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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-9340
REEBOK INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-2678061
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 TECHNOLOGY CENTER DRIVE, STOUGHTON, MASSACHUSETTS 02072
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 401-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE, $.01 PER SHARE NEW YORK STOCK EXCHANGE
COMMON STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 8, 2000, the aggregate market value of the registrant's voting
stock held by non-affiliates of the registrant was approximately $295,346,900.
As of March 8, 2000, 56,269,870 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement dated March 30, 2000 for the Annual Meeting of
Shareholders to be held on May 2, 2000 (certain parts as indicated herein in
Part III).
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REEBOK INTERNATIONAL LTD.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I...................................................... 1
Item 1. Business.......................................... 1
General.......................................... 1
THE REEBOK DIVISION....................................... 1
Technology............................................. 2
Marketing and Promotional Activities................... 3
U.S. Operations........................................ 4
International Operations............................... 5
Licensing.............................................. 6
Retail................................................. 7
THE ROCKPORT COMPANY...................................... 7
RALPH LAUREN(R) BRAND..................................... 8
GREG NORMAN(R) COLLECTION................................. 8
MANUFACTURING............................................. 9
SOURCES OF SUPPLY......................................... 10
TRADE POLICY.............................................. 10
PRINCIPAL PRODUCTS........................................ 11
TRADEMARKS AND OTHER PROPRIETARY RIGHTS................... 11
WORKING CAPITAL ARRANGEMENTS.............................. 12
SEASONALITY............................................... 12
SINGLE CUSTOMER........................................... 13
BACKLOG................................................... 13
COMPETITION AND COMPETITORS............................... 13
ISSUES AND UNCERTAINTIES.................................. 13
Competition and Consumer Preferences................... 14
Inventory Risk......................................... 15
Sales Forecasts........................................ 15
Pricing and Margins.................................... 16
Backlog................................................ 16
Advertising and Marketing Investment................... 16
Retail Operations...................................... 16
Timeliness of Product.................................. 17
International Sales and Production..................... 17
Sources of Supply...................................... 17
Risk Associated with Indebtedness...................... 17
Risk of Currency Fluctuations.......................... 18
Euro Conversion........................................ 18
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Customers.............................................. 19
Intellectual Property.................................. 19
Litigation............................................. 19
Economic Factors....................................... 19
Tax Rate Changes and Deferred Tax Assets............... 19
Global Restructuring Activities........................ 20
EMPLOYEES................................................. 20
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS............................................. 20
RESEARCH AND DEVELOPMENT.................................. 21
EXECUTIVE OFFICERS OF THE REGISTRANT...................... 21
Item 2. Properties........................................ 22
Item 3. Legal Proceedings................................. 23
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 24
PART II..................................................... 24
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 24
Item 6. Selected Financial Data........................... 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 25
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................ 32
Item 8. Financial Statements and Supplementary Data....... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 54
PART III.................................................... 54
Item 10. Directors and Executive Officers of the
Registrant............................................. 54
Item 11. Executive Compensation........................... 54
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 54
Item 13. Certain Relationships and Related Transactions... 54
PART IV..................................................... 55
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................... 55
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PART I
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, including
statements with regard to the Company's revenues, earnings, spending, margins,
cash flow, orders, inventory, products, actions, plans, strategies and
objectives. Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate or imply future results,
performance or achievements, and may contain the words "believe," "anticipate,"
"expect," "estimate," "intend," "plan," "project," "will be," "will continue,"
"will result," "could," "may," "might," or any variations of such words or other
words with similar meanings. 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. For a
description of such risks, see the section below entitled "ISSUES AND
UNCERTAINTIES."
ITEM 1. BUSINESS.
GENERAL.
Reebok International Ltd., a Massachusetts corporation organized on July
26, 1979, is a global company engaged primarily in the design and marketing of
sports and fitness products, including footwear and apparel, as well as the
design and marketing of footwear and apparel for non-athletic "casual" use. The
Company has four major brand groups: (1) the Reebok Division, which is primarily
responsible for the Company's REEBOK(R) brand; (2) The Rockport Company, LLC
(successor in interest to The Rockport Company, Inc.), a subsidiary of the
Company ("Rockport"), which is responsible for the ROCKPORT(R) brand; (3) Ralph
Lauren Footwear Co., Inc., a subsidiary of the Company ("Ralph Lauren
Footwear"), which is responsible for footwear and certain apparel sold under the
RALPH LAUREN(R) and POLO SPORT(R) brands; and (4) the Greg Norman Division,
which is responsible for the GREG NORMAN(R) brand. (Reebok International Ltd. is
referred to herein, together with its subsidiaries, as "Reebok," the "Company"
or the "Registrant" unless the context requires otherwise.)
During calendar year 1999, net income for the Company decreased to $11.0
million, or $.20 per diluted share (inclusive of $61.6 million (pre-tax) special
charges for personnel-related expenses in connection with the Company's global
restructuring efforts and for the Company's settlement of its lawsuit with
Supracor, Inc., as described below in Item 3), from $23.9 million, or $.42 per
diluted share (inclusive of a $35.0 million (pre-tax) special charge for
personnel-related expenses in connection with ongoing business re-engineering
efforts and the restructuring of certain underperforming marketing contracts)
for calendar year 1998. Net sales for the Company decreased by 10.1%, from $3.22
billion in 1998 to $2.90 billion in 1999.
THE REEBOK DIVISION
The Reebok Division designs, produces and markets sports, fitness and
casual footwear, apparel and accessories, that combine the attributes of
athletic performance and style, as well as related sports and fitness products.
The Reebok Division's products include footwear for a variety of sports and
fitness categories, lifestyle footwear marketed under the Reebok Classic brand,
and sports and fitness apparel and accessories. The Reebok Division's products
also include footwear and apparel for children sold under the REEBOK(R) brand,
as well as footwear and apparel sold under the WEEBOK(R) brand. The Reebok
Division continues to expand its product scope through its strategic licensing
program, pursuant to which the Company's technologies and/or trademarks are
licensed to third parties for fitness equipment, sporting goods, accessories,
sports and fitness videos and related products and services.
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The Reebok Division is organized in five strategic business units
("SBU's"), each of which has responsibility for product and marketing for the
unit's business. The SBU's are:
The Classic/Kids Business Unit, which focuses on Classic footwear and
children's footwear, including the Company's new Traxtar children's shoe,
an athletic shoe that uses smart technology to measure performance;
The Athletic Performance and Fitness Business Unit, which is
responsible for Basketball, Cross-Training, Running, Adventure/Outdoor,
Soccer, U.S. Cleated Sports (Football and Baseball), Tennis, Walking, and
Women's Fitness footwear categories;
The Diamond Flag Business Unit, which focuses on the development of
products on the cutting edge of style and performance;
The Apparel Business Unit, which is responsible for sports and fitness
apparel worldwide; and
The Retail Operations Business Unit, which is responsible for retail
and factory direct stores selling REEBOK, ROCKPORT and GREG NORMAN products
as well as certain RALPH LAUREN footwear products.
In 1999 the Global Marketing Services Group of the Reebok Division added
responsibility for the Reebok licensing business, which includes offerings of
both commercial and home REEBOK fitness equipment, related performance
enhancement sports and fitness products and accessories sold by licensees,
REEBOK UNIVERSITY(R) and REEBOK Sports Clubs and infant and toddler clothing and
footwear sold under the REEBOK or WEEBOK brands.
During the past few years, the Reebok Division has focused its efforts on
enhancing the performance of its products and developing proprietary
technologies which can help consumers reach their own personal level of
achievement. The Reebok Division seeks to broaden its targeted customer base
beyond athletes, to include consumers of all ages who seek sports and fitness
products that will help them lead healthier and happier lives. By building upon
its heritage and strengths in the women's fitness and lifestyle categories, the
Reebok Division's strong technology platform and its reputation as an authentic
performance brand, Reebok plans to offer products that appeal to a broad segment
of the marketplace.
TECHNOLOGY
Reebok places a strong emphasis on technology and has continued to
incorporate various proprietary performance technologies in its products,
focusing on cushioning, stability and lightweight features.
As part of its commitment to offer leading footwear technologies, the
Reebok Division engages in product research, development and design activities
in the Company's Massachusetts headquarters, where it has a state-of-the-art
50,000 square foot product development facility which is dedicated to the design
and development of technologically-advanced athletic and fitness footwear.
Reebok also has product development centers in Korea, China and Taiwan to enable
its development activities to be more closely integrated with production.
Reebok's most significant proprietary technology is its DMX(R) technology,
which provides superb cushioning utilizing a heel-to-forefoot, active airflow
system that delivers cushioning when and where it is needed. Originally
introduced in 1995, Reebok has enhanced and expanded this technology by
developing multiple versions of DMX to meet the performance demands of various
activities to take into account performance attributes, aesthetics, and price
among the various versions, including a six-pod version (the DMX(6)) and a
ten-pod system (the DMX(10)). In 1999, the Company introduced DMX 2x technology,
an upgrade of the DMX(2) two-pod system designed specifically for performance
walking shoes, which was incorporated into the Leader DMX walking shoe. Reebok
currently offers a broad array of products that incorporate the different
versions of DMX at various price-points, and throughout 1999 Reebok continued to
expand the range of its DMX product with offerings including the Velocity
basketball and Rapidfire tennis shoes.
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3D ULTRALITE technology is Reebok's approach to lightweight performance
footwear. 3D ULTRALITE is a proprietary material that allows the midsole and
outsole to be combined in one injection molded unit composed of foam and rubber,
thus making the shoe lightweight, flexible, and durable.
In 1999 the Company continued to offer DMX Lite products, such as The
Answer II basketball shoe, that combine the cushioning benefits of the DMX
technology with the lightweight advantages of the 3D ULTRALITE technology. In
February 1999 Reebok introduced the Fusion DMX running shoe, which combines the
DMX(10)-pod system with 3D ULTRALITE technology.
In December 1999, Reebok introduced in limited markets the Traxtar
children's athletic shoe, a new product that measures athletic performance.
Using microprocessor technology that provides output with a sound and light
display "pod" on the tongue of the shoe, the Traxtar shoe measures how fast
wearers run, how high they jump, and how far they leap. Reebok currently plans
to develop adult footwear that incorporates the smart technology used in the
Traxtar shoe.
Finally, Reebok has incorporated advanced technology into its apparel
products with the introduction of HYDROMOVE(R) technology in certain performance
apparel. This "wicking" technology helps to keep athletes dry and to regulate
body temperature through its moisture-management system. Performance apparel
incorporating the HYDROMOVE technology first became available at retail at the
end of 1996. During 1999, Reebok continued to offer apparel products
incorporating the HYDROMOVE technology.
MARKETING AND PROMOTIONAL ACTIVITIES
The Reebok Division devotes significant resources to advertising its
products to a variety of audiences through television, radio, print and other
media and utilizes its relationships with major sports figures to maintain and
enhance visibility for the REEBOK(R) brand. In 1999 the principal marketing
focus was on the promotion of DMX(R) technology and the new Traxtar children's
athletic shoe.
During 1999 the Reebok Division brought its message on product performance
and brand essence directly to the consumer. As part of this strategy, the Reebok
Division continued in 1999 a direct-to-the-consumer campaign called "the
DMXperience" which involved a nationwide mobile tour designed to give consumers
the opportunity to experience and "try on" Reebok's new products and
technologies. The "DMXperience" was also Reebok's major advertising campaign of
1999 and was designed to build on the DMXperience tour and to increase awareness
of Reebok's DMX technology and to encourage consumers to try on DMX footwear.
Reebok believes these campaigns were innovative and compelling because of their
experiential nature which allowed the customer to get first-hand knowledge of
the product.
Although the Reebok Division has focused on fewer key sponsorships to
achieve a greater balance in its marketing activities and to promote fitness and
other activities in addition to sports, the Reebok Division remains involved in
athletic endorsements and sport sponsorships, including those highlighted below.
In 1999 athlete endorsements to promote the sale of basketball shoes
included an endorsement arrangement with Allen Iverson of the Philadelphia
76ers, with whom Reebok markets a signature line of footwear and apparel; an
endorsement arrangement with Steve Francis, a Houston Rockets rookie and the
second overall selection in the 1999 National Basketball Association draft, whom
Reebok will feature in marketing its BLACKTOP(R) product line of basketball
shoes; and endorsement arrangements with NBA stars Shawn Kemp and Steve Smith.
In addition, Reebok has sponsorship arrangements with a number of college
basketball programs, including University of Utah, University of Arkansas and
University of Virginia.
To promote the sale of cross training and cleated baseball and football
footwear in 1999, Reebok used school-wide sponsorship arrangements with
universities such as University of Texas, University of Virginia, University of
Wisconsin and University of Arkansas, and endorsements by prominent athletes
such as National Football League players Joey Galloway and Herman Moore, as well
as Major League Baseball player Roger Clemens.
In soccer, Reebok has a number of sponsorship agreements including
contracts with Ryan Giggs of European Cup-holder Manchester United; Dennis
Bergkamp of Arsenal and the Netherlands; Spain's Raul
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who plays for Real Madrid and Spain; and Argentinean Gabriel Batistuta of
Fiorentina. The Company also has major sponsorship agreements with Liverpool
Football Club, one of the world's best-known club soccer teams, and with the
Argentina Football Association, which is a two-time World Cup winner. In
addition, Reebok sponsors the Columbian national team, as well as such club
teams as Aston Villa (United Kingdom), Borussia Moenchengladbach (Germany),
Palmeiras (Brazil), Brondby (Denmark) and Bolton Wanderers of England, for which
the sponsorship includes naming rights to the team's new soccer arena, the
"Reebok Stadium." In 1999 Reebok was also the official uniform supplier of the
New England Revolution, a U.S. Major League soccer team.
To gain further visibility for the REEBOK brand, Reebok has entered into
certain other sport sponsorships, such as an arrangement under which Reebok was
designated the official footwear and apparel sponsor of the Russian Olympic
Committee and approximately 25 associated Russian sports federations; this
arrangement was extended through the Sydney 2000 Summer Olympic Games. Although
its agreement to be an official sponsor of the Sydney 2000 Summer Olympic Games
is no longer in effect, as described below in Item 3, Reebok will continue to
have a strong presence at the 2000 Olympic Games as an official sponsor and
supplier of sports footwear and apparel to the national Olympic teams from
Jamaica, New Zealand, Poland, South Africa, Tobago and Trinidad.
To further promote the REEBOK brand in general as well as specific
products, Reebok has entered into additional endorsement arrangements. Such
endorsements and sponsorships include professional tennis players Venus
Williams, Patrick Rafter and Michael Chang; runners such as Abel Anton,
Christine Arron and Marie Jose Perec; U.S. national soccer team member Julie
Foudy; and U.S. national softball team member Lisa Fernandez. To promote the new
Traxtar children's athletic shoe, Reebok utilized its endorsement arrangement
with the Harlem Globetrotters.
In 1999 the Reebok Division also continued its promotional and educational
efforts in the fitness area. As part of this effort, the Reebok Division
initiated a marketing campaign that offers, with the purchase of select REEBOK
footwear, an interactive CD-ROM featuring detailed, personalized fitness and
nutritional information. This marketing campaign seeks to leverage and expand
Reebok's position as a leading source of fitness programming and information by
linking it more directly to the promotion of REEBOK footwear. In 1999 this
campaign featured Women's DMX Power Trainer and is expected to be expanded in
2000 to include other REEBOK fitness and walking shoes. In addition, through
REEBOK UNIVERSITY(R) and its network of Master trainers, such as Gin Miller and
Petra Kolber, and Alliance fitness instructors, the Reebok Division develops and
promotes numerous fitness programs such as its WALK REEBOK program which
promotes walking, its CYCLE REEBOK program that features the CYCLE REEBOK studio
cycle, the REEBOK FLEXIBLE STRENGTH program that develops strength and
flexibility simultaneously and the RNT and REEBOK STRENGTH programs which focus
on strength training. These programs were complemented by the marketing and sale
of a line of REEBOK fitness videos, as well as the marketing and sale of REEBOK
fitness equipment products such as the STEP REEBOK exercise platform, the REEBOK
BODY TREC, the REEBOK ACD line of home treadmills and the REEBOK home exercise
bike collection.
The Reebok Division also runs marketing promotions and brand extension
programs on its Internet website. In 1999 this on-line brand marketing took the
form of e-commerce for REEBOK, ROCKPORT and WEEBOK products; links to country
and language-specific websites that promote the REEBOK brand, emphasizing its
global nature and appeal; and a link to a site focused on kids that promoted the
launch of the Traxtar children's athletic shoe. In 2000 Reebok expects to focus
its on-line brand marketing on training and fitness through an on-line platform
for REEBOK UNIVERSITY programs and instructions. Reebok's website is located on
the worldwide web at www.reebok.com.
U.S. OPERATIONS
The Reebok Division's U.S. operations unit is responsible for all footwear
and apparel products that the Reebok Division sells in the United States. This
unit is also responsible for operations in Canada, which are managed by a
wholly-owned subsidiary of the Company. Sales of footwear in the United States
totaled approximately $918.6 million in 1999 compared to $1.062 billion in 1998.
REEBOK(R) brand apparel sales
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(including GREG NORMAN(R) apparel) in the United States in 1999 totaled
approximately $253.8 million, compared to approximately $362.2 million in 1998.
In the United States, the Reebok Division uses both an employee sales force
as well as independent sales representatives to sell its products. Reebok's U.S.
national sales staff and locally-based sales employees and sales representatives
are supported by retail marketing representatives employed by Reebok who travel
to assist in retail merchandising efforts and provide information to consumers
and retailers regarding the features of the Company's products.
