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 March 31, 1999
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
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(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 May 7, 1999, was 55,975,766 shares.
<PAGE>
REEBOK INTERNATIONAL LTD.
INDEX
PART I. FINANCIAL INFORMATION:
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 1999 and 1998, and December 31, 1998 . . 3-4
Condensed Consolidated Statements of Income -
Three months Ended March 31, 1999 and 1998 . . . . 5
Condensed Consolidated Statements of Cash Flows -
Three months Ended March 31, 1999 and 1998 . . . . 6-7
Notes to Condensed Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . 8-11
Item 2
Management's Discussion and Analysis of Results
Of Operations and Financial Condition . . . . . . . 12-19
Part II. OTHER INFORMATION:
Items 1-3 Not Applicable . . . . . . . . . . . . . . . . . . . 20
Item 4 Submission of Matters to a Vote of Security Holders . 20
Item 5 Not Applicable . . . . . . . . . . . . . . . . . . . 20
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . 21
2
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998
---- ---- ----
(Unaudited) (See Note 1)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 108,104 $ 143,748 $ 180,070
Accounts receivable, net
of allowance for doubtful
accounts (March 1999,
$45,646; March 1998,
$45,859; December 1998,
$47,383) 611,854 690,808 517,830
Inventory 486,573 531,859 535,168
Deferred income taxes 77,878 84,621 78,419
Prepaid expenses and other
current assets 57,976 56,021 50,309
--------- --------- ---------
Total current assets 1,342,385 1,507,057 1,361,796
--------- --------- ---------
Property and equipment, net 176,470 155,434 172,585
Other non-current assets:
Intangibles, net of
amortization 74,662 64,164 68,648
Deferred income taxes 46,782 21,603 99,212
Other 31,611 47,759 37,383
--------- --------- ---------
153,055 133,526 205,243
--------- --------- ---------
Total Assets $1,671,910 $1,796,017 $1,739,624
========= ========= =========
</TABLE>
3
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998
---- ---- ----
(Unaudited) (See Note 1)
<S> <C> <C> <C>
Current liabilities:
Notes payable to banks $ 60,696 $ 69,888 $ 48,070
Commercial paper 11,274 34,816
Current portion of
long-term debt 91,973 117,821 86,640
Accounts payable 138,579 170,129 203,144
Accrued expenses 243,562 233,293 191,833
Income taxes payable 36,514 6,975 82,597
---------- ---------- ----------
Total current liabilities 582,598 632,922 612,284
---------- ---------- ----------
Long-term debt, net of
current portion 534,556 629,176 554,432
Minority interest 20,247 32,090 31,972
Commitments and contingencies
Outstanding redemption value
of equity put options 16,559 16,559
Stockholders' equity:
Common stock, par value
$.01; authorized 250,000
shares; issued
March 31, 1999,
92,688; issued
March 31, 1998, 93,030;
issued December 31,1998,
93,307 927 930 933
Retained earnings 1,174,782 1,124,457 1,156,739
Less 36,716 shares
in treasury at cost (617,620) (617,620) (617,620)
Unearned compensation (10) (71) (26)
Accumulated other
comprehensive expense (23,570) (22,426) (15,649)
---------- ---------- ----------
534,509 485,270 524,377
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,671,910 $1,796,017 $1,739,624
========== ========== ==========
</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 share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $ 785,784 $ 880,123
Other income (expense) 1,168 (196)
--------- ----------
786,952 879,927
Costs and expenses:
Cost of sales 487,766 566,072
Selling, general and
administrative expenses 252,254 265,442
Special charge 35,000
Amortization of intangibles 1,136 967
Interest expense 13,996 17,602
Interest income (1,395) (4,842)
--------- ----------
753,757 880,241
--------- ----------
Income (loss) before income
taxes and minority interest 33,195 (314)
Income tax expense (benefit) 11,950 (100)
--------- ----------
Income (loss) before minority
interest 21,245 (214)
Minority interest 3,340 3,144
--------- ----------
Net income (loss) $ 17,905 $ (3,358)
========= ==========
Basic earnings (loss) per share $ .32 $ (.06)
========= ==========
Diluted earnings (loss)
per share $ .32 $ (.06)
========= ==========
</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>
Three months Ended
March 31,
----------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 17,905 $ (3,358)
Adjustments to reconcile net income
to net cash used for operating activities:
Depreciation and amortization 11,490 11,703
