder against any monies which Reebok or any of its subsidiaries may
owe to Yankowski, of any nature whatsoever, including without limitation, any
compensation and any severance owed under the Employment Agreement or any other
benefit owed to or held by Yankowski as an employee of Reebok or any of its
subsidiaries, and Yankowski hereby agrees to and authorizes any such setoff.
If payment of the principal on this Note is not paid in accordance with
the terms aforementioned, then this Note shall be deemed to be in default and if
suit is brought to collect this Note, Reebok shall be entitled to collect, in
addition to any principal outstanding, all reasonable costs and expenses to
include, but not necessarily be limited to, reasonable attorneys' fees and
expenses.
Presentment, notice of dishonor and protest are hereby waived by
Yankowski. This Note shall be binding upon Yankowski and his heirs, executors,
administrators, and legal representatives.
No delay or omission on the part of Reebok in exercising any rights
hereunder shall operate as a waiver of such rights or of any other right of
Reebok, nor shall any delay, omission or waiver on any one occasion be deemed as
a bar to or waiver of the same or any other right on any future occasion. This
Note may not be changed or terminated orally.
Yankowski shall have the right to prepay the principal of this Note, in
whole or in part, at any time or times, without penalty.
All rights and obligations hereunder shall be governed by, and
construed and enforced in accordance with, the substantive laws of The
Commonwealth of Massachusetts, and this Note is executed as, and shall have
effect of, a sealed instrument. If any provision of this transaction is
inconsistent with the laws and statutes of The Commonwealth of Massachusetts,
the rest of the transaction shall not be affected, and that part that is not in
accord with the said laws shall be adjusted to so comply.
IN WITNESS WHEREOF, the undersigned has executed this Note as an
instrument under seal this 11 day of September, 1998.
/S/ CARL J. YANKOWSKI
Carl J. Yankowski
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SEPTEMBER 30, 1998 CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
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<NAME> REEBOK INTERNATIONAL LTD.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 99,021
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<INVENTORY> 535,734
<CURRENT-ASSETS> 1,382,262
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<COMMON> 932
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<SALES> 2,519,026
<TOTAL-REVENUES> 2,507,157
<CGS> 1,592,651
<TOTAL-COSTS> 1,592,651
<OTHER-EXPENSES> 816,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,164
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EXHIBIT 99
ISSUES AND UNCERTAINTIES
The Company's Quarterly report on Form 10-Q filed herewith includes,
and other documents, information or statements released or made from time to
time by the Company may include, forward-looking statements. These statements
involve risks and uncertainties. The Company's actual results may differ
materially from those discussed in such forward-looking statements. Prospective
information is based on management's then current expectations or forecasts.
Such information is subject to the risk that such expectations or forecasts, or
the assumptions underlying such expectations or forecasts, become inaccurate.
The following discussion identifies certain important issues and uncertainties
that are among the factors that could affect the Company's actual results and
could cause such results to differ materially from those contained in forward
looking statements made by or on behalf of the Company.
Competition and Consumer Preferences
The footwear and apparel industry is intensely competitive and subject
to rapid changes in consumer preferences, as well as technological innovations.
A major technological breakthrough or marketing or promotional success by one of
the Company's competitors could adversely affect the Company's competitive
position. A shift in consumer preferences could also negatively impact the
Company's sales and financial results.
Currently, the athletic footwear and apparel industry is experiencing
some shift in consumer preference away from athletic footwear to "casual"
product offerings. This change in preference has adversely affected the
Company's business, as well as that of some of its competitors. The Company is
taking steps to respond to this shift by focusing on its products and
technologies and pursuing growth opportunities with its Rockport, Ralph Lauren
Footwear and Greg Norman brands. There is, however, substantial uncertainty as
to whether the Company's actions will be effective and how significant the
adverse impact of the shift in consumer preference will be on the Company's
business. The outcome will be dependent on a number of factors, including the
extent of the change in consumer preference, consumer and retailer acceptance of
the Company's products, technologies and marketing, and the ability of the
Company to effectively respond to the shift in the marketplace, as well as the
other factors described in this Exhibit.