The Reebok Division's U.S. distribution strategy emphasizes high-quality
retailers and seeks to avoid lower-margin mass merchandisers and discount
outlets. REEBOK footwear is distributed primarily through specialty athletic
retailers, sporting goods stores and department stores, with specialty products
also being distributed in certain specialty channels. Distribution of the
Company's apparel line is predominantly through department, sporting goods and
specialty stores. The Reebok Division also sells its products through REEBOK
concept or company stores, as described below in the section entitled "Retail."
INTERNATIONAL OPERATIONS
The Reebok Division's international sales are coordinated from the
Company's corporate headquarters in Stoughton, Massachusetts, which is also
where the Reebok Division's regional operations responsible for Latin America
are located. There are also regional offices in Lancaster, England, which is
responsible for operations in Europe, the Middle East and Africa, and in Hong
Kong, which is responsible for Far East operations. The Canadian operations of
the Reebok Division are managed through a wholly-owned subsidiary headquartered
outside of Toronto, Canada. The Reebok Division markets REEBOK products
internationally through wholly-owned subsidiaries in Austria, Belgium, Canada,
France, Germany, Ireland, The Netherlands, Italy, Poland, Portugal, and the
United Kingdom, as well as in Japan and South Korea, following the 1999
acquisitions of the minority interests in these two distributors; and through
majority-owned subsidiaries in India, Spain and South Africa. A wholly-owned
subsidiary located in Vastervik, Sweden distributes REEBOK and ROCKPORT products
in Sweden, Denmark and Norway. The Company has recently sold its Russian and
Swiss operations to local management and has also divested its minority stake in
distributors in Brazil and Singapore. These four companies now function as
independent distributors. Thirty other independent distributors and joint
ventures in which the Company holds a minority interest market products
internationally. The Company or its wholly-owned U.K. subsidiary holds partial
ownership interests in five of these international distributors, with its
percentage of ownership ranging from 30 to 35 percent. Through this
international distribution network, products bearing the REEBOK brand are
actively marketed in approximately 170 countries and territories.
For the past several years, the Company has undertaken various global
restructuring activities designed to enable the Company to achieve operating
efficiencies, improve logistics and reduce expenses. These restructuring
activities support the Company's decision to (i) transition globally to SAP
enterprise software, a global management information system; (ii) consolidate
the Company's European logistics operations into a 700,000 square-foot
distribution center in Rotterdam; and (iii) consolidate financial and
administrative operations in a new Rotterdam shared services center. The
implementation of a new version of SAP software specifically designed to support
the footwear and apparel industries generated some technical issues that had to
be resolved before the system could be implemented Company-wide. Because of
these issues, the Company delayed its implementation of SAP and decided to
proceed with contingency plans for operating units that had not implemented SAP,
under which these units' existing software remained in place but was modified to
make it Year 2000 compliant. The Company now plans to install SAP according to
the following timetable: REEBOK golf products in Summer 2000; Ralph Lauren
Footwear in late Fall 2000; North American Reebok operations in Summer/Fall
2001; and Reebok operations in France and Italy in Spring/Summer 2001. The
timing of these and additional installations will depend on business conditions
and technical risk. These technical issues also delayed the consolidation of the
new Rotterdam distribution center and shared services center. In 1999 Reebok's
German and Austrian subsidiaries began to use the Rotterdam distribution center.
They experienced start-up and software complications which delayed shipments to
Germany and Austria. The Company estimates that this was one factor that
accounted for an approximately 40 percent decline in sales in
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Germany in 1999. As a result of these complications, the use of the Rotterdam
distribution center will not be expanded until these technical issues are
resolved. Such expansion is currently not expected to occur until 2001.
During 1999 the contribution of the Reebok Division's international
operations unit to overall sales of REEBOK products (including GREG NORMAN
apparel) decreased to $1.197 billion from $1.267 billion in 1998. The Reebok
Division's 1999 international sales were negatively impacted by adverse
financial conditions in Latin America, which is a highly competitive
environment; the restructuring of Reebok's Russia business to a retail
operation; and the adverse effects of the start-up and software problems
encountered at the new Rotterdam distribution center. These sales figures do not
reflect the full wholesale value of all REEBOK products sold outside the United
States in 1999 or 1998 because some of the Division's distributors are not
subsidiaries and thus their sales to retailers are not included in the
calculation of the Division's international sales. If the full wholesale value
of all international sales of REEBOK products are included, total sales of
REEBOK products outside the United States represent approximately $1.277 billion
in wholesale value, consisting of approximately 25.8 million pairs of shoes
totaling approximately $692.0 million in wholesale value of footwear sold
outside the United States in 1999 (compared with approximately 29.6 million
pairs totaling approximately $828.8 billion in 1998) and approximately $584.5
million in wholesale value of REEBOK apparel (including GREG NORMAN apparel)
sold outside the United States in 1999 (compared with approximately $625.1
million in 1998).
LICENSING
The Company has continued to pursue its strategic trademark and technology
licensing program begun in 1991. This program is designed to pursue
opportunities for licensing the Company's trademarks, patents and other
intellectual property to third parties for sporting goods, apparel and related
products and services. The licensing program is focused on expanding the REEBOK
brand into new sports and fitness and other markets and enhancing the reputation
of the Company's brands and technologies. The Company believes that its
licensing program reinforces Reebok's reputation as a market leader.
The Company's licensing program includes such products as a full line of
athletic gloves, featuring the REEBOK trademark and Reebok's Vector Logo; a
collection of REEBOK performance sports sunglasses; REEBOK weight belts, both
with and without Reebok's INSTAPUMP(TM) technology; a collection of REEBOK
infant and toddler apparel; a line of REEBOK team uniforms and jackets; REEBOK
watches; and REEBOK fitness videos and audio tapes.
Pursuant to its licensing program, Reebok has a full line of REEBOK fitness
equipment products for the home market, as well as fitness equipment products
designed for use in health clubs and other institutional markets. Home fitness
products include the REEBOK ACD line of home treadmills, the REEBOK elliptical
cross-trainer and the REEBOK home exercise bike collection. Reebok's line of
club fitness products include the REEBOK Body Trec(R), REEBOK Body Peak(R),
REEBOK Fusion, REEBOK Studio Cycle and REEBOK Ridge Rocker(TM) equipment.
Through a licensee, Reebok also markets and sells a line of strength equipment
products in Europe and the United States. Reebok has also entered into various
license agreements for the sale of the REEBOK fitness equipment products
internationally. In addition, through a license agreement entered into in 1999,
Reebok expects to market REEBOK heart rate monitors in 2000.
As part of the Company's licensing program, WEEBOK(R) infant and toddler
apparel and footwear are sold by licensees. WEEBOK is a fashion-oriented,
kid-specific brand, which offers apparel in sizes 0-7 and footwear in sizes
0-12.
Reebok is a partner in the REEBOK Sports Club/NY, a premier sports and
fitness complex in New York City featuring a wide array of fitness equipment,
facilities and services in a luxurious atmosphere. The club utilizes
approximately 125,000 square feet and occupies five floors of the Lincoln Square
project. REEBOK, ROCKPORT and GREG NORMAN concept stores are located in the
building. Reebok has also entered into a license agreement under which its
licensee developed a Reebok Sports and Fitness Center in Bologna, Italy, which
opened in early 1999.
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RETAIL
The Company operates approximately 186 store fronts in the United States
(including REEBOK, ROCKPORT and GREG NORMAN stores and counting multiple store
fronts in combination stores as separate store fronts) which sell a variety of
footwear, apparel and accessories marketed under the Company's various brands.
The Company intends to continue to open additional factory direct stores,
although its policy is to locate and operate these retail outlets in such a way
as to minimize disruption to its normal channels of distribution.
The Company also operates a REEBOK "concept" or company retail store in New
York City. The store sells a wide selection of current, in-line REEBOK footwear,
apparel and accessories. Internationally, there are a number of REEBOK retail
stores owned by the Company, its subsidiaries or its independent distributors.
The Company continues to open retail stores either directly or through its
distributors in numerous international markets. REEBOK retail shops are
important means of presenting the brand in markets such as China, India, Korea,
Russia and South America, as well as in other international markets.
In 1999 the Company allowed select retailers to sell REEBOK and GREG NORMAN
products to consumers through the Internet. Such e-commerce arrangements are
expected to continue in 2000.
THE ROCKPORT COMPANY
The Company's Rockport subsidiary, headquartered in Marlboro,
Massachusetts, designs, produces and distributes specially-engineered comfort
footwear for men and women worldwide under the ROCKPORT(R) brand, as well as
apparel through a licensee.
Rockport's net sales decreased by approximately $25.7 million in 1999 to
$435.0 million from approximately $460.7 million in 1998. In 1999 the Rockport
brand's international revenues grew approximately 4.7% from 1998 international
revenues.
Designed to address the different aspects of consumers' lives, the ROCKPORT
product line includes performance, casual and dress shoes. In 1999 Rockport
continued to use proprietary technologies in its footwear to further enhance
comfort. In 1999 Rockport introduced the Prowalker(R) DMX(R) shoe which
incorporates DMX technology into the midsole of the Prowalker shoe. In the men's
business, Rockport expanded its waterproof offerings in the casual category with
the introduction in the fall of 1999 of its Storm Chasers collection. In 1999
Rockport relocated its women's business to New York City to bring a renewed
concentration on this business opportunity. As part of this renewed focus on
women's business, Rockport introduced its Enlightened Souls(TM) collection, an
ultralight casual women's shoe collection, in the Fall of 1999 featuring soft
leather and Rockport's Comfort by DMX removable footbed, which provides
relaxation and comfort through a system of air channels that deliver
massage-like stimulation.
During 1999 Rockport continued to expand its offerings on its Internet
website located at www.rockportstore.com, growing its business-to-business
direct purchase program which enables employees at participating companies to
purchase ROCKPORT products through Rockport's website and launching, towards the
end of 1999, a direct consumer purchase program that allows consumers to
purchase select ROCKPORT products through Rockport's website.
Rockport markets its products to authorized retailers throughout the United
States primarily through a locally-based employee sales staff, although Rockport
utilizes independent sales agencies for certain products. Internationally,
Rockport markets its products through approximately 30 locally based
distributors in approximately 50 foreign countries and territories. A majority
of the international distributors are either subsidiaries of the Company or
joint venture partners or independent distributors which also sell REEBOK brand
products.
Rockport distributes its products in the United States predominantly
through select higher-quality national and local shoe store chains, department
stores, independent shoe stores, and outdoor outfitters, emphasizing retailers
that provide substantial point-of-sale assistance and carry a full product line.
Rockport also sells its products through independently-owned ROCKPORT-dedicated
retail shops, as well as ROCK-
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PORT concept or company stores. In addition to the concept or company retail
stores it already had in San Francisco (California), Newport (Rhode Island),
King of Prussia (Pennsylvania), Boston (Massachusetts) and New York City (New
York), in 1999 Rockport opened several new concept stores featuring ROCKPORT
footwear in New York City (New York), Santa Monica (California), Boston
(Massachusetts), Braintree (Massachusetts) and Las Vegas (Nevada). In addition,
there are a number of ROCKPORT shops -- independent stores which sell Rockport
products exclusively -- in and outside the United States. Rockport has not
pursued mass merchandisers or discount outlets for the distribution of its
products.
RALPH LAUREN(R) BRAND
In 1999 the RALPH LAUREN footwear business, which was acquired in May 1996,
continued to grow. Net sales for Ralph Lauren Footwear grew to approximately
$96.0 million in 1999 from approximately $73.2 million in 1998. Ralph Lauren
Footwear launched the RLX(R) performance product line, consisting of high
performance athletic footwear, in the first half of 1999 and launched a new
Lauren(TM) by Ralph Lauren product line for women in July 1999. In December
1999, Ralph Lauren Footwear previewed two new product segments to its business,
Polo Jeans and a Ralph Lauren childrens' line, for sale in the second half of
2000. Polo Jeans, targeted to males between the ages 16 and 25, is a more
fashion forward collection, which Ralph Lauren Footwear plans to sell in major
department stores and Polo Jeans stores. Ralph Lauren childrens is targeted to
boys and girls between the ages 5 and 12. Its product line features traditional
classics in addition to POLO SPORT(R) and dressier fashion silhouettes
influenced by the Lauren product line.
Internationally, in 1999 Ralph Lauren Footwear expanded its business into
several new markets and has distributors in Japan and Canada and one in Central
America for Central and South America that market RALPH LAUREN footwear products
in approximately 8 foreign countries and territories. Ralph Lauren Footwear
markets its products to authorized retailers principally through an employee
staff, although Ralph Lauren Footwear retained independent sales agencies in
1999 for sales of certain products to specialty distribution points. Products
are distributed primarily through higher-quality department stores and, in the
case of RLX(R) footwear, through specialty retailers focusing on athletic,
running, outdoor and skiing products. Products are also sold through space
licensing arrangements at approximately 29 RALPH LAUREN/POLO(R) retail stores.
Ralph Lauren Footwear operates "concept" footwear departments in RALPH
LAUREN/POLO stores in a number of locations in the United States, including New
York City (New York), and Beverly Hills (California) and new departments in
Chicago (Illinois), and Palm Beach (Florida). In addition, Ralph Lauren Footwear
has footwear retail operations in approximately 17 RALPH LAUREN/POLO factory
direct stores and operates one factory direct store in Ellenton (Florida) that
opened in February 2000.
GREG NORMAN(R) COLLECTION
The Company's Greg Norman Division produces a range of men's apparel and
accessories marketed under the GREG NORMAN name and logo. Originally a golf
apparel line, the Greg Norman Collection has grown to be a complete collection
of men's sportswear with products ranging from shearling jackets to swimwear. In
the Fall of 1999 the Greg Norman Division introduced for Spring 2000 a line of
performance fabric. The Greg Norman Division will continue to offer an expanded
variety of lifestyle products and expand into international markets, as well as
corporate accounts, through various licensing and distribution arrangements. In
1999 GREG NORMAN belts, small leather goods and hosiery products were sold
through licensees of the Company. In the Fall of 1999, Greg Norman Collection's
established international business was expanded with the launch of a licensee in
Mexico.
In December 1999 the Greg Norman Division expanded its line of products by
assuming responsibility for the golf footwear business from the Reebok Division.
In connection with this new responsibility, the Greg Norman Division
concentrated its marketing efforts on the DMX Trac technology used in REEBOK
golf shoes.
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The GREG NORMAN brand is marketed through its endorsement by professional
golfer Greg Norman, and a marketing and advertising campaign designed to
emphasize his aggressive, bold, charismatic and "winning" style. The current tag
line for the brand and marketing focus is the theme "Attack Life(R)".
GREG NORMAN products are distributed principally at department and men's
specialty stores, on-course pro-shops and golf specialty stores and are sold by
a combination of independent and employee sales representatives. The GREG NORMAN
Collection is also sold in GREG NORMAN-dedicated shops within
independently-owned retail stores, as well as GREG NORMAN concept or company
stores. In 1999, two GREG NORMAN stand-alone retail stores opened, one in La
Quinta (California) and one in Grand Traverse (Michigan).
MANUFACTURING
Virtually all of the Company's products are produced by independent
manufacturers, almost all of which are outside the United States, except that
some of the Company's apparel and some of the component parts used in the
Company's footwear are sourced from independent manufacturers located in the
United States. Each of the Company's operating units generally contracts with
its manufacturers on a purchase order basis, subject in most cases to the terms
of a formal manufacturing agreement between the Company and such manufacturers.
All contract manufacturing is performed in accordance with detailed
specifications furnished by the operating unit, subject to strict quality
control standards, with a right to reject products that do not meet
specifications. To date, the Company has not encountered any significant problem
with product rejection or customer returns due to quality problems. The Company
generally considers its relationships with its contract manufacturers to be
good.
As part of its commitment to human rights, the Company has adopted certain
human rights standards and a monitoring program which applies to manufacturers
of its products. Through its human rights initiatives, Reebok has eliminated the
need for toluene from all cold cement shoe production (representing
approximately 98% of Reebok athletic shoe production in Asia), has an ongoing
program to provide technical assistance to improve air quality in factories
producing REEBOK footwear, has implemented a worker communication system to
resolve conflicts in such factories and has taken steps to increase certain
wages and to reduce overtime hours at such factories. In conjunction with its
human rights program, the Company required its supplier of soccer balls in
Pakistan to end the use of child labor by centralizing all production, including
ball stitching, so that the labor force can be adequately monitored to prevent
the use of child labor. REEBOK soccer balls are sold with a guarantee that the
balls are made without child labor.
China, Indonesia and Thailand were the Company's primary sources for
footwear, accounting for approximately 44%, 29% and 16%, respectively, of the
Company's total footwear production during 1999 (based on the number of units
produced). The Company's largest manufacturer, which has several factory
locations, accounted for approximately 12% of the Company's total footwear
production in 1999.