Minority interest 3,340 3,144
Deferred income taxes (3,551) (11,667)
Special charges 35,000
Changes in operating assets and
liabilities:
Accounts receivable (111,346) (130,738)
Inventory 37,407 29,508
Prepaid expenses (8,501) (1,749)
Other (2,428) 6,022
Accounts payable and accrued expenses (6,917) (43,705)
Income taxes payable 10,220 2,202
---------- ----------
Total adjustments (70,286) (100,280)
---------- ----------
Net cash used for operating activities (52,381) (103,638)
---------- ----------
Cash flows from investing activity:
Payments to acquire property and
equipment (15,775) (8,369)
---------- ----------
Net cash used for investing activity (15,775) (8,369)
---------- ----------
</TABLE>
6
<PAGE>
REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months Ended
March 31,
----------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net borrowings of notes payable to banks $ 43,733 $ 29,978
Proceeds from issuance of commercial paper 11,274 34,816
Payments of long-term debt (42,569) (13,658)
Proceeds from issuance of common stock to
employees 133 282
Proceeds from premium on equity put options 2,002
Dividends to minority shareholders (10,224) (2,590)
Repurchases of common stock (16,559) (3,181)
-------- --------
Net cash provided by (used for)
financing activities (14,212) 47,649
-------- --------
Effect of exchange rate changes on cash
and cash equivalents 10,402 (1,660)
-------- --------
Net decrease in cash and cash equivalents (71,966) (66,018)
-------- --------
Cash and cash equivalents at beginning of
period 180,070 209,766
-------- ---------
Cash and cash equivalents at end of period $ 108,104 $ 143,748
======== =========
Supplemental disclosures of cash flow information:
1999 1998
---- ----
Cash paid during the period for:
Interest $ 13,753 $ 18,475
Income taxes 920 8,852
</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 share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation
- ---------------------
The balance sheet at December 31, 1998 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 three months ended March 31, 1999 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 1999
presentation.
8
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NOTE 2 - SPECIAL CHARGE
- -----------------------
In the first quarter of 1998, the Company recorded a special charge of $35,000
($23,674 after tax, 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 resulted
in the termination of approximately 485 full-time positions, should enable the
Company to achieve greater operating efficiencies. The underperforming marketing
contracts have been 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 consists of 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 liability for
special charges recorded during 1998 and 1999:
<TABLE>
<CAPTION>
Balance 1998 1998 Balance 1999 Balance
12/31/97 Charges Utilization 12/31/98 Utilization 3/31/99
-------- ------- ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Marketing contracts $ 25,000 $ 18,476 $ (28,734) $ 14,742 $ (1,465) $ 13,277
Fixed asset
write-downs 6,900 (1,134) 5,766 5,766
Employee severance 8,400 14,798 (15,983) 7,215 (1,142) 6,073
Termination of
leases and other 6,761 1,726 (5,912) 2,575 (416) 2,159
-------- -------- --------- -------- ------- -------
$ 47,061 $ 35,000 $ (51,763) $ 30,298 $ (3,023) $ 27,275
======== ======== ========= ======== ======== =========
</TABLE>
The fixed asset write-downs relate to assets that will be abandoned or sold.
9
<PAGE>
NOTE 3 - EARNINGS PER SHARE
- ---------------------------
The following table sets forth the computation of basic and diluted earnings
(loss) per share (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------
1999 1998
---- ----
<S> <C> <C>
Numerator:
Net income (loss) $ 17,905 $ (3,358)
------- -------
Denominator for basic
earnings per share:
Weighted average shares 56,065 56,344
Dilutive employee stock
options 476 N/A
------- -------
Denominator for diluted
earnings per share:
Weighted average shares
and assumed conversions 56,541 56,344
======= =======
Basic earnings (loss) per share $ .32 $ (.06)
Diluted earnings (loss) per share $ .32 $ (.06)
</TABLE>
Common stock equivalents were anti-dilutive and therefore were not included in
the computation of weighted average shares used in computing diluted loss per
share for the three months ended March 31, 1998.
NOTE 4 - COMPREHENSIVE INCOME
- -----------------------------
Comprehensive income (loss) for the quarters ended March 31, 1999 and March 31,
1998 was $9,984 and ($4,499) respectively.