The Company has received initial positive feedback from retailers and
customers regarding its DMX product line. However, whether this technology will
be successful is dependent on numerous factors including consumer preference,
consumer and retailer acceptance of such technology, competitive product
offerings, the Company's ability to utilize such technology and to extend it to
other products, as well as other factors described in this Exhibit.
In addition, in countries where the athletic footwear market is mature
(including the U.S.), sales growth may be dependent in part on the Company
increasing its market share at the expense of its competitors, which may be
difficult to accomplish. The Company also faces strong competition with respect
to its other product lines, such as the ROCKPORT product line and the GREG
NORMAN Collection.
Competition in the markets for the Company's products occurs in a
variety of ways, including price, quality, product design, brand image,
marketing and promotion and ability to meet delivery commitments to retailers.
The intensity of the competition faced by the various operating units of the
Company and the rapid changes in the consumer preference and technology that can
occur in the footwear and apparel markets constitute significant risk factors in
the Company's operations.
Inventory Risk
The footwear industry has relatively long lead times for design and
production of product and thus, the Company must commit to production tooling
and in some cases to production in advance of orders. If the Company fails to
accurately forecast consumer demand or if there are changes in consumer
preference or market demand after the Company has made such production
commitments, the Company may encounter difficulty in filling customer orders or
in liquidating excess inventory, or may find that retailers are canceling orders
or returning product, all of which may have an adverse effect on the Company's
sales, its margins and brand image. In addition, the Company may be required to
pay for certain tooling if it does not satisfy minimum production quantities.
Sales Forecasts
The Company's investment in advertising and marketing and in certain
other expenses is based on sales forecasts and is necessarily made in advance of
actual sales. The markets in which the Company does business are highly
competitive, and the Company's business is affected by a variety of factors,
including brand awareness, changing consumer preferences, fashion trends, retail
market conditions, currency changes and economic and other factors. There can be
no assurance that sales forecasts will be achieved, and to the extent sales
forecasts are not achieved, these investments will represent a higher percentage
of revenues, and the Company will experience higher inventory levels and
associated carrying costs, all of which would adversely impact the Company's
financial condition and results. See also discussion below under "Advertising
and Marketing Investment."
Pricing and Margins
The prices that the Company is able to charge for its products are
dependent on the type of product offered and the consumer and retailer response
to such product, as well as the prices charged by the Company's competitors. If,
for example, the Company's products provide enhanced performance capabilities,
the Company should be able to achieve relatively higher prices for such
products. The gross margins which the Company earns are dependent on the prices
which the Company can charge for these goods and the costs incurred in acquiring
the products for sale. To the extent that the Company has higher costs, such as
the higher startup costs associated with technological products, its margins
will be lower unless it can increase its prices or reduce its costs. Recently,
the Company has experienced an improving trend in its pricing margins as a
result of manufacturing efficiencies and changes in sourcing initiated to take
advantage of currency opportunities in the Far East. There can be no assurance
that this trend will continue. In addition, because of the shift in the
marketplace and the resulting over-inventoried promotional retail environment,
the Company's full-margin business has decreased and the Company has encountered
increased returns and cancellations from retailers, which have adversely
affected its margins. The ability of the Company to increase its full margin
business is dependent on a number of factors including the success of the
Company's products and marketing, the retail environment and general industry
conditions. In addition, because of the over-inventoried environment, retailers
have been more reluctant to place future orders for products, thus the Company
has fewer future orders and may be required to take on more inventory risk to
fulfill "at once" business.
Backlog
The Company reports its backlog of open orders for the Reebok Brand. However,
its backlog position is not necessarily indicative of future sales because the
ratio of future orders to "at once" shipments, as well as sales by Company-owned
retail stores, may vary from year to year. In addition, many customer orders are
cancelable. The recent slowdown at retail has resulted in higher cancellations
and returns.