Reebok's wholly-owned Hong Kong subsidiary, and a network of affiliates in
China, Indonesia, India, Thailand, Taiwan, South Korea and the Philippines,
provided quality assurance, quality control, and inspection services with
respect to footwear purchased by the Reebok Division's U.S. and International
operations. In addition, this network of affiliates inspects certain components
and materials purchased by unrelated manufacturers for use in footwear
production. This network of affiliates also facilitates the shipment of footwear
from the shipping point to the point of destination, as well as arranging for
the issuance to the unrelated footwear manufacturers of letters of credit, which
are the primary means used to pay manufacturers for finished products. The
Company's apparel group utilizes the services of independent third parties, as
well as the Company's Hong Kong subsidiary and its network of affiliates in the
Far East, to assist in the placement, inspection and shipment of apparel and
accessories orders internationally. Production of apparel in the United States
is through independent contractors that are retained and managed by the
Company's apparel group. ROCKPORT footwear products are produced by independent
contractors that are retained and managed through country managers employed by
Rockport. The remainder of the Company's order placement, quality control and
inspection work abroad is handled by a combination of employees and independent
contractors in the various countries in which its products are made.
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SOURCES OF SUPPLY
The principal materials used in the Company's footwear products are
leather, nylon, rubber, ethylvinyl acetate and polyurethane. Most of these
materials can be obtained from a number of sources, although a loss of supply
could temporarily disrupt production. Some of the components used in the
Company's technologies are obtained from only one or two sources, and thus a
loss of supply could disrupt production. The principal materials used in the
Company's apparel products are cotton, fleece, nylon and spandex. These
materials can be obtained from a number of sources.
The footwear products of the Company that are manufactured overseas and
shipped to the United States for sale are subject to U.S. Customs duties. Duties
on the footwear products imported by the Company range from 6% to 37.5% (plus a
unit charge in some cases of 90 cents), depending on the construction and
whether the principal component is leather or some other material.
As with its international sales operations, the Company's footwear and
apparel production operations are subject to the usual risks of doing business
abroad, such as import duties, quotas and other threats to free trade, foreign
currency fluctuations and restrictions, labor unrest and political instability,
as more fully described below in the section entitled "TRADE POLICY." The
Company believes that it has the ability to develop, over time, adequate
substitute sources of supply for the products obtained from present foreign
suppliers. If, however, events should prevent the Company from acquiring
products from its suppliers in China, Indonesia, Thailand or the Philippines, or
significantly increase the cost to the Company of such products, the Company's
operations could be seriously disrupted until alternative suppliers were found,
with a significant negative financial impact.
TRADE POLICY
For several years, imports from China to the United States, including
footwear, have been threatened with higher or prohibitive tariff rates, either
through statutory action or intervention by the Executive Branch, due to concern
over China's trade policies, human rights, foreign weapons sales practices and
its foreign policy. Further debate on these issues is expected to continue in
2000, a year in which two major developments may occur. First, it is possible
that China will be admitted to the World Trade Organization (the "WTO"), which
would reduce the likelihood of future trade restrictions on China-sourced
products by the United States and other nations. Second, it is also possible
that the United States will grant China permanent Normal Trade Relations status,
which would eliminate the annual review process regarding trade status and
further reduce the likelihood of future trade restrictions on China-sourced
products by the United States. Whether or not China is admitted to the WTO
and/or granted Normal Trade Relations status, the Company does not currently
anticipate that restrictions on imports from China will be imposed by the United
States during 2000. If adverse action is taken with respect to imports from
China, it could have an adverse effect on some or all of the Company's product
lines, which could result in a negative financial impact. The Company has put in
place contingency plans which should allow it to diversify some of its sourcing
to countries other than China if any such adverse action occurred. In addition,
the Company does not believe that it would be more negatively impacted by any
such adverse action than its major competitors. The actual effect of any such
action will, however, depend on a number of factors, including how reliant the
Company, as compared to its competitors, is on production in China and the
effectiveness of the contingency plans put in place.
The European Union (the "EU") imposed import quotas on certain footwear
from China in 1994. The effect of such quota scheme on Reebok has not been
significant because the quota scheme provides an exemption for certain
higher-priced special technology athletic footwear, which exemption is available
for most REEBOK products and some ROCKPORT products. The EU continues to review
the athletic footwear exemption which applies to both the quota scheme and
antidumping duties discussed below. The Company, through relevant trade
associations, is working to prevent imposition of a more limited athletic
footwear exception. Should revisions be adopted narrowing such exemption,
certain of the Company's product lines could be affected adversely, although the
Company does not expect that its products would be more severely affected than
those of its major competitors.
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In addition to the quotas on China-sourced footwear, the EU has imposed
antidumping duties against certain textile upper footwear from China and
Indonesia. A broad exemption from the dumping duties is provided for athletic
textile footwear which covers most REEBOK models. If the athletic footwear
exemption remains in its current form, few REEBOK product lines will be affected
by the duties; however, ROCKPORT products would be subject to these duties.
Nevertheless, the Company believes that those REEBOK and ROCKPORT products
affected by the duties can generally be sourced from other countries not subject
to such duties. If, however, the Company were unable to implement such
alternative sourcing arrangements, certain of its product lines could be
adversely affected by these duties.
The EU also has imposed antidumping duties on certain leather upper
footwear from China, Thailand and Indonesia. These duties apply only to low-cost
footwear, below the import prices of most REEBOK and ROCKPORT products. Thus the
Company's products have not been significantly impacted by such duties.
The EU continues to expand the list of restricted substances in consumer
products. As individual EU Member States initiate enforcement of these EU
Directives, the Company is taking aggressive steps to assure that its suppliers
and factories are in full compliance with EU Directives in accordance with the
terms of their agreements. Despite these efforts, from time to time the Company
may have some product already in the distribution chain which does not comply
with the most recent EU Directives. This could cause some disruption to the
delivery of product to the market. As a result, it may be necessary to
substitute styles, to delay deliveries or even to forego sales. The Company
believes that its major competitors are similarly impacted by these EU
restrictions.
The Company is also aware of possible consumer rejection of products
containing substances not restricted by the EU or any Member State for
environmental, health and human rights concerns. Such consumer action, and the
response of retailers, could disrupt Company distribution and cause withdrawal
of the product from the market, which would substantially impact the Company's
sales of those specific products. To date the Company has not encountered
rejection on any of its products, but is aware of such consumer action against
certain competitors' products, which has lead to the voluntary recall of such
products. While it is impossible to predict such consumer action, the Company is
closely monitoring the demands of non-governmental organizations active in
Europe. The Company believes that it is no more exposed to such adverse action
than its major competitors.
Various other countries have taken or are considering steps to restrict
footwear imports or impose additional customs duties or other impediments, which
actions affect the Company as well as other footwear importers. The Company, in
conjunction with other footwear importers, is aggressively challenging such
restrictions and is attempting to develop new production capacity in countries
not subject to those restrictions. Nevertheless, such restrictions have in some
cases had a significant adverse effect on the Company's sales in some of such
countries, most notably Argentina, although they have not had a material adverse
effect on the Company as a whole.
PRINCIPAL PRODUCTS
Sales of the following categories of products contributed more than 10% to
the Company's total consolidated revenue in the years indicated: 1999, footwear
(approximately 73%) and apparel (approximately 27%); 1998, footwear
(approximately 72%) and apparel (approximately 28%); and 1997, footwear
(approximately 72%) and apparel (approximately 27%).
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company believes that its trademarks, especially the REEBOK and
ROCKPORT trademarks, and its rights to use GREG NORMAN and RALPH LAUREN names
and logos, are of great value, and the Company is vigilant in protecting these
marks from counterfeiting or infringement. Loss of the REEBOK, ROCKPORT, RALPH
LAUREN or GREG NORMAN trademark rights could have a serious impact on
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the Company's business. The Company owns the REEBOK and ROCKPORT trademarks and
has contractual rights that survive in perpetuity to use the GREG NORMAN name
and logo. The Company also has rights to use the RALPH LAUREN name and logo
under a 1996 agreement that has an initial term of five years and is subject to
two five-year extensions.
The Company also believes that its technologies and designs are of great
value and the Company is vigilant in procuring patents and enforcing its patents
and other proprietary rights in the United States and in other countries.
WORKING CAPITAL ARRANGEMENTS
In conjunction with the Company's repurchase of approximately 17 million
shares of its common stock pursuant to a Dutch Auction self-tender offer in
1996, the Company entered into a credit agreement underwritten by Credit Suisse
and a syndicate of major banks. The facility included a committed $750 million
revolving credit line to replace the Company's previous $300 million revolving
credit facility. The balance of the facility is a $640 million six-year term
loan which was used to finance the share repurchase. In July 1997, the Company
amended and restated this agreement to reduce the revolving credit portion of
the facility to $400 million. As part of this amendment, the commitment fees the
Company is required to pay on the unused portion of the revolving credit
facility, as well as the borrowing margins over the London Interbank Offer Rate
paid on the term loan and used portion of the revolving credit facility, were
reduced. The amendment further removed or relaxed various covenants including
the restrictions on asset acquisitions and sales, capital expenditures, future
indebtedness and investments. The Company subsequently amended its credit
arrangements in October 1998 to relax the debt coverage ratio covenants in such
agreements. The balance of the term loan as of December 31, 1999 was
approximately $342 million.
The Company also has various arrangements with numerous banks which provide
an aggregate of approximately $703 million of uncommitted facilities,
substantially all of which are available to the Company's foreign subsidiaries.
Of this amount, approximately $283 million is available for short-term
borrowings and bank overdrafts, with the remainder available for letters of
credit for inventory purchases. At December 31, 1999, approximately $195 million
was outstanding for open letters of credit for inventory purchases, in addition
to approximately $28 million in notes payable to banks and $18.4 million was
outstanding under standby letter of credit.
The Company also has authority to issue up to $200 million of commercial
paper which is supported to the extent available by its revolving credit and
loan agreements, referred to above. As of December 31, 1999, the Company had no
commercial paper obligations outstanding.
Moody's Investor Service, Inc. ("Moody's") lowered the Company's credit
ratings in December 1998 and placed the Company's debt on review for possible
downgrade in December 1999; and Standard & Poor's Rating Group ("S&P") lowered
the Company's credit rating in January 1999 and, after placing the Company on
credit watch in December 1999, reaffirmed its credit rating in February 2000.
Although it has not been more difficult for the Company to borrow as a result of
these reductions of the Company's credit ratings in late 1998 and early 1999,
the costs of borrowing have increased, including the costs the Company incurs
under some of its existing credit arrangements. If Moody's were to downgrade the
Company's credit rating, it may become more difficult for the Company to borrow
and the costs of borrowing will increase.
With respect to working capital items, the Company must commit to
production tooling and in some cases to production in advance of orders because
of the relatively long lead times for design and production in the footwear
industry. The Company must also maintain inventory to fulfill "at once"
shipments. The Company believes its practices with respect to working capital
items are consistent with the footwear and apparel industry in general.
SEASONALITY
Sales by the Company of athletic and casual footwear tend to be seasonal in
nature, with the strongest sales occurring in the first and third quarters.
Apparel sales also generally vary during the course of the year, with the
greatest demand occurring during the Spring and Fall seasons.
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SINGLE CUSTOMER
There was no single customer of the Company that accounted for 10% or more
of the Company's net sales in 1999. The Company is not dependent on a single
customer, or a few customers, the loss of any one or more of which would have a
material adverse impact on the Company.
BACKLOG
As of December 31, 1999 the Company's backlog of orders that the Company
believes to be firm (albeit cancelable by the purchaser) totaled approximately
$1.004 billion, compared to $1.097 billion as of December 31, 1998. The 1999
backlog position includes approximately $19.4 million worth of open orders to
Just For Feet, Inc. ("Just For Feet"), which filed for bankruptcy and is
liquidating its assets. In February 2000, Footstar Inc. entered into an
agreement to acquire certain assets of Just For Feet, including the Just For
Feet name, approximately 79 Just For Feet superstores and approximately 23
speciality retail stores. The Company believes that a portion of the open orders
to Just For Feet will be sold to the acquiring company. In addition, a portion
of the orders canceled have been resold to other customers. Other than the open
orders for Just For Feet, the Company expects that substantially all of these
orders will be shipped in 2000, although, as noted above, many of these orders
are cancelable. The 1998 backlog position included open orders of the Company's
Germany subsidiary that did not ship in 1999 due to logistical issues, as
described below in the section entitled "Global Restructuring Activities." The
backlog position is not necessarily indicative of future sales because the ratio
of future orders to "at once" shipments and sales by Company-owned retail stores
may vary from year to year. In addition, many markets in South America and Asia
Pacific are not included in the backlog since sales are made by independent
distributors.
COMPETITION AND COMPETITORS
Competition in sports and fitness footwear and apparel sales is intense.
Competitors include a number of sports and fitness footwear and apparel
companies, such as Nike, adidas, Fila, Converse, New Balance and others.
Competition is very strong in each of the sports and fitness footwear and
apparel market segments, with new entrants and established companies providing
challenges in every category.
The casual footwear market into which the ROCKPORT product lines fall is
also highly competitive. Due to the diversity of product designs and intended
end uses, however, there are very few companies that Rockport competes with
directly in every product category. Companies that could be described as
competitors in specific product categories include, among others, Timberland,
Clarks, Ecco, Mephisto, Bass, Bostonian, Merril, Easy Spirit, Nine West and
Gabor. Rockport occupies a strong position in the comfort and walking shoe
market. Competition in this area has intensified as the activity of walking has
grown in popularity and as athletic shoe companies have entered the market. In
addition, Rockport also produces men's and women's dress shoes and competes in
this market with other leading makers of dress shoes.
The Company's other product lines also continue to confront strong
competition. The REEBOK apparel line competes with well-known brands such as
Nike, adidas and Fila. The GREG NORMAN line competes with Tommy Hilfiger, Ralph
Lauren, Nautica, Ashworth, Cutter Buck and other makers of men's casual
sportswear and golf apparel and footwear. The RALPH LAUREN footwear brand
competes with such brands as Cole Haan, Timberland, Tommy Hilfiger, Prada and
Gucci. In addition, the new RLX/POLO SPORT line will compete with major athletic
shoe companies.
ISSUES AND UNCERTAINTIES
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, including
statements with regard to the Company's revenues, earnings, spending, margins,
cash flow, orders, inventory, products, actions, plans, strategies and
objectives. Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate or imply future results,
performance or achievements, and may contain the words "believe," "anticipate,"
"expect," "estimate," "intend," "plan," "project," "will be," "will continue,"
"will result," "could," "may," "might," or any variations of such words or other
words with similar meanings. Any such statements are subject to risks and
uncertainties that could cause the Company's actual results to differ
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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.
Risks and uncertainties 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, the following: technological, marketing, product, promotional or
other success by one of more of the Company's competitors; changes in consumer
preferences; failure by the Company to adequately forecast consumer demand and
sales volume, leading to increased spending, inventory risk, tooling and other
costs; inability to obtain desired pricing margins and profitability because of
industry conditions, production inefficiencies, increased costs of goods,
currency trends, the general retail environment or the lack of success of the
Company's products or marketing; higher-than-anticipated levels of customer
cancellations or returns; lack of success in the Company's retail operations due
to general retail market conditions or loss of market share to competitors;
failure to meet delivery deadlines because of design, production or distribution
problems; currency fluctuations, government actions, import regulations,
political instability or general economic factors that negatively impact the
Company's business in one or more international regions; interruption or
unavailability of sources of supply; inability to make timely payments on the
Company's indebtedness or to meet debt covenants; loss of one or more
significant customers; inability to protect significant trademarks, patents or
other intellectual property of the Company; negative results in litigation;
general economic factors impacting consumer purchasing power and preferences;
changes in the Company's tax rate or its ability to fully utilize deferred tax
assets; the Company's ability to achieve desired operating and logistical
efficiencies in the areas of distribution and information systems; disruptions
due to Year 2000 non-compliance in the systems of its key suppliers, customers,
distributors or other business partners; start-up and software complications
related to its global restructuring efforts; and other factors mentioned or
incorporated by reference in this report or other reports.
This list of risk factors is not exhaustive. Certain factors that could
affect the Company's actual results and cause actual 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 as
well as those discussed in other reports filed by the Company with the
Securities and Exchange Commission (the "SEC"), such as reports on Forms 8-K and
10-Q. In addition, the Company operates in a highly competitive and rapidly
changing environment. Therefore, new risk factors can arise, and it is not
possible for management to predict all such risk factors, nor to assess the
impact of all such risk factors on the Company's business or the extent to which
any individual risk factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement.
Accordingly, investors should not place undue reliance on forward-looking
statements as predictions of actual results.
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
has taken and continues to take steps to respond to this shift by focusing on
its products and technologies. There is, however, substantial uncertainty as to
whether the Company's actions will be effective, especially given recent
difficulties faced by certain department store, athletic specialty and sporting
goods chains (which are important customers for these brands), and the softness
in the branded apparel market in the United States. The outcome will be
dependent on a number of factors, including the extent of the change in consumer
preference, consumer and
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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 United States), sales growth may depend 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 consumer preference and technology that can occur in the
footwear and apparel markets constitute significant risk factors in the
Company's operations.
The Company launched the RLX/Polo Sport(R) performance product line,
consisting of high performance athletic footwear, in the first half of 1999 and
launched a new Lauren(TM) by Ralph Lauren product line for women in July 1999.
The Company also launched the Traxtar children's shoe in the children's market
and in late 2000 or early 2001 plans to launch adult footwear with similar smart
technology. Investments in product development, advertising, marketing and
merchandising have been, and will continue to 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. Retailer consolidation may make inventory
management more difficult and require more liquidation of excess inventory, as
certain retailers may cancel orders. The Company may also be required to pay for
certain tooling if it does not satisfy minimum production quantities.
Difficulties related to distribution, such as those encountered at the new
Rotterdam distribution center (as described above more fully in the section
entitled "International Operations"), may have an adverse impact on the
Company's business by increasing the amount of inventory and the cost of
warehousing inventory.