10
<PAGE>
NOTE 5 - 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. The Company settled for $4,000 in April, 1999 a lawsuit filed by a
former distributor in which the plaintiff asserted a claim for damages in excess
of $50,000. The settlement will be recorded in the Company's second quarter.
NOTE 6 - EQUITY PUT OPTIONS
- ---------------------------
During 1998, the Company issued equity put options as part of its ongoing share
repurchase program. These options provide the Company with an additional source
to supplement open market purchases of its common stock. The options were priced
based on the market value of the Company's common stock at the date of issuance.
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 sheets at December 31, 1998 and
March 31, 1998 as "Outstanding redemption value of equity put options." At
December 31, 1998 and March 31, 1998 625,000 shares of outstanding common stock
were subject to repurchase under the terms and conditions of these options. In
January 1999, the Company purchased the 625,000 shares under the terms of the
equity put agreements for a net aggregate purchase price of $16,559. At March
31, 1999, no shares of outstanding common stock were subject to repurchase under
the terms and conditions of equity put options.
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, actions, 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
- -----------------
First Quarter 1999 Compared to First Quarter 1998
- ---------------------------------------------------
Net sales for the quarter ended March 31, 1999 were $785.8 million, a 10.7%
decrease from 1998's first quarter net sales of $880.1 million. The Reebok
Division's worldwide sales (including the sales of the Greg Norman Collection)
were $651.5 million, a 13.2% decrease from sales of $750.5 million in the first
quarter of 1998. U.S. footwear sales of the Reebok Brand decreased 9.3% to
$266.3 million in the first quarter of 1999 from $293.7 million in the first
quarter of 1998. U.S. footwear categories that generated sales increases in the
first quarter of 1999 were running and walking, primarily due to the Company's
technology products; whereas U.S. footwear sales in most other categories
declined. The Classics category declined partially as a result of the Company's
strategic initiative to segment the distribution of these products in the
marketplace. U.S. apparel sales of the Reebok Division decreased in the first
quarter by 29.5% to $68.2 million from $96.8 million in the first quarter of
1998. Part of the sales decline in U.S. apparel is attributable to the Company's
plans to strategically reposition this business to be more consistent with its
International apparel operations. This strategic initiative includes
significantly reducing distribution
12
<PAGE>
and eliminating many of the Company's U.S. apparel product offerings.
The decrease also includes a decline in sales of the
Greg Norman Collection.
International sales of the Reebok Brand (including footwear and apparel) were
$317.0 million in the first quarter of 1999, a decrease of 11.9% from $360.0
million in the first quarter of 1998. International sales were adversely
impacted by start-up issues experienced in the Company's new Logistics and
Shared Service Companies in Rotterdam. The Company estimates that between
$15-$20 million of the International sales decline can be directly attributable
to these issues. As a result of these issues, the European region reported a
sales decline of 4.0%. The Company's sales performance in its other
International regions is being adversely affected by economic conditions in
Latin America, Asia Pacific and Russia. As compared to the first quarter of
1998, footwear sales to unconsolidated Latin American distributors declined by
75%, or approximately $15 million, and sales in Asia Pacific declined 21% or $11
million. Most of the Reebok Brand's International footwear categories declined
during the quarter whereas International apparel sales increased 6.2%.
Rockport's first quarter 1999 sales were $109.7 million as compared to sales of
$110.8 million in the first quarter of 1998. Domestic sales for the Rockport
brand decreased by 9.7% while International sales increased by 27.4%.
Domestically, sales decreased in both men's and women's categories and were
negatively impacted by declines in the Company's outlet store business and by
heavy promotional activity at retail for the brown shoe segment. International
revenues accounted for 21.0% of Rockport's sales in the first quarter of 1999 as
compared to 16.0% in the first quarter of 1998.
Sales of the Polo Ralph Lauren Footwear Brand were $24.6 million in the first
quarter of 1999, an increase of 30.9% from $18.8 million in the first quarter of
1998. This increase was led by growth in the rugged casual and athletic
segments. During the first half of 1999, the Company will debut the RLX/Polo
Sport Ralph Lauren performance product line and in the second half of 1999 the
Company expects to debut a separate Lauren by Ralph Lauren product line for
women.