Advertising and Marketing Investment
Because consumer demand for athletic footwear and apparel is heavily influenced
by brand image, the Company's business requires substantial investments in
marketing and advertising, including television and other advertising, athlete
endorsements and athletic sponsorships, as well as investments in retail
presence. In the event that such investments do not achieve the desired effect
in terms of increased retailer acceptance and/or consumer purchase of the
Company's products, there could be an adverse impact on the Company's financial
results. Recently, there has been some shift in the marketplace away from
certain "icon" athletes and the products they endorse. As a result, the Company
has re-evaluated its investment in certain sports marketing deals and is in the
process of eliminating or restructuring certain of its marketing contracts that
no longer reflect Reebok's brand positioning.
Retail Operations
The Company currently operates approximately 150 retail stores in the
U.S. and a significant number of retail stores internationally which are
operated either directly or through the Company's distributors or other third
parties. The Company has made a significant capital investment in opening these
stores and incurs significant expenditures in operating these stores. To the
extent the Company continues to expand its retail organization, the Company's
performance could be adversely affected by lower than anticipated sales at its
retail stores. The performance of the Company's retail organization is also
subject to general retail market conditions. The recent over-inventoried
promotional environment in the U.S. has resulted in a decline in retail margins,
thus adversely affecting the Company's own retail business.
Timeliness of Product
Timely product deliveries are essential in the footwear and apparel
business since the Company's orders are cancelable by customers if agreed
delivery windows are not met. If as a result of design, production or
distribution problems, the Company is late in delivering product, it could have
an adverse impact on its sales and/or profitability.
International Sales and Production
A substantial portion of the Company's products are manufactured abroad
and approximately 40% of the Company's sales are made outside the U.S. The
Company's footwear and apparel production and sales operations are thus subject
to the usual risks of doing business abroad, such as currency fluctuations,
longer payment terms, potentially adverse tax consequences, repatriation of
earnings, import duties, tariffs, quotas and other threats to free trade, labor
unrest, political instability and other problems linked to local production
conditions and the difficulty of managing multinational operations. If such
factors limited or prevented the Company from selling products in any
significant international market or prevented the Company from acquiring
products from its suppliers in China, Indonesia, Thailand or the Philippines, or
significantly increased the cost to the Company of such products, the Company's
operations could be seriously disrupted until alternative suppliers were found
or alternative markets were developed, with a significant negative impact. See
also discussion below under "Economic Factors".
Sources of Supply
The Company depends upon independent manufacturers to manufacture
high-quality product in a timely and cost-efficient manner and relies upon the
availability of sufficient production capacity at its existing manufacturers or
the ability to utilize alternative sources of supply. A failure by one or more
of the Company's significant manufacturers to meet established criteria for
pricing, product quality or timeliness could negatively impact the Company's
sales and profitability. In addition, if the Company were to experience
significant shortages in raw materials or components used in its products, it
could have a negative effect on the Company's business, including increased
costs or difficulty in delivering product. Some of the components used in the
Company's technologies are obtained from only one or two sources and thus a loss
of supply could disrupt production. See also discussion below under "Economic
Factors".
Risk Associated with Indebtedness
In connection with the Company's Dutch Auction share repurchase in
1996, the Company incurred $640 million in additional debt to finance the
repurchase of shares (as of September 30, 1998, the outstanding balance of such
debt was approximately $428 million) and has a $400 million revolving credit
line (as of September 30, 1998, there were no borrowings outstanding under the
revolving credit line). As a result of this indebtedness, the Company currently
faces significantly increased interest expense and debt amortization, as
compared to the past. The credit arrangement contains certain covenants
(including restrictions on liens and the requirements to maintain a minimum
interest coverage ratio and a minimum debt to cash flow ratio) which are
intended to limit the Company's future actions and which may also limit the
Company's financial, operating and strategic flexibility. In addition, the
Company's failure to make timely payments of interest and principal on its debt,
or to comply with the material covenants applicable thereto, could result in
significant negative consequences. As of September 30, 1998, the Company amended
its credit arrangements to relax its debt to operating cash flow ratio.
The Company believes that its cash, short-term investments and access
to credit facilities, together with its anticipated cash flow from operations,
are adequate for the Company's current and planned needs in 1998. However, the
Company's actual experience may differ from the expectations set forth in the
preceding sentence. Factors that might lead to a difference include, but are not
limited to, the matters discussed herein, as well as future events that might
have the effect of reducing the Company's available cash balances (such as
unexpected operating losses or increased capital or other expenditures, as well
as increases in the Company's inventory or accounts receivable) or future events
that might reduce or eliminate the availability of external financial resources.