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."
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<PAGE> 19
PRICING AND MARGINS
The prices that the Company is able to charge for its products depend 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 that the Company earns depend 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
start-up 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. Pricing and margins may also be adversely affected by
liquidation sales by retailers in a consolidating environment. In addition, a
shift in the marketplace may occur that produces an over-inventoried promotional
retail environment, resulting in the Company encountering increased returns and
cancellations from retailers, which may adversely affect its margins. If an
over-inventoried environment is produced, retailers may be more reluctant to
place future orders for product than they would be otherwise, resulting in fewer
future orders for the Company and requiring the Company to take more inventory
risk to fulfill "at once" business. 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. Additionally, fluctuations in foreign currency exchange
rates may have an adverse impact on the Company's margins. See the section below
entitled "Risk of Currency Fluctuations" for more details.
BACKLOG
The Company reports its backlog of open orders for the REEBOK(R) 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. Any slowdown at retail and consolidation of the
retail industry 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, 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 purchases 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 186 retail store fronts in the
United States (including REEBOK, ROCKPORT and GREG NORMAN stores and counting
multiple store fronts in combination stores as separate store fronts) 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 United States has resulted in a decline in retail margins,
thus adversely
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affecting the Company's own retail business. Because of the retail environment
and increased competition, comparative store sales in 1999 declined in 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-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. For example, in 1999
start-up and software complications that were encountered at the new Rotterdam
distribution center delayed shipments to Reebok's German and Austrian customers,
adversely affecting those markets (as more fully described above in the section
entitled "International Operations"). The Company has taken steps to address
these problems, including the addition of a new management team in Germany, but
the success of these measures is not certain and depends on a number of factors,
including how long the adverse effects of the 1999 delay lasts and how quickly
the Company can remedy the start-up and software issues.
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 of the United States.
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. In addition, the Company's European operations may
be impacted by the start-up and software complications encountered at the
Rotterdam distribution center which have delayed implementation of the
distribution center, forcing the Company to incur significant duplicate
distribution costs. 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 December 31, 1999, the outstanding balance of such debt
was approximately $342 million) and has a $400 million revolving credit line (as
of December 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
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<PAGE> 21
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 2000. 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.
As indicated above (see "WORKING CAPITAL ARRANGEMENTS" above), Moody's
lowered the Company's credit ratings in December 1998 and placed the Company's
debt on review for possible downgrade in December 1999; and S&P lowered the
Company's credit rating in January 1999 and, after placing the Company on credit
watch in December 1999, reaffirmed its credit rating in February 2000. Although
it has not been more difficult for the Company to borrow as a result of these
reductions in the Company's credit in late 1998 and early 1999, the costs of
borrowing have increased including the costs the Company incurs under some of
its existing credit arrangements. If the Company's credit rating is downgraded,
it may become more difficult for the Company to borrow and the costs of
borrowing will increase.
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 1999 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 adopted a single currency called the "Euro." On this date, fixed
conversion rates between the existing currencies of these countries ("the 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 is making 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 should be
converted for the Euro by the end of
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<PAGE> 22
the transition period or earlier to meet business needs. The Company does not
expect such conversion costs to be material.
The Company was not materially affected by the Euro conversion in 1999 and
does not expect any materially adverse impact in 2000.
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. For example, Just For Feet, an
important customer of the Company, has filed for bankruptcy. Although the impact
of its liquidation will be mitigated by its acquisition by Footstar Inc., as
described in greater detail above in the section entitled "BACKLOG", Just For
Feet's bankruptcy may have a negative impact on the Company's business. See also
discussion below under "Economic Factors".
INTELLECTUAL PROPERTY
The Company believes that its trademarks, patents, 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, RALPH LAUREN 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. See Item 3 below for a further description of
litigation involving the Company.
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 slowdown in the athletic
footwear and branded apparel markets has had negative effects on the Company's
business. 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 retailer bankruptcy, consolidation and 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 taxable income is earned in markets where
the tax rate is
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<PAGE> 23
relatively higher, the Company's effective tax rate will increase. The Company
expects that the full year 2000 tax rate will be slightly higher than the rate
for 1999.
The Company has approximately $132.0 million of net deferred tax assets, of
which approximately $91.0 million is attributable to the expected utilization of
tax net operating loss carryforwards and tax credit carryforwards. 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. The Company believes it
is more likely than not that its deferred tax assets will be realized. However,
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's 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 has been in the process of 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
has experienced, and may in the future experience, difficulties in product
delivery or other logistical operations as a result of its restructuring
activities, which have had, and in the future could have, an adverse effect on
the Company's business. For example, in 1999 Reebok's German and Austrian
subsidiaries began to use the Rotterdam distribution center. These distributors
experienced start-up and software complications which contributed to a decline
in their business. The Company estimates that this was one factor which
accounted for approximately a 40 percent decline in sales in Germany in 1999. 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, in 1999 the Company decided to defer the consolidation of its
warehouse facilities in Europe into its Rotterdam distribution center, as well
as to delay implementation of certain aspects of its planned SAP implementation.
This decision was made with the intention of removing certain logistical risks
from the Company's business in the year 2000. However, as a result of this
decision, certain logistical advantages and efficiencies that may result from a
complete consolidation of the Company's European distribution facilities and
full implementation of SAP will be lost until such time as such consolidation
and implementation is completed. In addition, the Company incurred in 1999, and
expects to continue to incur in 2000, significant duplicate distribution and
start-up expenses, and it is likely that such duplicate expenses will continue
into 2001 because of the decision to defer warehouse consolidation and full
implementation of SAP. The complete implementation of SAP may also be delayed
further and encounter further complications in part because of the nature of the
system. The SAP system did not previously have an appropriate application for
the footwear and apparel industry, requiring the Company, together with its
software vendor and another company in the apparel industry, to develop a new
software application for the footwear and apparel industry. This adaptation to
the footwear and apparel business may cause future complications that will
require the Company to invest additional resources and further delay
implementation.
EMPLOYEES
As of December 31, 1999, the Company had approximately 6,500 employees in
all operating units. None of these employees is represented by a labor union.
The Company has never suffered a material interruption of business caused by
labor disputes with employees. Management considers employee relations to be
good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial information about geographic operations appears in Note 14 of the
consolidated financial statements on page 50.
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RESEARCH AND DEVELOPMENT
Incorporation of new technologies into its footwear and apparel products is
integral to the Company's success. The Company has been, and will continue to
be, committed to product research and development that will bring innovative
technology to its consumers.
In 1999 the Company spent approximately $55.4 million on product research,
development and evaluation, compared to $65.7 million in 1998, and $62.4 million
in 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is submitted as to the executive officers of the
Company:
<TABLE>
<CAPTION>
NAME AGE OFFICE HELD
- ---- --- -----------
<S> <C> <C>
Paul B. Fireman....................... 56 President, Chief Executive Officer and
Chairman of the Board of Directors
Angel R. Martinez..................... 44 Executive Vice President, Chief Marketing
Officer of the Reebok Division
Kenneth I. Watchmaker................. 57 Executive Vice President, Chief Financial
Officer and Treasurer
Paul R. Duncan........................ 59 Executive Vice President
James R. Jones, III................... 55 Senior Vice President and Chief Human
Resources Officer
Terry R. Pillow....................... 46 Senior Vice President, President and Chief
Executive Officer of The Rockport Company
David A. Perdue....................... 50 Senior Vice President, Executive Vice
President, Global Operating Units of the
Reebok Division
David A. Pace......................... 39... Vice President, General Counsel and Clerk
</TABLE>
Officers hold office until the first meeting of the Board of Directors
following the annual meeting of stockholders, or special meeting in lieu
thereof, and thereafter until their respective successors are chosen and
qualified.
Paul B. Fireman is the founder of the Company and has served as its Chief
Executive Officer since the Company's founding in 1979 and its Chairman of the
Board since 1986. Mr. Fireman served as President of the Company from 1979 to
1987 and was appointed again to that position in 1989. Mr. Fireman has been a
Director since 1979.
Angel R. Martinez was appointed Chief Marketing Officer of the Reebok
Division in October 1998. He has been an Executive Vice President of the Company
since February 1994. Previously, he was President and Chief Executive Officer of
The Rockport Company, Inc. from August 1994 to October 1998. Prior to that, Mr.
Martinez was the President of the Fitness Division of the Company from September
1992 to January 1994 and Executive Vice President of Marketing Services from
January 1994 to August 1994, and prior to that he was Vice President for
Business Development of the Company for several years. Mr. Martinez joined the
Company in 1980.
Kenneth I. Watchmaker has been an Executive Vice President of the Company
since February 1994. He was appointed Chief Financial Officer of the Company in
June 1995 and was elected Treasurer in September 1999. Previously, since
February 1994, he was an Executive Vice President of the Company with
responsibility for finance, footwear production and management information
systems. He joined the Company in July 1992 as Executive Vice President,
Operations and Finance, Reebok Division. Prior to joining Reebok, Mr. Watchmaker
was the partner in charge of audit services in the Boston office of Ernst &
Young LLP.
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<PAGE> 25
Paul R. Duncan had been an Executive Vice President of the Company from
February 1990 until December 1998. In February 2000, Mr. Duncan rejoined the
Company as Executive Vice President and oversees the ROCKPORT, RALPH LAUREN and
GREG NORMAN brands. Mr. Duncan has been a Director of the Company since March
1989. From November 1996 until 1999 Mr. Duncan had a part-time position with the
Company in which he was responsible for special projects. He was previously
President of the Specialty Business Group from October 1995 until November 1996.
From June 1995 until October 1995, Mr. Duncan was Chief Operating Officer for
the Reebok Division. Prior to June 1995, Mr. Duncan was Executive Vice President
and Chief Financial Officer. Mr. Duncan joined the Company in 1985 as Senior
Vice President and Chief Financial Officer.
James R. Jones, III has been Senior Vice President and Chief Human
Resources Officer for the Company since May 1998. Mr. Jones joined Reebok as
Senior Vice President of Human Resources for the Reebok Division in April 1997.
Prior to that, Mr. Jones was Vice President of Human Resources of Inova Health
System from May 1996 through April 1997. From July 1995 through May 1996, Mr.
Jones was the Senior Vice President of Human Resources of Franciscan Health
System. Prior to that, since 1991, Mr. Jones was the Vice President of Human
Resources of The Johns Hopkins University.
Terry R. Pillow was appointed Senior Vice President of Reebok and President
and Chief Executive Officer of Rockport in May 1999. Prior to joining the
Company, Mr. Pillow was President of the apparel division of Coach Leatherware,
a subsidiary of Sara Lee Corporation. From 1989 to 1994, Mr. Pillow served as
President of A/X Armani Exchange, New York.
David A. Perdue joined the Company in September 1998 as Senior Vice
President, Global Supply Chain, and was promoted to Executive Vice President
Global Operating Units of the Reebok Division in December 1999. From 1993 until
he joined the Company, Mr. Perdue was Senior Vice President of Haggar, Inc.,
where he was responsible for all aspects of manufacturing, from planning through
distribution.
David A. Pace was appointed Vice President and General Counsel of the
Company and was elected Clerk in December 1999. From May 1999 until his
promotion, Mr. Pace was Vice President, Global Alliances and Endorsements for
the Reebok Division. Prior to this position, Mr. Pace was Assistant General
Counsel from January 1997 until May 1999. In June 1995, Mr. Pace joined the
Company's legal department as Counsel-Marketing. Prior to joining the Company,
Mr. Pace was Vice President and General Counsel of Applied Extrusion
Technologies, Inc. from June 1994 to June 1995, prior to which he was an
associate at the Boston law firm of Ropes & Gray.
ITEM 2. PROPERTIES.
The Company leases most of the properties that are used in its business.
Its corporate headquarters and the offices of the Reebok Division and its U.S.
Operations are located in office facilities in Stoughton, Massachusetts. At its
corporate headquarters, the Company occupies under lease approximately 200,000
square feet of space. This lease expires on June 30, 2000. This facility and two
other smaller facilities, each of which is occupied under a lease that expires
on June 30, 2000, are located approximately one mile from the Reebok Division's
U.S. Operations group's principal warehouse and distribution center in
Stoughton, which is owned by the Company and which contains approximately
450,000 total square feet of usable space.
In order to address the need for additional space at its corporate
headquarters, in March 1998 the Company secured, through a leasing arrangement,
a 42-acre site in Canton, Massachusetts, which is being developed as a corporate
headquarters facility. Construction of the corporate headquarters facility is
expected to be complete in March 2000 and the relocation is expected to be
finished in June 2000. The facility, which contains approximately 522,000 square
feet of space, is leased by the Company through an operating lease agreement
entered into for the purpose of financing construction costs for the corporate
headquarters facility. Under the agreement, the lessor purchases the property,
pays for the construction costs and subsequently leases the facility to the
Company. The initial lease term is six years with five two-year renewal options.
The lease provides substantial residual value guarantees by the Company and
includes a purchase option at original cost of the property. The mailing address
of this new facility is 1895 J.W. Foster Boulevard, Canton, Massachusetts 02021.
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In 1994, the Company purchased a building in Avon, Massachusetts containing
approximately 430,000 square feet of space which it uses as an office and
warehouse. The Company expects to sell this building in 2000. The Company also
leases approximately 330,000 square feet of space in Memphis, Tennessee which it
uses as a warehouse and distribution center.
In 1993 Rockport purchased its corporate headquarters facility in Marlboro,
Massachusetts, containing approximately 80,000 square feet of floor space. In
1995 Rockport completed construction of a distribution center of approximately
285,000 usable square feet on approximately 140 acres of land in Lancaster,
Massachusetts which it purchased in 1992.
The Company's international operations were previously headquartered in
Stockley Park, London where the Company's U.K. subsidiary still leases
approximately 37,000 square feet under a fifteen-year lease which is guaranteed
by the Company. This property has been subleased to two parties for the term of
the lease.
In June 1998, the Company entered into an operating lease agreement for the
purpose of financing construction costs for a new distribution facility in
Rotterdam, The Netherlands. Under the agreement, the lessor leased the land
pursuant to a 99-year ground lease, paid for the construction costs and
subsequently leases the entire facility to the Company. The initial lease term
is six years with one five-year renewal option. The lease provides for
substantial residual value guarantees by the Company and includes a purchase
option at original cost of the property.
The Company's wholly-owned Canadian distribution subsidiary, Reebok Canada
Inc., leases an approximately 145,000-square foot office/warehouse facility in
Aurora, Ontario pursuant to a lease that expires in 2001.
The Company and its subsidiaries own and lease other warehouses, offices,
showrooms and retail and other facilities in the United States and in various
foreign countries to meet their space requirements. Except as otherwise
indicated, the Company believes that these arrangements are satisfactory to meet
its needs.
ITEM 3. LEGAL PROCEEDINGS.
In 1997, Supracor, Inc. ("Supracor") filed a lawsuit against the Company in
the U.S. District Court for the Northern District of California, alleging, among
other things that, the Company breached certain exclusive supply rights granted
to Supracor under a 1989 License and Purchase Agreement (the "Agreement"), the
Company fraudulently induced Supracor to enter into the Agreement, and the
Company misappropriated certain Supracor trade secrets. The parties have agreed
to dismiss this lawsuit following a settlement between the Company and Supracor
pursuant to which the Company will pay Supracor $18.75 million. The Company paid
$2.0 million of this settlement amount in 1999 and will pay the remaining
portion in 2001. In connection with this settlement, the Company recorded a
special charge in the fourth quarter of 1999 for the entire settlement amount,
plus other related costs. In connection with this settlement, the Company made
no admission of liability.
In December 1999, Reebok International Limited, a wholly-owned subsidiary
of the Company ("Reebok Limited"), filed a lawsuit against the Sydney Organizing
Committee for the Olympic Games ("SOCOG") in the Supreme Court of New South
Wales, Australia. This lawsuit arises from a 1997 sponsorship agreement (the
"Sponsorship Agreement") between Reebok Limited and SOCOG, pursuant to which
Reebok Limited was to be the official sports brand of the Sydney 2000 Summer
Olympic Games. Among other allegations, Reebok Limited alleges that SOCOG
breached the exclusivity provisions of the Sponsorship Agreement by authorizing
certain Reebok competitors to produce branded apparel for the Sydney 2000 Summer
Olympic Games, and seeks damages for breach of contract. In February 2000, SOCOG
counterclaimed, alleging wrongful termination of the Sponsorship Agreement by
Reebok Limited. SOCOG has not specified the amount of damages it will claim;
however the Company does not believe any adverse judgment will have a material
adverse effect on its financial condition.
23
<PAGE> 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of 1999 to a vote of
security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Reebok's common stock is quoted on the New York Stock Exchange under the
symbol RBK. At March 8, 2000 there were 6,630 record holders of the Company's
common stock. The following table sets forth the quarterly high and low sales
prices during 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
QUARTER HIGH LOW HIGH LOW
- ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First.................................................... 19 1/4 14 1/2 33 3/16 25 1/2
Second................................................... 22 3/4 15 3/4 32 1/2 27
Third.................................................... 18 5/16 10 3/8 29 1/4 13 1/8
Fourth................................................... 11 1/8 7 7/8 18 1/2 12 9/16
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the financial statements, including the
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Annual Report.