During the first quarter of 1999, the Company's overall gross margin was 37.9%
of sales, this compares to 35.7% for 1998's first quarter, an increase of 220
basis points. The increase is primarily attributable to the strengthening of the
Company's initial pricing margins due to manufacturing and sourcing efficiencies
the Company has been able to implement. These initial pricing margins have
returned to levels the Company was
13
<PAGE>
experiencing prior to the introduction of its DMX and 3D Ultralite technology
products in 1997. During the quarter, with the exception of U.S. apparel, all
business units reported margin improvements over the prior year's first quarter.
Selling, general and administrative expenses for the first quarter of 1999 were
$252.3 million, or 32.1% of sales, as compared to $265.4 million, or 30.2% of
sales in 1998's first quarter. While the Company's overall spending declined by
$13.1 million, the increased spending as a percentage of sales is partly
attributable to the Company's continued investment in its various growth
segments and partly because of the inclusion in 1999 of significant start-up
expenses for the new Logistics and Shared Service Companies in Rotterdam as well
as the Company's global information system re-engineering efforts. In the first
quarter of 1999, these start-up expenses, which are mostly redundant in nature,
amounted to approximately $12.2 million as compared to $5.0 million in the first
quarter of 1998. Of the 1999 amount, $8.3 million is included in selling,
general and administrative expenses and $3.9 million is included in cost of
sales. These start-up expenses are expected to aggregate approximately $40-$50
million for the full year 1999. Exclusive of start-up expenses, selling, general
and administrative expenses for the first quarter of 1999 declined by
approximately $30.0 million in the period or 12.0% as compared to the first
quarter of 1998. Included in this amount is a decline in advertising expenses
for the quarter which will be reinvested in the second and third quarters of
1999 for the Reebok Brand's new advertising campaign which was launched in April
1999.
Net interest expense was $12.6 million for the first quarter of 1999,
approximately the same as compared to the first quarter of 1998. Although
outstanding indebtedness has declined over $150 million from 1998, the Company's
average borrowing rates have increased and the amount of interest income earned
on invested cash during the period has declined.
The effective income tax rate was 36.0% in the first quarter of 1999 as compared
to 31.8% in the first quarter of 1998 and 32.2% for the full year 1998. Looking
forward, dependent on the geographic mix of earnings in 1999, the Company
expects the first quarter 1999 rate to be indicative of the full year 1999 rate.
However, the rate could fluctuate from quarter to quarter depending on where the
Company earns income geographically, and, if the Company incurs non-benefitable
losses in certain economically troubled regions, the rate could increase
further.
14
<PAGE>
Reebok Brand Backlog of Open Orders
- -----------------------------------
The Reebok Brand backlog (including Greg Norman Collection apparel) of open
customer orders scheduled for delivery during the period April 1 through
September 30, 1999 declined 10.4% as compared to the same period last year.
North American backlog for the Reebok Brand, which includes the U.S. and Canada,
decreased 20.7%, and, the International backlog increased 6.7%. On a constant
dollar basis, worldwide Reebok Brand backlog was down 10.0%, and International
backlog increased 7.2%. U.S. footwear backlog decreased 16.3%, a slight
improvement over last quarter, and U.S. apparel backlog (including Greg Norman
Collection apparel) decreased 34.1% as compared to the same period last year.
The Company believes that the overall mix of the Company's open U.S. footwear
orders has improved from last year, with the athletic specialty channel down
8.0% and volume retailers down approximately 22.0%. In North America, the rate
of returns and cancellations has improved substantially over the same period as
last year. 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.
Liquidity and Sources of Capital
- --------------------------------
The Company's financial position remains strong. Working capital was $759.8
million at March 31, 1999 and $874.1 million at March 31, 1998. The current
ratio at March 31, 1999 was 2.3 to 1 as compared to 2.2 to 1 at December 31,
1998 and 2.4 to 1 at March 31, 1998.
Accounts receivable decreased by $79.0 million from March 31, 1998, a decrease
of 11.4%. The decrease is primarily due to the sales decline. Inventory
decreased by $45.3 million or 8.5% from March 31, 1998. This decrease is in line
with the Company's plans. In the U.S., the Company's Reebok Brand footwear
inventories were down 9.3%. U.S. Reebok Brand apparel inventories were down
45.0% and retail inventories were down 5.2% from last year. Inventories of all
brands outside the U.S. decreased 11.1%. The Company believes that the overall
condition of its inventory at wholesale and at retail has improved over last
year, with more of the inventory being current product.