In June 1998, two credit rating agencies, Standard & Poor's Rating
Group and Moody's Investors Service, Inc., put the Company on "credit watch"
with negative implications, which indicates that these agencies are reviewing
the Company's financial condition to determine whether its current credit
ratings are still appropriate or whether the ratings should be lowered. No
determination has yet been made by either credit agency. If the Company's credit
ratings were lowered, it may be more difficult for the Company to borrow and the
costs of borrowing would increase, including the costs the Company incurs under
some of its existing credit arrangements.
Risk of Currency Fluctuations
The Company conducts operations in various international countries and
a significant portion of its sales are transacted in local currencies. As a
result, the Company's revenues are subject to foreign exchange rate
fluctuations. The Company enters into forward currency exchange contracts and
options to hedge its exposure for merchandise purchased in U.S. dollars that
will be sold to customers in other currencies. The Company also uses foreign
currency exchange contracts and options to hedge significant inter-company
assets and liabilities denominated in other currencies. However, no assurance
can be given that fluctuation in foreign currency exchange rates will not have
an adverse impact on the Company's revenues, net profits or financial condition.
In 1997 and in the first nine months of 1998, the Company's international sales,
gross margins and profits were negatively impacted by changes in foreign
currency exchange rates.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the
European Union are scheduled to adopt a single currency called the euro. On this
date, fixed conversion rates between the existing currencies of these countries
("legacy currencies") and the euro will be established and thereafter the euro
will trade in the currency markets and may be used in business transactions. The
legacy currencies will remain as legal tender together with the euro until at
least January 1, 2002 (but not later than July 1, 2002). During the transition
period, parties may settle transactions using either the euro or a participating
country's legacy currency.
The use of a single currency in the eleven participating countries may
result in increased price transparency which may affect Reebok's ability to
price its products differently in various European markets. Although it is not
clear what the result of this price harmonization might be, one possible result
is lower average prices for products sold in certain of these markets.
Conversion to the euro is not expected to have a significant impact on the
amount of Reebok's exposures to changes in foreign exchange rates since most of
Reebok's exposures are incurred against the U.S. dollar, as opposed to other
legacy currencies. Reebok's foreign exchange hedging costs should also not
change significantly. Nevertheless, because there will be less diversity in
Reebok's currency exposures, changes in the euro's value against the U.S. dollar
could have a more pronounced effect, whether positive or negative, on the
Company.
The Company has made the necessary changes in its internal and banking
systems in Europe to accommodate introduction of the euro and will be prepared
to make and receive payments in Europe using the euro effective as of January 1,
1999. As part of its global restructuring, the Company is in the process of
implementing SAP software on a global basis; the SAP system will be
euro-compatible. Other business functions will be converted for the euro by the
end of the transition period or earlier to meet business needs. The Company does
not expect such conversion costs to be material.
Customers
Although the Company has no single customer that represents 10% or more
of its sales, the Company has certain significant customers, the loss of which
could have an adverse effect on its business. There could also be a negative
effect on the Company's business if any such significant customer became
insolvent or otherwise failed to pay its debts. See also discussion below under
"Economic Factors".
Intellectual Property
The Company believes that its trademarks, technologies and designs are
of great value. From time to time the Company has been, and may in the future
be, the subject of litigation challenging its ownership of certain intellectual
property. Loss of the REEBOK, ROCKPORT or GREG NORMAN trademark rights could
have a serious impact on the Company's business. Because of the importance of
such intellectual property rights, the Company's business is subject to the risk
of counterfeiting, parallel trade or intellectual property infringement. The
Company is, however, vigilant in protecting its intellectual property rights.
Litigation
The Company is subject to the normal risks of litigation with respect
to its business operations.