Amounts in thousands, except per share data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales.................... $2,899,872 $3,224,592 $3,643,599 $3,478,604 $3,481,450
Income before income taxes
and minority interest...... 28,038 37,030 158,085 237,668 275,974
Net income................... 11,045 23,927 135,119 138,950 164,798
Net income excluding special
charges.................... 50,485 47,601 134,280 138,950 209,732
Basic earnings per share..... .20 .42 2.41 2.06 2.10
Diluted earnings per share... .20 .42 2.32 2.03 2.07
Dividends per common share... -- -- -- .225 .300
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Working capital.............. $ 619,215 $ 820,277 $ 887,367 $ 946,127 $ 900,922
Total assets................. 1,564,128 1,684,624 1,756,097 1,786,184 1,651,619
Long-term debt............... 370,302 554,432 639,355 854,099 254,178
Stockholders' equity......... 528,816 524,377 507,157 381,234 895,289
</TABLE>
Financial data for 1999 includes special charges of $39,440 after taxes, or
$0.69 per diluted share, pertaining to restructuring activities in the Company's
global operations and for the settlement of litigation.
Financial data for 1998 includes special charges of $23,674 after taxes, or
$0.42 per diluted share, in connection with the Company's various business
re-engineering efforts and the restructuring or adjustment of certain
underperforming marketing contracts.
On June 7, 1996, Reebok completed the sale of substantially all of the
operating assets and business of its subsidiary, Avia Group International, Inc.
("Avia"); accordingly, subsequent to that date, the operations of Avia are no
longer included in the Company's financial results. 1997 results include an
income tax benefit of $40,000, or $0.69 per diluted share, related to the
conclusion in 1997 of outstanding tax matters associated
24
<PAGE> 28
with the sale of Avia. 1997 also includes total special charges of $39,161 after
taxes, or $0.67 per diluted share, relating to restructuring activities in the
Company's global operations.
Financial data for 1995 includes total special charges of $44,934 after
taxes, or $0.56 per diluted share, of which $33,699 relates to the sale of Avia
and $11,235 relates to facilities consolidation, severance and other related
costs associated with the streamlining of certain segments of the Company's
operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As discussed above, this Annual Report on Form 10-K, including the material
in this Item 7, contains forward-looking statements which 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. For a more
detailed discussion of such risks and uncertainties, refer to the section above
entitled "ISSUES AND UNCERTAINTIES".
OPERATING RESULTS 1999
Net sales for the year ended December 31, 1999 were $2.900 billion, a 10.1%
decrease from the year ended December 31, 1998 sales of $3.225 billion. The
Reebok Division's worldwide sales (including the sales of the Greg Norman
Collection) were $2.369 billion in 1999, a 12.0% decrease from sales of $2.691
billion in 1998. U.S. footwear sales of the Reebok Brand decreased 13.5% to $919
million in 1999 from $1.062 billion in 1998. U.S. footwear sales in most
categories declined. The Classics category declined partially as a result of the
Company's effort to redefine its distribution strategy in anticipation of new
Classic product extensions beginning in year 2000. During 2000, the Company will
launch its Classic advertising campaign, as well as, add a premier and heritage
collection to its existing Classics product offerings. U.S. apparel sales of the
Reebok Brand decreased by 29.9% to $253.8 million from $362.2 million in 1998.
During 1999, there has been general softness in the U.S. for branded athletic
apparel. These market conditions, combined with the Company's efforts to
strategically reposition the U.S. business by limiting distribution and
eliminating many unprofitable product offerings, has had an adverse impact on
U.S. apparel revenues. Sales of Greg Norman apparel also declined in the year.
During 1999, the domestic golf and branded apparel market was promotional and
overdistributed. For 2000, in an attempt to manage the Company's apparel
operations profitably, this division will reduce the number of retail doors in
which its products are carried. Also, beginning in 2000, Reebok golf footwear
has been integrated with the Greg Norman Collection to create a more complete
golf product line.
International sales of the Reebok Division (including footwear and apparel)
were $1.197 billion in 1999, a decrease of 5.5% from International sales of
$1.267 billion in 1998. International sales were adversely impacted by start-up
issues experienced in the Company's new Distribution and Shared Services Centers
in Rotterdam and with various new software systems. The Company estimates that
between $15-$20 million of the International sales decline can be directly
attributable to these issues. Excluding the countries affected by the new
software and distribution center, International sales increased slightly and
sales in Europe were approximately the same as in 1998. Sales in Asia Pacific
increased 10.6% when compared to 1998. Fluctuations in foreign currency exchange
rates accounted for approximately a 1% decline in sales in 1999. Most of the
Reebok Brand's International footwear categories declined during the year;
however, the men's cross-training category had a sales increase. International
apparel sales increased slightly.
Rockport's sales for 1999 decreased by 5.6% to $435.0 million from $460.7
million in 1998. International revenues, which grew by 4.7%, accounted for
approximately 24.2% of Rockport's sales in 1999 as compared to 21.8% in 1998.
Domestic sales for the Rockport brand decreased by 9.2%. Domestically, sales
decreased in most categories. Sales for many of the Rockport's core dress
products for men have declined and Rockport will be updating and refreshing this
line over the next year. Also, in 2000, Rockport will introduce a wider
selection of DMX technology into many of its new products along with a new and
improved "Millennium" fit. Most of these new products will debut at retail in
the second half of 2000.
25
<PAGE> 29
Ralph Lauren Footwear had a sales increase of 31.1% in 1999 to $96.0
million from $73.2 million in 1998. During the fall of 1999, the "Lauren" line
of women's footwear debuted at retail and in 2000 the RLF Division plans to
introduce footwear complementing the Polo Jeans and Ralph Lauren Children's
apparel categories. During 1999, the Company increased its advertising and
marketing commitment for this division and will continue this investment through
much of 2000.
The Company's overall gross margin was 38.5% of sales for 1999, as compared
to 36.8% for 1998, an increase of 170 basis points. The increase is primarily
attributable to the strengthening of the Company's initial pricing margins due
to manufacturing and sourcing efficiencies and to lower markdowns, cancellations
and returns for the Reebok Brand.
Selling, general and administrative expenses for the year ended December
31, 1999 were $971.9 million, or 33.5% of sales, as compared to $1.043 billion,
or 32.4% of sales for 1998. While the Company's overall spending declined $71.3
million during 1999 as compared to 1998, spending as a percentage of sales
increased slightly. During 1999, the Company incurred start-up expenses for the
new Distribution and Shared Services Centers in Rotterdam as well as for its
global information systems re-engineering efforts. These start-up expenses, many
of which are redundant in nature, amounted to approximately $35.3 million for
1999. 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 levels. Further, the implementation of the Company's
new global software solution and further migration to the new Distribution
Center has for the most part been postponed until 2001. The Company's intention
is to limit its business risk from these initiatives during 2000 allowing the
new software and distribution center to mature. For 2000, the Company's overall
spending is planned to be at approximately the same level as 1999. Planned cost
savings from the Company's restructuring activities and the reduction of
start-up expenses in 2000 will be re-invested in marketing and other expenses to
support all of the Company's brands.
The financial results of 1999, included net special charges of $61.6
million ($39.4 million after-tax or $0.69 per diluted share). $38.0 million of
the special charges relates to restructuring activities in the Company's global
operations and $23.6 million to the settlement of litigation. The portion of the
charges that is for restructuring relates primarily to personnel expenses for
headcount reductions, asset valuation reserves and accruals related to the
abandonment of certain activities. The business re-engineering will result in
the elimination of approximately 600 full-time positions. The remainder of this
portion of the charge is primarily for lease terminations and the write-down of
assets held for sale or no longer in use. During the fourth quarter of 1999
approximately $2.0 million of the legal settlement was paid, with the balance
payable during 2001. Approximately $46.0 million of the total charge will
require cash payments.
Details of the special charge activity are as follows:
<TABLE>
<CAPTION>
TERMINATION
LEGAL EMPLOYEE FIXED ASSET MARKETING OF LEASES
TOTAL SETTLEMENT SEVERANCE WRITE-DOWNS CONTRACTS AND OTHER
-------- ---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 Charge...................... $ 58,161 $ $ 9,200 $16,500 $ 25,000 $ 7,461
1997 Utilization................. (11,100) (800) (9,600) (700)
-------- ------- -------- ------- -------- -------
Balance, December 31, 1997....... 47,061 8,400 6,900 25,000 6,761
1998 Charge...................... 35,000 14,798 18,476 1,726
1998 Utilization................. (51,763) (15,983) (1,134) (28,734) (5,912)
-------- ------- -------- ------- -------- -------
Balance, December 31, 1998....... 30,298 7,215 5,766 14,742 2,575
1999 Charge...................... 64,125 23,625 20,283 16,104 4,113
Change in estimates.............. (2,500) (2,500)
1999 Utilization................. (26,366) (2,201) (8,581) (3,836) (5,651) (6,097)
-------- ------- -------- ------- -------- -------
Balance, December 31, 1999....... $ 65,557 $21,424 $ 18,917 $15,534 $ 9,091 $ 591
======== ======= ======== ======= ======== =======
</TABLE>
Interest expense decreased in 1999 as compared to 1998 as a result of
strong cash flow generation and debt repayments. Other expense was $8.6 million
for the twelve months, a decline of $10.5 million from last year. The 1998
amount includes the Company's write-down of its investment in its Brazilian
joint venture and losses due to currency devaluation in Russia.
26
<PAGE> 30
The effective income tax rate was 36.0% for 1999 as compared to 32.2% for
1998. Looking forward, dependent on the geographic mix of earnings in 2000, the
Company expects that the full year 2000 rate will be approximately 37.5% based
on current estimates. 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.
At December 31, 1999, the Company had recorded net deferred tax assets of
$132.0 million, of which $65.6 million is attributable to the expected
utilization of tax net operating loss carryforwards. The remainder, $66.4
million, is attributable to tax credit carryforwards and the net tax effect of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Although realization is not assured, management believes it is more likely than
not that the net deferred tax assets will be realized. The estimate of future
taxable income relates to operations of the Company which have, in the past,
generated a level of taxable income in excess of amounts of future taxable
income necessary to realize the deferred tax assets. In addition, the Company
has tax planning strategies which can utilize a portion of the tax net operating
loss carryforwards and thereby reduce the likelihood that they will expire
unused. However, if the Company's 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 impacting future net income.
OPERATING RESULTS 1998
Net sales for the year ended December 31, 1998 were $3.225 billion, an
11.5% decrease from the year ended December 31, 1997 sales of $3.644 billion.
The Reebok Division's worldwide sales (including the sales of the Greg Norman
Collection) were $2.691 billion in 1998, a 14.1% decrease from sales of $3.131
billion in 1997. U.S. footwear sales of the Reebok Brand decreased 13.6% to
$1.062 billion in 1998 from $1.229 billion in 1997. U.S. footwear sales of the
Reebok Brand were adversely impacted by over-capacity in the market due to
significant retail expansion during a period of softening consumer demand. This
resulted in inventory backups and heavy promotional activity to move the excess
quantities.
Despite the sales decline, U.S. footwear sales of the Reebok Brand
generated a 44% sales increase in its running category and increases in its kids
and outdoor categories as compared with 1997. U.S. footwear sales in other
categories declined in 1998. U.S. apparel sales of the Reebok Brand decreased by
16.1% to $362.2 million from $431.9 million in 1997. Increased sales of apparel
in the Company's retail outlet stores and its Greg Norman Collection were more
than offset by declines in Reebok branded and licensed apparel. The Company is
in the process of repositioning the Reebok 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 $1.267 billion in 1998, a decrease of 13.8% from International
sales of $1.471 billion in 1997. The European region reported a sales increase
during 1998, whereas all other International regions reported sales declines.
The Company's sales performance was adversely affected by economic conditions in
Asia Pacific, Latin America and Russia. As compared to 1997, sales in Asia
Pacific declined 47% or approximately $150 million for the year and footwear
sales to unconsolidated Latin American distributors declined by 50% or
approximately $60 million.
During 1998, operations in Latin America, Asia Pacific and Russia
negatively impacted the Company's earnings by approximately $50.0 million on a
pre-tax basis, as compared to 1997. Another factor affecting International sales
comparisons is currency, particularly in Russia and Asia Pacific. Fluctuations
in foreign currency exchange rates accounted for approximately a 3% decline in
sales in 1998. Most of the Reebok Division's International footwear categories
declined during the year, however, the classic and kids categories had sales
increases.
Rockport's sales for 1998 (including sales of Ralph Lauren Footwear)
increased by 4.2% to $533.9 million from $512.5 million in 1997. International
revenues, which grew by 8.2%, accounted for approximately 20.0% of Rockport's
sales (excluding sales of Ralph Lauren Footwear) in both 1998 and 1997.
Increased sales in the walking, outdoor and men's categories were partially
offset by decreased sales in the women's category. The Company has been
strategically repositioning its Rockport women's products in an effort to expand
that
27
<PAGE> 31
segment of the business. For 1998, women's products represented only 20% of
Rockport's sales. During 1998, Rockport expanded its branded retail presence by
opening a number of shop-in-shop and retail concept areas. Ralph Lauren Footwear
had a sales increase of 15.0% in 1998 as compared to 1997, with all of the
increase coming from the Polo Sport segment.
The Company's overall gross margin for 1998 was 36.8% of sales which is
comparable to the 1997 rate of 37.0%. During the second half of 1998, U.S.
footwear pricing margins for the Reebok Brand were restored to levels that the
Company was achieving prior to the introduction of its technology products,
which is an improvement over 1997. This was the result of manufacturing
efficiencies the Company achieved with technology products and from sourcing
changes initiated to take advantage of currency opportunities in the Far East.
This 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 were adversely affected by the strong U.S. dollar.
Selling, general and administrative expenses for the year ended December
31, 1998 were $1.043 billion, or 32.4% of sales, as compared to $1.069 billion,
or 29.4% of sales for 1997. While overall spending declined, the increased
spending as a percentage of sales was attributable to additional expansion of
retail presence for all of the Company's brands and investments in research,
design, development and production. Also included in 1998 results were severance
expenses relating to the reorganization of certain business units and start-up
expenses for the Company's new Rotterdam Distribution Center and Shared Services
Center and global information system re-engineering efforts. These start-up
expenses, many of which are redundant in nature, amounted to approximately $43.5
million for 1998. Of this amount, $34.1 million was included in selling, general
and administrative expenses and $9.4 million was included in cost of sales. The
Company expects to incur additional start-up expenses during most of 1999 or
until such time as these business re-engineering efforts are fully implemented.
The Company benefited from the various cost reduction programs initiated in 1997
year, as all other selling, general and administrative expenses declined from
1997 levels.
In the first quarter of 1998, the Company recorded a pre-tax special charge
of $35.0 million, amounting to approximately $23.7 million after taxes or $0.42
per diluted share, relating to restructuring activities in the Company's global
operations. The charge included personnel-related expenses and other charges
associated with certain underperforming marketing contracts. The business
re-engineering should enable the Company to achieve greater operating
efficiencies. The underperforming marketing contracts were terminated or
restructured to focus the Company's spending on those key athletes and teams who
are more closely aligned with its core brand positioning.
Interest expense decreased in 1998 as compared to 1997 as a result of debt
repayments. Other expense was $19.2 million for the twelve months, an increase
of $13.0 million from last year. This increase is primarily due to the currency
devaluation in Russia and the Company's write-down of its investment in its
Brazilian joint venture.
The effective income tax rate was 32.2% for 1998 as compared to 33.2% for
1997 (exclusive of certain one-time tax benefits received in 1997).
REEBOK BRAND BACKLOG
The Reebok Brand backlog (including Greg Norman Collection apparel) of open
customer orders scheduled for delivery during the period from January 1, 2000
through June 30, 2000 declined 5.0% as compared to the same period last year.
North American backlog for the Reebok Brand, which includes the U.S. and Canada,
decreased 5.5% and the International backlog decreased 4.3% but increased 6.1%
in constant dollars. Reebok U.S. footwear backlog decreased 1.2% and Reebok U.S.
apparel backlog (including Greg Norman Collection apparel) decreased 25.1% as
compared to the same period last year. These open backlog comparisons are not
necessarily indicative of future sales trends. Many orders are cancelable, sales
by Company-owned retail stores can vary from year-to-year, many markets in Latin
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.
28
<PAGE> 32
LIQUIDITY AND SOURCES OF CAPITAL
Working capital was $619.2 million at December 31, 1999 and $820.3 million
at December 31, 1998. The 1999 classification to a current liability of the
$100.0 million medium-term note due in May 2000 resulted in a portion of the
working capital reduction. The current ratio at December 31, 1999 was 2.0 to 1
compared to 2.5 to 1 at December 31, 1998.
Accounts receivable decreased by $100.4 million from December 31, 1998, a
decrease of 19.4%. The decrease is partially due to the sales decline and
partially due to an improvement in average days sales outstanding in the U.S.
receivables as compared to last year. Inventory decreased by $120.6 million, or
22.5% from December 31, 1998. U.S. footwear inventories of the Reebok Brand
decreased 38.5% at year-end as compared to 1998, Reebok U.S. apparel inventories
were down 52.2%, International inventories declined 19.6% and Rockport
inventories declined 31.9%.
During the year ended December 31, 1999, cash and cash equivalents
increased $101.7 million and net debt repayments were $107.3 million. Cash
provided by operations during 1999 was $281.6 million, as compared to cash
provided by operations of $151.8 million during 1998, a $129.8 million
improvement despite lower earnings. The change in operating cash flow
year-to-year is attributable to improved inventory management practices and
improved cash collections on receivables in the U.S. Cash generated from
operations, together with the Company's existing credit lines and other
financial resources, is expected to adequately finance the Company's planned
2000 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 this
Annual Report on Form 10-K under the heading "ISSUES AND UNCERTAINTIES," as well
as future events that might have the effect of reducing the Company's available
cash balances (such as unexpected operating losses or 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.