15
<PAGE>
Cash used for operations during the first three months of 1999 was $52.4
million, as compared to cash used for operations of $103.6 million during the
first three months of 1998, a $51.2 million improvement as a result of the
Company's improved balance sheet management. Capital expenditures for the
quarter were $15.8 million, an increase from 1998 due to investments in the
Company's European Logistics and Shared Service Companies, international retail
expansion and various Year 2000 and other information systems initiatives. Cash
generated from operations during the balance of 1999, together with the
Company's existing credit lines and other financial resources, is expected to
adequately finance the Company's current and planned 1999 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.
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 has evaluated these inventoried items
to determine a remediation method and implementation plan. The IT evaluation and
non-IT evaluations are substantially complete. While the Company believes that
most of its critical non-IT systems will function without substantial year 2000
compliance problems, the Company will continue to review, test and remediate (if
necessary) such systems.
16
<PAGE>
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 most 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
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 a number of the Company's business units, as well as, in certain
other functional areas. These units have experienced certain technical
difficulties with the SAP system resulting in processing delays and selected
integrity of information issues. The Company together with its software partner
has made progress in resolving the issues, although these deficiencies have not
yet been fully remedied. By June 30, 1999 the Company will make a determination
whether the difficulties are sufficiently remedied to implement the SAP system
in the remaining operating units under the current accelerated implementation
schedule. If SAP is not installed in the remaining units by the end of 1999, the
Company has a contingency plan under which it will modify existing software to
make it year 2000 compliant and it has identified the appropriate resources to
complete this plan. The Company's Rockport subsidiary as well as certain other
International units, will not be converted to the new SAP system by the end of
1999. Accordingly, modifications to their
17
<PAGE>
existing software are being made to make them year 2000 compliant. These
modifications are substantially complete and the Company is currently testing
the effectiveness of these modifications.
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 $55 million has been spent to
date. Capitalized costs which are included in this estimate are expected to be
approximately $30 million. 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 in the process of
evaluating year 2000 compliance of all the major footwear factories used by the
Company through site visits and expects to complete such evaluation by the end
of June 1999. The Company has also begun evaluating and testing year 2000
compliance with its major customers including its EDI customers. 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.
Estimates of time and cost and risk assessments are based on currently available
information. Developments that could affect 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
18
<PAGE>
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.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1-3
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 4, 1999. The
following shows the proposals considered at the Annual Meeting and the voting
results:
1. Three Class III members of the Board of Directors were elected by
shareholders as follows (there are no abstentions or broker non-votes):
<TABLE>
<CAPTION>
Number of Votes Number of Votes
Name of Director Cast FOR WITHHELD
---------------- --------------- ----------------
<S> <C> <C>
Paul B. Fireman 45,710,765 479,312
Thomas M. Ryan 45,740,963 449,114
Carl J. Yankowski 45,733,485 456,592
</TABLE>
2. The amendment to the 1987 Employee Stock Purchase Plan to increase the
number of shares of common stock authorized for issuance thereunder by
1,000,000 was approved by a vote of 44,670,356 FOR, 1,380,727 AGAINST and
138,994 ABSTAIN.
3. A vote concerning a shareholder proposal requesting that the Board of
Directors take action to declassify the Board was defeated by a vote of
17,971,846 FOR, 21,062,589 AGAINST, 210,870 ABSTAIN and 6,944,772 BROKER
NON-VOTES.
Item 5
Not applicable
20
<PAGE>
Item 6
(a) Exhibits:
10.1 Amendment to Reebok International Ltd. Equity Incentive Plan dated as
of April 19, 1999
10.2 Amendment to Reebok International Ltd. Equity and Deferred Compensation
Plan for Directors dated as of April 19, 1999
27. Financial Data Schedule
99. Issues and Uncertainties
(b) Reports on Form 8-K:
There were no reports on form 8-K filed during the quarter ended March 31,
1999.
21
<PAGE>
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: May 13, 1999
REEBOK INTERNATIONAL LTD.