Economic Factors
The Company's business is subject to economic conditions in the
Company's major markets, including, without limitation, recession, inflation,
general weakness in retail markets and changes in consumer purchasing power and
preferences. Adverse changes in such economic factors could have a negative
effect on the Company's business. For example, the recent slowdown in the growth
of the athletic footwear and branded apparel markets has had negative effects on
the Company's business. As a result of current market conditions, a number of
the Company's competitors have excess inventory which they are attempting to
sell off. This over-inventoried, promotional environment has made it more
difficult for the Company to sell its products and has negatively impacted the
Company's gross margins. Domestically, a general decline in overall consumer
confidence combined with an economic slowdown has also resulted in sales
declines.
The current financial crisis in the Far East has also had a negative
impact on the Company's business. The economic problems in Asia have had an
adverse effect on the Company's sales to that region. Such financial
difficulties have also increased the risk that certain of the Company's
customers in the region will be unable to pay for product orders. In addition,
most of the Company's products are manufactured in the Far East by third party
manufacturers. The current economic conditions have made it more difficult for
such manufacturers to gain access to working capital and there is a risk that
such manufacturers could encounter financial problems which could affect their
ability to produce products for the Company. Similar problems have also resulted
from the financial difficulties in Latin America and in Russia.
Tax Rate Changes
If the Company was to encounter significant tax rate changes in the
major markets in which it operates, it could have an adverse effect on its
business or profitability.
Global Restructuring Activities
The Company is currently undertaking various global restructuring
activities designed to enable the Company to achieve operating efficiencies,
improve logistics and reduce expenses. There can be no assurance that the
Company will be able to effectively execute on its restructuring plans or that
such benefits will be achieved. In addition, in the short-term the Company could
experience difficulties in product delivery or other logistical operations as a
result of its restructuring activities, which could have an adverse effect on
the Company's business. In the short-term, the Company could also be subject to
increased expenditures and charges from such restructuring activities. For
example, the Company is currently consolidating its warehouses in Europe. Such
consolidation should enable it to achieve efficiencies and improve logistics.
However, in the short-term, such benefits may not be achieved and if
difficulties arise in effecting such consolidation, the Company could have
excess inventory or a decline in sales.
The Company is also in the process of eliminating or restructuring
certain of its underperforming marketing contracts. There can be no assurance
that the Company will be able to successfully restructure such agreements or
achieve the cost savings anticipated.
Year 2000 Readiness Disclosure
The Company has conducted a global review of its information technology
(IT) systems, as well as its non-IT computer systems, to identify the systems
that could be affected by the technical problems associated with the year 2000
and has developed an implementation plan to address the "year 2000" issue. The
Company made a strategic decision in 1993 to adopt a new global information
system, the SAP system, which will replace substantially all legacy systems. The
Company presently believes that, with modifications to existing software and
converting to SAP software and other packaged software, the year 2000 will not
pose significant operational problems for the Company's computer systems.
However, if the modifications and conversions are not implemented or completed
in a timely or effective manner, the year 2000 problem could have a material
adverse impact on the operations and financial condition of the Company. In
addition, in converting to SAP software, the Company is relying on its software
partner to develop and support new software applications and there could be
problems in successfully developing and implementing such new applications. The
Company is the first in the apparel and footwear industry to implement this new
software application and, because of the year 2000 time restraints, the schedule
for implementation is accelerated. Thus, there are substantial risks that
problems could arise in implementation or that the system may not be fully
effective by the end of 1999. Finally, the Company is dependent on its
suppliers, joint venture partners, independent distributors and customers to
implement appropriate changes to their IT and non-IT systems to address the
"year 2000" issue. The failure of such third parties to effectively address such
issue could have a material adverse effect on the Company's business.
Estimates of time and cost and risk assessments are based on currently
available information. Developments that could affect such estimates and
assessments include, but are not limited to, the ability to hold to the
schedule defined for SAP and other package conversion; the ability to remediate
all relevant computer code for those limited applications targeted to be
remediated; co-operation and remediation success of the Company's suppliers and
customers; and the ability to implement suitable contingency plans in the event
of year 2000 system failures at the Company or its suppliers or customers.
Quarterly Reports
The financial results reflected in the Company's quarterly report on
Form 10-Q are not necessarily indicative of the financial results which may be
achieved in future quarters or for year-end, which results may vary.