IMPACT OF YEAR 2000 AND IMPLEMENTATION OF SAP
As part of its strategic information systems plan, the Company has
installed the SAP system in some of its business units, as well as in certain
other functional areas. These units experienced certain technical difficulties
with the system resulting in processing delays and selected integrity of
information issues. The Company, together with its software partner, has
substantially remedied these deficiencies. However, because of the technical
difficulties with the SAP system and the delays resulting therefrom, the Company
postponed full implementation of the SAP system. The Company had initially
planned to address the year 2000 issue through the implementation of SAP. The
Company instead proceeded with its contingency plan and modified existing
software to make it year 2000 compliant. These remediation efforts were
substantially completed during the fourth quarter of 1999. The costs of such
modifications were not material.
Since the Company is no longer under an accelerated timetable to implement
SAP as a Year 2000 solution, the Company has re-evaluated its implementation
schedule and postponed most new conversions to SAP until 2001. This should
substantially reduce the Company's business risks and allow the Company to
better manage the investments in this project over the short-term. The Company
expects that the total costs of converting to the global SAP system will be
approximately $75 million, of which approximately $60 million has been spent to
date. Capitalized costs which are included in this estimate are expected to be
approximately $30 million. The Company did not incur significant year 2000
related costs on behalf of its suppliers, customers or other third parties.
The Company is not aware of any material Year 2000 issues either internally
or from outside sources. However, since it may take several additional months
before it is known whether the Company or third party suppliers, vendors or
customers may have undergone year 2000 problems, no assurances can be given that
the Company will not experience losses or disruptions due to year 2000 computer
related problems. The Company will continue to monitor its business critical
computer applications and those of its suppliers and vendors throughout the year
2000 to ensure that any latent year 2000 matters that may arise are addressed
promptly.
29
<PAGE> 33
CONTINGENCIES
As with its international sales operations, the Company's footwear and
apparel production operations are subject to the usual risks of doing business
abroad, such as import duties, quotas and other threats to free trade, foreign
currency fluctuations and restrictions, labor unrest and political instability,
as more fully described below in the section entitled "TRADE POLICY." The
Company believes that it has the ability to develop, over time, adequate
substitute sources of supply for the products obtained from present foreign
suppliers. If, however, events should prevent the Company from acquiring
products from its suppliers in China, Indonesia, Thailand or the Philippines, or
significantly increase the cost to the Company of such products, the Company's
operations could be seriously disrupted until alternative suppliers were found,
with a significant negative financial impact.
For several years, imports from China to the United States, including
footwear, have been threatened with higher or prohibitive tariff rates, either
through statutory action or intervention by the Executive Branch, due to concern
over China's trade policies, human rights, foreign weapons sales practices and
its foreign policy. Further debate on these issues is expected to continue in
2000, a year in which two major developments may occur. First, it is possible
that China will be admitted to the WTO, which would reduce the likelihood of
future trade restrictions on China-sourced products by the United States and
other nations. Second, it is also possible that the United States will grant
China permanent Normal Trade Relations status, which would eliminate the annual
review process regarding trade status and further reduce the likelihood of
future trade restrictions on China-sourced products by the United States.
Whether or not China is admitted to the WTO and/or granted Normal Trade
Relations status, the Company does not currently anticipate that restrictions on
imports from China will be imposed by the United States during 2000. If adverse
action is taken with respect to imports from China, it could have an adverse
effect on some or all of the Company's product lines, which could result in a
negative financial impact. The Company has put in place contingency plans which
should allow it to diversify some of its sourcing to countries other than China
if any such adverse action occurred. In addition, the Company does not believe
that it would be more negatively impacted by any such adverse action than its
major competitors. The actual effect of any such action will, however, depend on
a number of factors, including how reliant the Company, as compared to its
competitors, is on production in China and the effectiveness of the contingency
plans put in place.
The EU imposed import quotas on certain footwear from China in 1994. The
effect of such quota scheme on Reebok has not been significant because the quota
scheme provides an exemption for certain higher-priced special technology
athletic footwear, which exemption is available for most Reebok products and
some Rockport products. The EU continues to review the athletic footwear
exemption which applies to both the quota scheme and antidumping duties
discussed below. The Company, through relevant trade associations, is working to
prevent imposition of a more limited athletic footwear exception. Should
revisions be adopted narrowing such exemption, certain of the Company's product
lines could be affected adversely, although the Company does not expect that its
products would be more severely affected than those of its major competitors.
In addition to the quotas on China-sourced footwear, the EU has imposed
antidumping duties against certain textile upper footwear from China and
Indonesia. A broad exemption from the dumping duties is provided for athletic
textile footwear which covers most Reebok models. If the athletic footwear
exemption remains in its current form, few Reebok product lines will be affected
by the duties; however, Rockport products would be subject to these duties.
Nevertheless, the Company believes that those Reebok and Rockport products
affected by the duties can generally be sourced from other countries not subject
to such duties. If, however, the Company were unable to implement such
alternative sourcing arrangements, certain of its product lines could be
adversely affected by these duties.
The EU also has imposed antidumping duties on certain leather upper
footwear from China, Thailand and Indonesia. These duties apply only to low-cost
footwear, below the import prices of most Reebok and Rockport products. Thus the
Company's products have not been significantly impacted by such duties.
The EU continues to expand the list of restricted substances in consumer
products. As individual EU Member States initiate enforcement of these EU
Directives, the Company is taking aggressive steps to ensure
30
<PAGE> 34
that its suppliers and factories are in full compliance with EU Directives in
accordance with the contractual terms of their agreements. Despite these
efforts, from time to time the Company may have some product already in the
distribution chain which does not comply with the most recent EU Directives.
This could cause some disruption to the delivery of product to the market. As a
result, it may be necessary to substitute styles, to delay deliveries or even to
forego sales. The Company believes that its major competitors are similarly
impacted by these EU restrictions.
The Company is also aware of possible consumer rejection of products
containing substances not restricted by the EU or any Member State for
environmental, health and human rights concerns. Such consumer action, and the
response of retailers, could disrupt Company distribution and cause withdrawal
of the product from the market, which would substantially impact the Company's
sales of those specific products. To date the Company has not encountered
rejection on any of its products, but is aware of such consumer action against
certain competitors' products, which has lead to the voluntary recall of such
products. While it is impossible to predict such consumer action, the Company is
closely monitoring the demands of non-governmental organizations active in
Europe. The Company believes that it is no more exposed to such adverse action
than its major competitors.
Various other countries have taken or are considering steps to restrict
footwear imports or impose additional customs duties or other impediments, which
actions affect the Company as well as other footwear importers. The Company, in
conjunction with other footwear importers, is aggressively challenging such
restrictions and is attempting to develop new production capacity in countries
not subject to those restrictions. Nevertheless, such restrictions have in some
cases had a significant adverse effect on the Company's sales in some of such
countries, most notably Argentina, although they have not had a material adverse
effect on the Company as a whole.
Lawsuits arise during the normal course of business. The Company does not
expect the outcome of any existing litigation to have a significant impact on
its financial position or future results of operations.
The Company enters into forward currency exchange contracts and options to
hedge its exposure for merchandise purchased in U.S. dollars that will be sold
to customers in other currencies. Realized and unrealized gains and losses on
these contracts are included in net income except that gains and losses on
contracts which hedge specific foreign currency commitments are deferred and
accounted for as a part of the transaction.
The Company also uses forward currency exchange contracts and options to
hedge significant intercompany assets and liabilities denominated in other than
the functional currency. Contracts used to hedge intercompany balances are
marked to market and the resulting transaction gain or loss is included in the
determination of net income.
Foreign currency losses realized from settlements of transactions included
in net income for the years ended December 31, 1999, 1998 and 1997 were $10.0
million, $12.0 million and $8.1 million, respectively. The Company has used
forward exchange contracts and options as an element of its risk management
strategy for several years.
At December 31, 1999, the Company had forward currency exchange contracts
and options, all having maturities of less than one year, with a notional amount
aggregating $194.4 million. The contracts involved fifteen different foreign
currencies. The Euro currency represented 31% of the aggregate notional amount.
The notional amount of the contracts intended to hedge merchandise purchases was
$98.5 million. Deferred gains (losses) on these contracts were not material at
December 31, 1999 or 1998.
The Company uses interest rate swap agreements to manage its exposure to
interest rate movements by effectively converting a portion of its variable rate
long-term debt from floating to fixed rates. These agreements are also used to
manage interest rate exposure under the Company's Rotterdam Distribution Center
lease. These agreements involve the exchange of variable rate payments for fixed
rate payments without the effect of leverage and without the exchange of the
underlying principal amount. Interest rate differentials paid or received under
these swap agreements are recognized over the life of the contracts as
adjustments to interest expense or rent expense. At December 31, 1999, the
notional amount of interest rate
31
<PAGE> 35
swaps outstanding was $227.0 million. Interest expense in 1999, 1998 and 1997
would not have been materially different if these swap agreements had not been
used.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents, accounts
receivable and hedging instruments. The Company places cash equivalents with
high credit major financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution. Credit risk on trade
receivables is somewhat minimized as a result of the Company's worldwide
customer base and the fact that no one customer represents 10% or more of the
Company's net sales.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to hedging instruments. The counterparties to
these contracts are major financial institutions. The Company continually
monitors its positions and the credit ratings of its counterparties and places
dollar and term limits on the amount of contracts it enters into with any one
party.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to the impact of interest rate changes and foreign
currency fluctuations due to its international sales, production, and funding
requirements.
In the normal course of business, the Company employs established policies
and procedures to manage its exposure to changes in interest rates and
fluctuations in the value of foreign currencies using a variety of financial
instruments. It is the Company's policy to utilize financial instruments to
reduce risks where internal netting and other strategies cannot be effectively
employed.
The Company's objective in managing its exposure to interest rate changes
is to limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. To achieve these objectives, the Company
primarily uses interest rate swaps to manage net exposure to interest rate
changes related to its portfolio of borrowings. The Company maintains fixed rate
debt as a percentage of its net debt between a minimum and maximum percentage,
which is set by policy, or as may be required by certain loan agreements.
The Company's objective in managing the exposure to foreign currency
fluctuations is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes. The Company enters into forward 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.
Accordingly, these contracts change in value as foreign exchange rates change to
protect the value of these assets, liabilities, and merchandise purchases. The
gains and losses on these contracts offset changes in the value of the related
exposures.
It is the Company's policy to enter into foreign currency and interest rate
transactions only to the extent considered necessary to meet its objectives as
stated above. The Company does not enter into foreign currency or interest rate
transactions for speculative purposes.
The Company prepared a sensitivity analysis of its financial instruments to
determine the impact of hypothetical changes in interest rates and foreign
currency exchange rates on the Company's results of operations, cash flows, and
the fair value of its financial instruments. The interest rate analysis assumed
a 100 basis point adverse change in interest rates of all financial instruments.
The foreign currency rate analysis assumed that each foreign currency rate would
change by 10% in the same direction relative to the U.S. dollar on all financial
instruments. Based on the results of these analyses of the Company's financial
instruments, a 100 basis point adverse change in interest rates from year-end
1999 levels would reduce the fair value of the interest rate swaps by $1.5
million and a 10% adverse change in foreign currency rates would reduce the fair
value of the forward currency exchange contracts and options by $9.4 million. In
addition, a 100 basis point increase in interest rates from year-end 1999 levels
would increase interest expense on floating rate debt (net of hedges) by $1.5
million.
32
<PAGE> 36
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), which the Company is required by FASB's Statement No. 137 to adopt
for fiscal year 2001. SFAS 133 requires the Company to record all derivatives on
the balance sheet at fair value. Changes in derivative fair values will either
be recognized in earnings as offsets to the changes in fair value of related
hedged assets, liabilities and firm commitments or, for forecasted transactions,
deferred and recorded as a component of other stockholders' equity until the
hedged transactions occur and are recognized in earnings. The ineffective
portion of a hedging derivative's change in fair value will be immediately
recognized in earnings. The impact of SFAS 133 on the Company's financial
statements will depend on a variety of factors, including future interpretative
guidance from the FASB, the future level of forecasted and actual foreign
currency transactions, the extent of the Company's hedging activities, the types
of hedging instruments used and the effectiveness of such instruments. However,
the Company does not believe the effect of adopting SFAS 133 will be material to
its financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 34
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... 35
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 37
Notes to Consolidated Financial Statements.................. 38
Report of Independent Auditors.............................. 52
Report of Management........................................ 53
</TABLE>
33
<PAGE> 37
REEBOK INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 281,744 $ 180,070
Accounts receivable, net of allowance for doubtful
accounts
(1999, $46,217; 1998, $47,383)......................... 417,404 517,830
Inventory................................................. 414,616 535,168
Deferred income taxes..................................... 88,127 79,484
Prepaid expenses and other current assets................. 41,227 50,309
---------- ----------
Total current assets.............................. 1,243,118 1,362,861
---------- ----------
Property and equipment, net................................. 178,111 172,585
Other non-current assets:
Intangibles, net of amortization.......................... 68,892 68,648
Deferred income taxes..................................... 43,868 43,147
Other..................................................... 30,139 37,383
---------- ----------
142,899 149,178
---------- ----------
Total Assets...................................... $1,564,128 $1,684,624
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks.................................... $ 27,614 $ 48,070
Current portion of long-term debt......................... 185,167 86,640
Accounts payable.......................................... 153,998 203,144
Accrued expenses.......................................... 248,822 177,133
Income taxes payable...................................... 8,302 27,597
---------- ----------
Total current liabilities......................... 623,903 542,584
---------- ----------
Long-term debt, net of current portion...................... 370,302 554,432
Minority interest and other long-term liabilities........... 41,107 46,672
Commitments and contingencies
Outstanding redemption value of equity put options.......... 16,559
Stockholders' equity:
Common stock, par value $.01; authorized 250,000,000
shares;
issued shares 92,985,737 in 1999; 93,306,642 shares in
1998................................................... 930 933
Retained earnings......................................... 1,170,885 1,156,739
Less 36,716,227 shares in treasury at cost................ (617,620) (617,620)
Unearned compensation..................................... (26)
Accumulated other comprehensive income (expense).......... (25,379) (15,649)
---------- ----------
528,816 524,377
---------- ----------
Total Liabilities and Stockholders' Equity........ $1,564,128 $1,684,624
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE> 38
REEBOK INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales.............................................. $2,899,872 $3,224,592 $3,643,599
Other income (expense)................................. (8,635) (19,167) (6,158)
---------- ---------- ----------
2,891,237 3,205,425 3,637,441
---------- ---------- ----------
Costs and expenses:
Cost of sales........................................ 1,783,914 2,037,465 2,294,049
Selling, general and administrative expenses......... 971,945 1,043,199 1,069,433
Special charges...................................... 61,625 35,000 58,161
Amortization of intangibles.......................... 5,183 3,432 4,157
Interest expense..................................... 49,691 60,671 64,366
Interest income...................................... (9,159) (11,372) (10,810)
---------- ---------- ----------
2,863,199 3,168,395 3,479,356
---------- ---------- ----------
Income before income taxes and minority interest....... 28,038 37,030 158,085
Income taxes........................................... 10,093 11,925 12,490
---------- ---------- ----------
Income before minority interest........................ 17,945 25,105 145,595
Minority interest...................................... 6,900 1,178 10,476
---------- ---------- ----------
Net income............................................. $ 11,045 $ 23,927 $ 135,119
========== ========== ==========
Basic earnings per share............................... $ .20 $ .42 $ 2.41
========== ========== ==========
Diluted earnings per share............................. $ .20 $ .42 $ 2.32
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE> 39
REEBOK INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON COMPREHENSIVE
STOCK RETAINED TREASURY UNEARNED INCOME
SHARES TOTAL (PAR VALUE $.01) EARNINGS STOCK COMPENSATION (EXPENSE)
---------- -------- ---------------- ---------- --------- ------------ -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996..... 92,556,295 $381,234 $926 $ 992,563 $(617,620) $(283) $ 5,648
---------- -------- ---- ---------- --------- ----- --------
Comprehensive income:
Net income.................... 135,119 135,119
Adjustment for foreign
currency translation........ (26,933) (26,933)
--------
Comprehensive income........ 108,186
Issuance of shares to certain
employees................... 9,532 431 (431)
Amortization of unearned
compensation................ 566 566
Shares repurchased and
retired..................... (313) 8 8
Shares issued under employee
stock purchase plans........ 151,210 4,363 1 4,362
Shares issued upon exercise of
stock options............... 399,111 10,044 4 10,040
Income tax reductions relating
to exercise of stock
options..................... 2,756 2,756
---------- -------- ---- ---------- --------- ----- --------
Balance, December 31, 1997..... 93,115,835 507,157 931 1,145,271 (617,620) (140) (21,285)
---------- -------- ---- ---------- --------- ----- --------
Comprehensive income:
Net income.................... 23,927 23,927
Adjustment for foreign
currency translation........ 5,636 5,636
--------
Comprehensive income........ 29,563
Issuance of shares to certain
employees................... 14,704 458 (458)
Amortization of unearned
compensation................ 387 387
Shares repurchased and
retired..................... (114,920) (3,181) (1) (3,365) 185
Shares issued under employee
stock purchase plans........ 223,583 3,821 2 3,819
Shares issued upon exercise of
stock options............... 67,440 1,187 1 1,186
Put option contracts
outstanding................. (16,559) (16,559)
Premium received from
unexercised equity put
options..................... 2,002 2,002
---------- -------- ---- ---------- --------- ----- --------
Balance, December 31, 1998..... 93,306,642 524,377 933 1,156,739 (617,620) (26) (15,649)
---------- -------- ---- ---------- --------- ----- --------
Comprehensive income:
Net income.................... 11,045 11,045
Adjustment for foreign
currency translation........ (9,730) (9,730)
--------
Comprehensive income........ 1,315
Issuance of shares to certain
employees................... 4,449 116 (116)
Amortization of unearned
compensation................ 142 142
Shares repurchased pursuant to
equity put options.......... (625,000) 0 (6) 6
Shares issued under employee
stock purchase plans........ 292,432 2,885 3 2,882
Shares issued upon exercise of
stock options............... 7,214 97 97
---------- -------- ---- ---------- --------- ----- --------
Balance, December 31, 1999..... 92,985,737 $528,816 $930 $1,170,885 $(617,620) $ (0) $(25,379)
========== ======== ==== ========== ========= ===== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE> 40
REEBOK INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 11,045 $ 23,927 $ 135,119
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 48,643 48,017 47,423
Minority interest.................................. 6,900 1,178 10,476
Deferred income taxes.............................. (9,364) (28,074) (17,285)
Special charges.................................... 61,625 35,000 58,161
Changes in operating assets and liabilities:
Accounts receivable.............................. 85,698 63,951 (13,915)
Inventory........................................ 109,381 39,134 (47,937)
Prepaid expenses and other....................... 5,986 8,626 (4,155)
Accounts payable and accrued expenses............ (18,338) (65,616) 18,295
Income taxes payable............................. (19,951) 25,634 (59,257)
--------- --------- ---------
Total adjustments..................................... 270,580 127,850 (8,194)
--------- --------- ---------
Net cash provided by operating activities: 281,625 151,777 126,925
--------- --------- ---------
Cash flows from investing activity:
Payments to acquire property and equipment............ (51,197) (53,616) (23,910)
--------- --------- ---------
Net cash used for investing activity.................... (51,197) (53,616) (23,910)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) of notes payable to
banks.............................................. (22,269) 2,048 27,296
Repayments of long-term debt.......................... (85,020) (121,016) (156,966)
Proceeds from issuance of common stock to employees... 2,982 5,008 17,163
Proceeds from premium on equity put options........... 2,002
Dividends to minority shareholders.................... (17,966) (6,649) (3,900)
Repurchases of common stock........................... (16,559) (3,366)
--------- --------- ---------
Net cash used for financing activities.................. (138,832) (121,973) (116,407)
--------- --------- ---------
Effect of exchange rate changes on cash................. 10,078 (5,884) (9,207)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 101,674 (29,696) (22,599)
Cash and cash equivalents at beginning of year.......... 180,070 209,766 232,365
--------- --------- ---------
Cash and cash equivalents at end of year................ $ 281,744 $ 180,070 $ 209,766
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid......................................... $ 43,620 $ 58,224 $ 59,683
Income taxes paid..................................... 35,147 26,068 115,985
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE> 41
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
The Company and its subsidiaries design and market sports and fitness
products, including footwear and apparel, as well as footwear and apparel for
non-athletic "casual" use, under various trademarks, including REEBOK, the GREG
NORMAN Logo, ROCKPORT and footwear under RALPH LAUREN and POLO SPORT.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and accounts are
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Recognition of Revenues
Sales are recognized upon shipment of products.