BY: /s/ KENNETH WATCHMAKER
-------------------------
Kenneth Watchmaker
Executive Vice President and
Chief Financial Officer
22
EXHIBIT 10.1
AMENDMENT TO 1994 EQUITY INCENTIVE PLAN
Amendment, dated as of April 19, 1999, to the Reebok International
Equity Incentive Plan (the "Plan").
The Plan shall be amended as follows:
1. Section 7(c) of the Plan shall be amended by deleting such provision
in its entirety and substituting the following:
DURATION OF OPTIONS. The duration of any Option granted
hereunder shall be determined by the Committee at the time the
Option is granted, except that in the case of an ISO, the
duration shall be no more than ten years from the date the
Option was granted (five years in the case of an ISO granted
to a "ten-percent shareholder" as defined in (b) above).
2. Section 11 of the Plan shall be amended by adding the following
language at the end of such Section:
; PROVIDED, however, that the Committee may, at the time of
the grant of an Award, permit the transfer of the Award by the
Participant through a gift to any or all of the following: any
child, stepchild, grandchild, parent, stepparent,
mother-in-law, father-in-law or spouse of the Participant, any
trust in which these persons have more than a fifty percent
(50%) beneficial interest or a foundation in which these
persons (or the Participant) control the management of assets,
and permit the retransfer of the Award by any of these
permitted transferees back to the Participant.
EXHIBIT 10.2
AMENDMENT TO EQUITY AND DEFERRED
COMPENSATION PLAN FOR DIRECTORS
Amendment, dated as of April 19, 1999, to the Reebok International Ltd.
Equity and Deferred Compensation Plan for Directors (the "Plan").
The Plan shall be amended as follows:
1. Section 7(d)(1) shall be deleted in its entirety and the following
language shall be substituted therefor:
(i) Each option shall become exercisable at such time or
times, and subject to such conditions, as the
Committee may specify. The Committee may at any time
and from time to time accelerate the time at which
all or any part of the option may be exercised.
2. A new Section 7A shall be added to the Plan as follows:
7A. TERMS AND CONDITIONS OF DISCRETIONARY OPTION GRANTS
In addition to the award of options pursuant to Section 7
above, the Committee may from time to time award options to
any Eligible Director in such amount and subject to such terms
and conditions as the Committee may specify. The award of any
such options pursuant to this Section 7A shall be subject to
the provisions of clauses (b), (c), (d), (e), (f), (g) and (h)
of Section 7.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1999 CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED
STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000770949
<NAME> REEBOK INTERNATIONAL LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 108,104
<SECURITIES> 0
<RECEIVABLES> 657,500
<ALLOWANCES> 45,646
<INVENTORY> 486,573
<CURRENT-ASSETS> 1,342,385
<PP&E> 407,881
<DEPRECIATION> 231,411
<TOTAL-ASSETS> 1,671,910
<CURRENT-LIABILITIES> 582,598
<BONDS> 554,803
0
0
<COMMON> 927
<OTHER-SE> 533,582
<TOTAL-LIABILITY-AND-EQUITY> 1,671,910
<SALES> 785,784
<TOTAL-REVENUES> 786,952
<CGS> 487,766
<TOTAL-COSTS> 487,766
<OTHER-EXPENSES> 255,335
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,996
<INCOME-PRETAX> 29,855
<INCOME-TAX> 11,950
<INCOME-CONTINUING> 17,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,905
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
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.
The athletic footwear and apparel industry has been experiencing some
shift in consumer preference away from athletic footwear to "casual" product
offerings. This change in preference has adversely affected some of the
Company's businesses, 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 herein.
Whether the Company's DMX(R) technology will be successful on a
long-term basis 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 herein.
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, the GREG NORMAN
Collection and the RALPH LAUREN and POLO SPORT footwear lines.
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.
The Company is launching the RLX/Polo Sport performance product line in
the first half of 1999 and plans to launch a new Lauren by Ralph Lauren product
line for women in the second half of 1999. Investments in product development,
advertising, marketing and merchandising will be made in conjunction with such
launches. The success of such launches will depend on a number of factors
including consumer preference, retailer acceptance, competitive product
offerings, the effectiveness of the advertising and marketing, as well as other
factors described herein.
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 which resulted in a promotional retail environment, the Company has
encountered returns and cancellations from retailers. 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. A slowdown at retail may result in higher
cancellations and returns. Additionally, many markets in South America and Asia
Pacific are not included in the backlog since sales are made by independent
distributors.