Advertising
Advertising production costs are expensed the first time the advertisement
is run. Media (TV and print) placement costs are expensed in the month the
advertising appears. Advertising expense (including cooperative advertising)
amounted to $106,439, $143,471, and $164,870 for the years ended December 31,
1999, 1998 and 1997, respectively.
Research and Development
Product research, development and evaluation expenses amounted to
approximately $55,404, $65,717, and $62,411 for the years ended December 31,
1999, 1998 and 1997, respectively.
Accounting for Stock-Based Compensation
The Company accounts for its stock-based plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and provides
pro forma disclosures of the compensation expense determined under the fair
value provisions of Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation."
Cash Equivalents
Cash equivalents are defined as highly liquid investments with maturities
of three months or less at date of purchase.
Inventory Valuation
Inventory, substantially all finished goods, is recorded at the lower of
cost (first-in, first-out method) or market.
38
<PAGE> 42
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment and depreciation
Property and equipment are stated at cost. Depreciation is computed
principally on the straight line method over the assets' estimated lives.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful lives of the assets.
Intangibles
Excess purchase price over the fair value of assets acquired is amortized
using the straight-line method over periods ranging from 5 to 40 years. Other
intangibles are amortized using the straight line method over periods ranging
from 3 to 40 years. Intangibles are reviewed by the Company for potential
impairment periodically to determine if the carrying value exceeds fair value.
Foreign Currency Translation
Assets and liabilities of most of the Company's foreign subsidiaries are
translated at current exchange rates. Revenues, costs and expenses are
translated at the average exchange rates for the period. Translation adjustments
resulting from changes in exchange rates are reported as a component of
comprehensive income. The cumulative translation adjustment at December 31,
1999, 1998 and 1997 was ($25,379), ($15,649), and ($21,285), respectively. Other
foreign currency transaction gains and losses are included in the determination
of net income.
For those foreign subsidiaries operating in a highly inflationary economy
or having the U.S. dollar as their functional currency, net nonmonetary assets
are translated at historical rates and net monetary assets are translated at
current rates. Translation adjustments are included in the determination of net
income.
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Tax provisions and credits are recorded at statutory rates for taxable
items included in the consolidated statements of income regardless of the period
for which such items are reported for tax purposes. Deferred income taxes are
recognized for temporary differences between financial statement and income tax
bases of assets and liabilities.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"). Statement 133 will require the
Company to record all derivatives on the balance sheet at fair value. For
derivatives that are hedges, changes in the fair value of derivatives will be
offset by changes in the underlying hedged item in earnings in the same period.
In June 1999, the Financial Accounting Standards Board delayed the effective
date of Statement 133 to the first quarter of fiscal years beginning after June
15, 2000. The Company intends to adopt Statement 133 on January 1, 2001.
Management of the Company does not expect the adoption of this standard to
have a material impact on the Company's financial position or results from
operations.
Reclassification
Certain amounts in prior years have been reclassified to conform to the
1999 presentation.
39
<PAGE> 43
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2 SPECIAL CHARGES
The 1999 financial results include net special charges of $61,625 ($39,440
after-tax or $0.69 per diluted share); $38,000 of the special charge relates to
restructuring activities in the Company's global operations and $23,625 to the
settlement of litigation.
The portion of the charge that is for restructuring relates primarily to
personnel expenses for headcount reductions, asset valuation reserves and
accruals related to the abandonment of certain activities. The business
re-engineering will result in the elimination of approximately 600 full-time
positions. The remainder of this portion of the charge is primarily for lease
terminations and the write-down of assets held for sale or no longer in use.
During the fourth quarter approximately $2,000 of the legal settlement was paid,
with the balance payable during 2001. Approximately $46,000 of the charge will
require cash payments.
In the first quarter of 1998, the Company recorded a special charge of
$35,000 ($23,674 after tax, or $0.42 per diluted share) in connection with the
Company's ongoing business re-engineering efforts. The charge was for personnel
related expenses and certain other charges associated with the restructuring or
adjustment of underperforming marketing contracts. The business re-engineering
resulted in the termination of approximately 485 full-time positions. 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 were or will be cash payments.
The financial results for 1997 include special charges of $58,161 ($39,161
after tax or $0.67 per diluted share) relating to restructuring activities in
the Company's global operations. The restructuring charge relates to facilities
consolidation and elimination, asset write-downs, personnel related expenses and
the termination or restructuring of certain underperforming marketing contracts
that no longer reflect the Company's brand positioning. The restructuring
activities include reducing the number of European warehouses; establishing a
Shared Services Center that will centralize European administrative operations;
and implementing a global management information system. The charge covers
certain one-time costs, of which approximately $40,000 will be cash payments.
Details of the special charge activity are as follows:
<TABLE>
<CAPTION>
TERMINATION
LEGAL EMPLOYEE FIXED ASSET MARKETING OF LEASES
TOTAL SETTLEMENT SEVERANCE WRITE-DOWNS CONTRACTS AND OTHER
-------- ---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 Charge...................... $ 58,161 $ $ 9,200 $16,500 $ 25,000 $ 7,461
1997 Utilization................. (11,100) (800) (9,600) (700)
-------- ------- -------- ------- -------- -------
Balance, December 31, 1997....... 47,061 8,400 6,900 25,000 6,761
1998 Charge...................... 35,000 14,798 18,476 1,726
1998 Utilization................. (51,763) (15,983) (1,134) (28,734) (5,912)
-------- ------- -------- ------- -------- -------
Balance, December 31, 1998....... 30,298 7,215 5,766 14,742 2,575
1999 Charge...................... 64,125 23,625 20,283 16,104 4,113
Change in estimates.............. (2,500) (2,500)
1999 Utilization................. (26,366) (2,201) (8,581) (3,836) (5,651) (6,097)
-------- ------- -------- ------- -------- -------
Balance, December 31, 1999....... $ 65,557 $21,424 $ 18,917 $15,534 $ 9,091 $ 591
======== ======= ======== ======= ======== =======
</TABLE>
The fixed asset write-downs relate to assets that will be abandoned or
sold. The remaining accruals will be utilized throughout fiscal 2000 and 2001,
as leases expire, consolidations occur and severance payments are made.
40
<PAGE> 44
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3 PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
Land................................................... $ 8,699 $ 8,699
Buildings.............................................. 65,863 68,776
Fixtures, equipment and machinery...................... 285,533 264,642
Leasehold improvements................................. 61,590 56,701
-------- --------
421,685 398,818
Less accumulated depreciation and amortization......... 243,574 226,233
-------- --------
$178,111 $172,585
======== ========
</TABLE>
4 INTANGIBLES
Intangibles consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
Excess of purchase price over fair value of assets
acquired............................................. $ 39,600 $ 38,900
Other intangible assets:
Purchased technology................................. 52,827 52,827
Company tradename and trademarks..................... 51,384 47,678
Other................................................ 12,969 12,969
-------- --------
156,780 152,374
Less accumulated amortization.......................... 87,888 83,726
-------- --------
$ 68,892 $ 68,648
======== ========
</TABLE>
5 FINANCING AGREEMENTS
On August 23, 1996, the Company entered into a $1,700,000 Credit Agreement
underwritten by a syndicate of major banks of which $950,000 was available in
the form of a six-year term loan facility for the purpose of financing the
Company's acquisition of common stock pursuant to a Dutch Auction self-tender
offer. Under the Dutch Auction self-tender offer, the Company repurchased
approximately 17.0 million common shares at a price of $36.00 per share. Based
on the number of shares tendered, the Company borrowed $640,000 from this
facility. The undrawn portion of $310,000 was immediately canceled upon funding
of the share repurchase.
The Credit Agreement also included a $750,000 revolving credit facility,
expiring on August 31, 2002 which replaced the Company's previous $300,000
credit line. The revolving credit facility is available to finance the
short-term working capital needs of the Company, if required. As part of the
agreement, the Company is required to pay certain commitment fees on the unused
portion of the revolving credit facility. The Credit Agreement included various
covenants including restrictions on asset acquisitions, capital expenditures and
future indebtedness, and the requirement to maintain a minimum interest coverage
ratio. Under the terms of the agreement there are various options under which
interest is calculated.
On July 1, 1997, the Company amended and restated the Credit Agreement.
This amendment left the remaining portion of the six-year term loan of $522,398
(as of July 1, 1997) on substantially the same
41
<PAGE> 45
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payment schedule, after adjusting for the $100,000 in optional prepayments made
in 1997. The amendment also reduced the revolving credit portion of the facility
from $750,000 to $400,000. As part of the amendment, the commitment fees the
Company is required to pay on the unused portion of the revolving credit
facility as well as the borrowing margins over the London Interbank Offer Rate
on the used portion of the revolving credit facility were reduced. The amendment
also removed or relaxed covenants pertaining to restrictions on asset
acquisitions and sales, capital expenditures, future indebtedness and
investments and reduced the borrowing margins charged by the banks on the
variable rate term loan. All other material terms and conditions of the Credit
Agreement remain unchanged.
On September 30, 1998 the Company further amended the Credit Agreement. The
amendment relaxed certain financial covenants through June 2000, at which time
they will return to their original levels. At December 31, 1999 and 1998, there
were no borrowings outstanding under the revolving credit portion of this
agreement.
At December 31, 1999 and 1998, the effective rate of interest on the
variable term loan was approximately 6.2% and 5.9%, respectively. In addition,
the Company is amortizing fees and expenses associated with the credit agreement
over the life of the agreement.
Maturities of long-term debt during the five-year period ending December
31, 2004 are $185,167 in 2000, $121,905 in 2001, $147,508 in 2002, $119 in 2003
and $129 in 2004.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
Variable Rate Term Loan due August 31, 2002 with
interest payable quarterly........................... $342,398 $427,398
Medium-term notes, bearing interest at rates
approximating 6.75%, due May 15, 2000, with interest
payable semiannually on May 15 and November 15....... 100,000 100,000
6.75% debentures due September 15, 2005, with interest
payable semiannually on March 15 and September 15.... 99,252 99,103
Bank and other notes payable........................... 13,819 14,571
-------- --------
555,469 641,072
Less current portion................................... 185,167 86,640
-------- --------
$370,302 $554,432
======== ========
</TABLE>
The Company has various arrangements with numerous banks which provide an
aggregate of approximately $703,000 of uncommitted facilities, substantially all
of which are available to the Company's foreign subsidiaries. Of this amount,
$283,000 is available for short-term borrowings and bank overdrafts, with the
remainder available for letters of credit for inventory purchases. In addition
to amounts reported as notes payable to banks, approximately $195,000 was
outstanding for open letters of credit for inventory purchases at December 31,
1999 and $18,400 was outstanding for standby letters of credit at December 31,
1999. The weighted average interest rate on notes payable to banks was 8.3% and
8.5% At December 31, 1999 and 1998, respectively.
The Company utilizes a commercial paper program under which it can borrow
up to $200,000 for periods not to exceed 270 days. This program is supported, to
the extent available, by the unused portion of the $400,000 revolving credit
facility. At December 31, 1999, the Company had no commercial paper obligations
outstanding.
42
<PAGE> 46
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6 LEASING ARRANGEMENTS
The Company leases various offices, warehouses, retail store facilities and
certain of its data processing and warehouse equipment under lease arrangements
expiring between 2000 and 2006.
In March 1998, the Company entered into an operating lease agreement for a
Worldwide Headquarters and North American Operations facility scheduled to open
in 2000. Under the agreement, the lessor purchases the property, pays for the
construction costs and subsequently leases the facility to the Company. The
initial lease term is six years with five two-year renewal options. Lease
payments will commence the earlier of occupancy or March 27, 2001 and the
expected annual payments are approximately $10,000. In June 1998, the Company
entered into an operating lease agreement for the purpose of financing
construction costs for a new distribution facility in the Netherlands. Under the
agreement, the lessor leased the land pursuant to a ninety-nine year ground
lease, paid for the construction costs and subsequently leased the entire
facility to the Company. The initial lease term is six years with one five-year
renewal option. These leases provide for substantial residual value guarantees
by the Company and include purchase options at the original cost of the
properties. The maximum amount of the residual value guarantees relative to the
assets under these two leases is projected to be $162,000. As part of these
agreements, the Company is required to comply with various financial and other
covenants, generally similar to those contained in its other borrowing
agreements.
Minimum annual rentals under operating leases (including the Worldwide
Headquarters and North American Operations facility lease discussed above) for
the five years subsequent to December 31, 1999 and in the aggregate are as
follows:
<TABLE>
<CAPTION>
LESS: AMOUNTS
TOTAL REPRESENTING NET
AMOUNT SUBLEASE INCOME AMOUNT
-------- --------------- --------
<S> <C> <C> <C>
2000........................................... $ 43,984 $2,087 $ 41,897
2001........................................... 42,277 2,107 40,170
2002........................................... 36,574 2,003 34,571
2003........................................... 30,393 1,105 29,288
2004........................................... 25,007 311 24,696
2005 and thereafter............................ 20,498 1,088 _ 19,410
-------- ------ --------
$198,733 $8,701 $190,032
======== ====== ========
</TABLE>
Total rent expense for all operating leases amounted to $46,650, $45,771,
and $45,827 for the years ended December 31, 1999, 1998 and 1997, respectively.
7 EMPLOYEE BENEFIT PLANS
The Company sponsors defined contribution retirement plans covering
substantially all of its domestic employees and certain employees of its foreign
subsidiaries. Contributions are determined at the discretion of the Board of
Directors. Aggregate contributions made by the Company to the plans and charged
to operations in 1999, 1998, and 1997 were $18,588, $14,394 and $13,696,
respectively. In addition, certain foreign subsidiaries are required to provide
benefits pursuant to government regulations.