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. 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 has eliminated or restructured certain of its marketing contracts that no
longer reflect Reebok's brand positioning.
RETAIL OPERATIONS
The Company currently operates approximately 175 retail store fronts in
the U.S. (including REEBOK, ROCKPORT and GREG NORMAN stores and combination
stores, in which stores for all three brands are located at a single site) 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. Because of the retail
environment and increased competition, comparative store sales in the Company's
own retail business have declined.
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 upon
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
The Company has a substantial credit facility which consists of a $640
million term loan (as of March, 1999, the outstanding balance of such debt was
approximately $417 million) and has a $400 million revolving credit line (as of
March 31, 1999, there were no borrowings outstanding under the revolving credit
line). As a result of this indebtedness, the Company currently faces significant
interest expense and debt amortization. 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.
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 1999. However, the
Company's actual experience may differ from the expectations set forth in the
preceding sentence. Factors that might lead to a difference include, but are not
limited to, the matters discussed herein, as well as future events that might
have the effect of reducing the Company's available cash balances (such as
unexpected operating losses or increased capital or other expenditures, as well
as increases in the Company's inventory or accounts receivable) or future events
that might reduce or eliminate the availability of external financial resources.
RISK OF CURRENCY FLUCTUATIONS
The Company conducts operations in various international countries and
a significant portion of its sales are transacted in local currencies. As a
result, the Company's revenues are subject to foreign exchange rate
fluctuations. The Company enters into forward currency exchange contracts and
options to hedge its exposure for merchandise purchased in U.S. dollars that
will be sold to customers in other currencies. The Company also uses foreign
currency exchange contracts and options to hedge significant inter-company
assets and liabilities denominated in other currencies. However, no assurance
can be given that fluctuation in foreign currency exchange rates will not have
an adverse impact on the Company's revenues, net profits or financial condition.
Recently, the Company's international sales, gross margins and profits have been
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 adopted a single currency called the Euro. On this date, fixed
conversion rates between the existing currencies of these countries ("legacy
currencies") and the Euro were established and the Euro is now traded 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 can make and
receive payments in Europe using the Euro. 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
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 generated excess inventories which they are
attempting to sell off. The U.S. market has also suffered from over capacity due
to significant retail expansion during a period of softening consumer demand.
This has resulted in inventory backups and heavy promotional activity which has
made it more difficult for the Company to sell its products.
The 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 (especially Brazil) and in Russia.
TAX RATE CHANGES AND DEFERRED TAX ASSETS
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. In addition, the tax rate can be affected by the
Company's geographic mix of earnings. If more revenue is earned in markets where
the tax rate is relatively higher, the Company's effective tax rate will
increase. The Company expects that the full year 1999 tax rate will be higher
than the rate for 1998.
The Company has approximately $177 million of net deferred tax assets,
of which approximately $70 million is attributable to the expected utilization
of tax net operating loss carry- forwards. There can be no assurance that the
Company will realize the full value of such deferred tax assets, although the
Company has tax planning strategies which are designed to utilize at least a
portion of the tax net operating loss carryforwards and thereby reduce the
likelihood that they expire unused. Realization of the deferred tax assets will
be dependent on a number of factors including the level of taxable income
generated by the Company, the countries in which such income is generated, as
well as the effectiveness of the Company's tax planning strategies. If the
Company estimates of future taxable income are not realized in the near-term,
the net carrying value of the deferred tax assets could be reduced, thereby
reducing future net income.
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. Moreover, 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 because of inefficiencies resulting 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 experience operational difficulties, excess inventory or a
decline in sales. For example, the Company estimates that it was unable to ship
approximately $15-20 million of product during the first quarter of 1999 due to
start-up issues in its new Rotterdam distribution center. Delays in product
shipment could result in additional order cancellations, added distribution
costs and increased markdowns on products. In the first quarter of 1999 the
Company incurred approximately $12.2 million in start-up costs (consisting of
increased costs of sales, as well as selling, general and administrative
expenses) as a result of its global restructuring efforts. These incremental
start-up expenses are expected to continue throughout 1999.
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 most legacy systems. The Company's
Rockport subsidiary and a few other international business units will not be
converted to the new SAP system by the end of 1999 and thus modifications to its
existing software are being made to make it year 2000 compliant. 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.