43
<PAGE> 47
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8 STOCK PLANS
The Company has stock plans which provide for the grant of options to
purchase shares of the Company's common stock to key employees, other persons or
entities who make significant contributions to the success of the Company, and
eligible members of the Company's Board of Directors. The Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations in accounting for its
employee stock options. Under APB 25, as long as the exercise price of the
Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Under the 1994 Equity Incentive Plan, options may be incentive stock
options or "non-qualified options" under applicable provisions of the Internal
Revenue Code. The exercise price of any stock option granted may not be less
than fair market value at the date of grant except in the case of grants to
participants who are not executive officers of the Company and in certain other
limited circumstances. The vesting schedule for options granted under the 1994
Equity Incentive Plan is determined by the Compensation Committee of the Board
of Directors. The 1994 Equity Incentive Plan also permits the Company to grant
restricted stock to key employees and other persons or entities who make
significant contributions to the success of the Company. The restrictions and
vesting schedule for restricted stock granted under this Plan are determined by
the Compensation Committee of the Board of Directors. The Company also has an
option plan for its Directors. Under this plan, a fixed amount of options are
granted annually to all non-employee Directors. Grants of options under the
Directors plan generally vest in equal annual installments over three years. The
Directors plan also permits discretionary grants of options to non-employee
directors.
The Company has two employee stock purchase plans. Under the 1987 Employee
Stock Purchase Plan, eligible employees are granted options to purchase shares
of the Company's common stock through voluntary payroll deductions during two
option periods, running from January 1 to June 30 and from July 1 to December
31, at a price equal to the lower of 85% of market value at the beginning or end
of each period. Under the 1992 Employee Stock Purchase Plan, for certain
foreign-based employees, eligible employees are granted options to purchase
shares of the Company's common stock during two option periods, running from
January 1 to June 30 and from July 1 to December 31, at the market price at the
beginning of the period. The option becomes exercisable 90 days following the
date of grant and expires on the last day of the option period. Accordingly, no
options were outstanding under these plans at December 31, 1999 and 1998. During
1999, 1998 and 1997, respectively, 292,432, 223,583 and 151,210 shares were
issued pursuant to these plans.
In June 1990, the Company adopted a shareholders' rights plan and declared
a dividend distribution of one common stock purchase right ("Right") for each
share of common stock outstanding. Each Right entitles the holder to purchase
one share of the Company's common stock at a price of $60 per share, subject to
adjustment. The Rights will be exercisable only if a person or group of
affiliated or associated persons acquires beneficial ownership of 10% or more of
the outstanding shares of the Company's common stock or commences a tender or
exchange offer that would result in a person or group owning 10% or more of the
outstanding common stock, or in the event that the Company is subsequently
acquired in a merger or other business combination. When the Rights become
exercisable, each holder would have the right to purchase, at the then-current
exercise price, common stock of the surviving company having a market value of
two times the exercise price of the Right. The Company can redeem the Rights at
$.01 per Right at any time prior to expiration on June 14, 2000.
At December 31, 1999, 12,444,655 shares of common stock were reserved for
issuance under the Company's various stock plans and 68,714,165 shares were
reserved for issuance under the shareholders' rights plan.
44
<PAGE> 48
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule summarizes the changes in stock options during the
three years ended December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDER OPTION
---------------------------------------------------
NON-QUALIFIED
STOCK OPTION PRICE WEIGHTED AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
------------- -------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31, 1996....... 9,915,706 $8.75 - $41.63 $27.54
---------- -------------- ------
Granted................................ 1,205,704 33.75 - 49.25 35.51
Exercised.............................. (399,111) 8.75 - 36.75 25.72
Canceled............................... (534,680) 24.00 - 41.63 33.14
---------- -------------- ------
Outstanding at December 31, 1997....... 10,187,619 10.63 - 49.25 28.26
---------- -------------- ------
Granted................................ 4,187,889 12.63 - 31.88 13.69
Exercised.............................. (67,440) 10.63 - 28.87 17.60
Canceled............................... (5,066,327) 12.63 - 49.25 32.21
---------- -------------- ------
Outstanding at December 31, 1998....... 9,241,741 11.37 - 48.37 19.54
---------- -------------- ------
Granted................................ 1,558,845 9.88 - 21.56 16.44
Exercised.............................. (7,214) 11.37 - 13.75 13.46
Canceled............................... (2,440,813) 11.37 - 47.75 18.10
---------- -------------- ------
Outstanding at December 31, 1999....... 8,352,559 $9.88 - $48.37 $19.45
---------- -------------- ------
</TABLE>
The following information applies to options outstanding at December 31,
1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 9.88 - $14.81 2,711,751 8.4 $12.64 917,607 $12.63
$14.88 - $21.56 3,613,826 4.4 $17.62 2,365,922 $17.30
$23.50 - $33.25 1,082,311 5.2 $28.41 903,564 $28.50
$33.75 - $48.37 944,671 6.3 $36.62 711,430 $36.82
</TABLE>
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 above market employee stock
options for a smaller number of new options, with a new four-year vesting
schedule. The number of existing outstanding option shares exchanged for the new
option shares was at a ratio of 1.25:1. The new options have an exercise price
of $12.625 per share which was the current market price as of October 6, 1998.
Executive officers of the Company who were also directors and certain other
option holders were not eligible to participate in this program. Of the
9,932,000 option shares outstanding under the Company's stock option programs as
of October 6, 1998, approximately 3,900,000 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.
At December 31, 1999, 1998 and 1997, options to purchase 4,898,523,
4,220,722, and 4,324,208, shares of common stock were exercisable, and
3,586,283, 3,648,581, and 3,032,790 shares, respectively, were available for
future grants under the Company's stock equity plans. Pro forma information
regarding net income and earnings per share is required by Statement 123, which
requires that the information be determined as if the Company has accounted for
its employee stock options granted subsequent to December 31, 1994 under the
45
<PAGE> 49
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value method of that statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1999, 1998 and 1997,
respectively: risk-free interest rates ranging from 4.2% to 7.7%; dividend
yields of .00%, volatility factors of the expected market price of the Company's
common stock of .50 in 1999, .52 in 1998 and .35 in 1997; and a weighted-average
expected life of the option of 3.5 years in 1999 and 1998 and 4.2 years in 1997.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- --------
<S> <C> <C> <C>
Pro forma net income.................................. $5,789 $27,008 $127,506
Pro forma basic earnings per share.................... $ 0.11 $ 0.49 $ 2.31
Pro forma diluted earnings per share.................. $ 0.11 $ 0.49 $ 2.23
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and 1997
is $7.09, $6.70, and $13.09, respectively.
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 2001.
9 ACQUISITION OF COMMON STOCK
Under various share repurchase programs from 1992 to 1995, the Board of
Directors authorized the repurchase of up to $800,000 in Reebok common stock in
the open market or privately-negotiated transactions. As of December 31, 1999,
the Company had approximately $126,600 available for future repurchases of
common stock under these programs (See Note 10).
10 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 consolidated balance sheet at December 31, 1998 as "Outstanding
redemption value of equity put options." At December 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 December 31, 1999, no equity put options were outstanding.
11 FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company to estimate
the fair value of its financial instruments:
Cash and cash equivalents and notes payable to banks: the carrying amounts
reported in the balance sheet approximate fair value. Long-term debt: the fair
value of the Company's medium-term notes and debentures is estimated based on
quoted market prices. The fair value of other long-term debt is estimated using
discounted cash flow analyses, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements. Unrealized gains or losses on
foreign currency exchange contracts and options: the fair value of the Company's
foreign currency exchange contracts is estimated based on current foreign
exchange rates. Fair market value of interest rate swaps: the fair value of the
Company's interest rate swaps is estimated based on current interest rates.
46
<PAGE> 50
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and fair value of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
-------------------------- --------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Long-term debt.................... $555,469 $641,072 $538,459 $629,789
Unrealized gains (losses) on
foreign currency exchange
contracts and options........... (133) 2,024 7,270 (2,817)
Interest rate swaps............... 0 0 4,378 (3,622)
</TABLE>
Foreign Exchange Forwards and Options
The Company enters into forward currency exchange contracts and options to
hedge its exposure for merchandise purchased in U.S. dollars that will be sold
to customers in other currencies. Realized and unrealized gains and losses on
these contracts are included in net income except that gains and losses on
contracts which hedge specific foreign currency commitments are deferred and
accounted for as a part of the transaction. The Company also uses forward
currency exchange contracts and options to hedge significant intercompany assets
and liabilities denominated in other than the functional currency. Contracts
used to hedge intercompany balances are marked to market and the resulting
transaction gain or loss is included in the determination of net income.
Foreign currency losses realized from settlements of transactions included
in other income (expense) for the years-ended December 31, 1999, 1998 and 1997
were $10,000, $12,000 and $8,100, respectively. The Company has used forward
exchange contracts and options as an element of its risk management strategy for
several years.
At December 31, 1999, the Company had option and forward currency exchange
contracts, all having maturities of less than one year, with a notional amount
aggregating $194,411. The contracts involved fifteen different foreign
currencies, of which the Euro currency represented 31.0% of the aggregate
notional amount. The notional amount of contracts intended to hedge merchandise
purchases was $98,474. Deferred gains (losses) on these contracts were not
material at December 31, 1999 and 1998.
Interest Rate Swaps
The Company uses interest rate swap agreements to manage its exposure to
interest rate movements by effectively converting a portion of its variable-rate
long-term debt from floating to fixed rates. These agreements involve the
exchange of variable rate payments for fixed rate payments without the effect of
leverage and without the exchange of the underlying principal amount. Interest
rate differentials paid or received under these swap agreements are recognized
as adjustments to interest expense.
During the fourth quarter of 1996, the Company entered into several
amortizing interest rate swaps with a group of financial institutions having an
initial notional value of $320,000 and expiring on December 31, 2000. The
notional amount of the swaps is reduced each year in accordance with the
expected repayment schedule of the Company's variable-rate term loan. In January
1998, the Company entered into additional interest rate swaps in the amount of
$150,000 with respect to the variable-rate term loan. In June 1999, the Company
entered into an interest rate swap in the amount of $37,327, expiring in June
2002, in conjunction with the Company's operating lease for its Rotterdam
Distribution Center. The terms of the swaps require the Company to make fixed
rate payments on a quarterly basis whereas the Company will receive variable
rate payments based on the three-month U.S. dollar LIBOR. At December 31, 1999
and 1998, the notional amount of interest rate swaps outstanding was $227,000
and $295,000 respectively. Interest expense in 1999, 1998 and 1997 would not
have been materially different if these swap agreements had not been used.
47
<PAGE> 51
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents, accounts
receivable and hedging instruments.
The Company places cash equivalents with high credit financial institutions
and, by policy, limits the amount of credit exposure to any one financial
institution. Credit risk on trade receivables is somewhat minimized as a result
of the Company's worldwide customer base and the fact that no one customer
represents 10% or more of the Company's net sales.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to hedging instruments. The counterparties to
these contracts are major financial institutions. The Company continually
monitors its positions and the credit ratings of its counterparties and places
dollar and term limits on the amount of contracts it enters into with any one
party.
12 INCOME TAXES
The components of income before income taxes and minority interest are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Domestic........................................... $(25,090) $(54,064) $(32,783)
Foreign............................................ 53,128 91,094 190,868
-------- -------- --------
$ 28,038 $ 37,030 $158,085
======== ======== ========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $ 2,088 $ 1,028 $(34,314)
State............................................. 1,080 1,978 (324)
Foreign........................................... 16,289 36,993 64,413
------- -------- --------
19,457 39,999 29,775
Deferred:
Federal........................................... (9,637) (19,653) (8,940)
State............................................. (2,846) (1,423) (1,900)
Foreign........................................... 3,119 (6,998) (6,445)
------- -------- --------
(9,364) (28,074) (17,285)
------- -------- --------
$10,093 $ 11,925 $ 12,490
======= ======== ========
</TABLE>
During 1992, the Company recorded a write-down in the carrying value of its
Avia subsidiary in the amount of $100,000 with no corresponding tax benefit
recognized in that year due to the uncertainty concerning the ultimate
deductibility of the charge. In June 1996, substantially all of the operating
assets and business of Avia were sold. After the sale, in December 1996, the
Company requested a pre-filing determination from the Internal Revenue Service
("IRS") regarding the deductibility of certain losses pertaining to the sale of
Avia. In August 1997, the IRS notified the Company that it had approved the
Company's tax treatment concerning the deductibility of the Avia losses and
accordingly, a corresponding reduction in income taxes totaling $40,000 was
recorded in the third quarter of that year.
48
<PAGE> 52
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $430,057, $409,369, and $405,265 at December 31, 1999, 1998 and
1997, respectively. The Company has provided for the estimated residual U.S. tax
on a portion of these earnings which may not be indefinitely reinvested. The
remaining earnings are considered to be indefinitely reinvested. Upon
distribution of those earnings in the form of dividends or otherwise, some
portion of the distribution would be subject to both U.S. income taxes and
foreign withholding taxes, less an adjustment for applicable foreign tax
credits. Determination of the amount of U.S. income tax liability that would be
incurred is not practicable because of the complexities associated with its
hypothetical calculation; however, unrecognized foreign tax credits and net
operating loss carryforwards may be available to reduce some portion of any U.S.
income tax liability.
Income taxes computed at the federal statutory rate differ from amounts
provided as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- -----
<S> <C> <C> <C>
Tax at statutory rate....................................... 35.0% 35.0% 35.0%
State taxes, less federal tax effect........................ (6.3) 1.5 1.5
Effect of tax rates of foreign subsidiaries and joint
ventures.................................................. 2.9 (5.1) (4.3)
Tax benefit from Avia losses................................ (25.3)
Effect of expenses with no tax benefit...................... 3.9 0.7 0.4
Other, net.................................................. 0.5 0.1 0.6
---- ---- -----
Provision for income taxes.................................. 36.0% 32.2% 7.9%
==== ==== =====
</TABLE>
Deferred income taxes reflect the expected utilization of tax net operating
loss carryforwards, tax credit carryforwards and the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Net deferred tax assets are attributable to the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
Inventory.............................................. $ 31,011 $ 37,175
Accounts receivable.................................... 22,871 26,641
Liabilities............................................ 19,377 11,849
Depreciation........................................... 14,327 8,436
Accrued special charges................................ 18,415 11,707
Tax net operating loss carryforwards................... 65,626 69,707
Tax credit carryforwards............................... 25,305 16,710
Other, net............................................. 63 (4,594)
Undistributed earnings of foreign subsidiaries......... (65,000) (55,000)
-------- --------
Total.................................................. $131,995 $122,631
======== ========
</TABLE>
At December 31, 1999, the Company had U.S. federal and state and local tax
net operating loss carryforwards and foreign tax net operating loss
carryforwards for certain foreign subsidiaries, the tax effect of which is
approximately $65,626. These carryforwards will expire as follows: $4,557 in
2001, $3,772 in 2002, $10,847 in 2003, $1,873 in 2004, and $44,577 thereafter.
The Company also has available tax credit carryforwards of approximately
$25,305, which will expire as follows: $5,715 in 2004, and $19,590 thereafter.
49
<PAGE> 53
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13 EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net
earnings available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if options to acquire common stock were
exercised.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Numerator:
Net Income................................. $11,045 $23,927 $135,119
------- ------- --------
Denominator:
Denominator for basic earnings per share --
weighted average shares................. 56,065 56,394 56,162
Dilutive employee stock options and equity
put options............................. 465 635 2,147
------- ------- --------
Denominator for diluted earnings per share --
adjusted weighted average shares and
assumed conversions........................ 56,530 57,029 58,309
======= ======= ========
Basic earnings per share..................... $ .20 $ .42 $ 2.41
======= ======= ========
Diluted earnings per share................... $ .20 $ .42 $ 2.32
======= ======= ========
</TABLE>
14 SEGMENT AND RELATED INFORMATION
The Company designs and markets footwear and/or apparel products, under
various brand names. All products are generally manufactured using similar
manufacturing processes. Additionally, these products share similar distribution
methods and are marketed and sold to a similar type of customer. Operating
results are assessed on an aggregate basis to make decisions about resources to
be allocated among the brands.
Consequently, as permitted by the provisions of Statement 131, "Disclosure
About Segments of an Enterprise and Related Information," the Company has one
reportable segment for financial statement purposes.
Net sales to unaffiliated customers and long-lived assets by geographic
area are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales:
United States................................ $1,609,697 $1,858,316 $2,000,883
United Kingdom............................... 545,562 522,393 661,358
Europe....................................... 476,695 585,686 510,981
Other countries.............................. 267,918 258,197 470,377
---------- ---------- ----------
$2,899,872 $3,224,592 $3,643,599
========== ========== ==========
Long-lived assets:
United States................................ $ 167,068 $ 170,537 $ 175,744
United Kingdom............................... 28,149 28,697 23,565
Europe....................................... 40,737 30,138 14,388
Other countries.............................. 11,049 11,861 9,046
---------- ---------- ----------
$ 247,003 $ 241,233 $ 222,743
========== ========== ==========
</TABLE>
50
<PAGE> 54
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15 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. In April, 1999 the Company settled for $4,000 a lawsuit
filed by a former distributor in Brazil in which the plaintiff asserted a claim
for damages in excess of $50,000. The settlement was recorded in the Company's
second quarter. The Company recorded a special charge in the fourth quarter for
the settlement of litigation filed against the Company by Supracor, Inc. (See
Note 2.)
16 SUBSEQUENT EVENTS
Subsequent to December 31, 1999, the Company acquired the remaining
minority interest of certain of its Asia Pacific subsidiaries. The company also
sold its Swiss subsidiary to local management. The impact of these events is
deemed not material to the consolidated financial statements.
17 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of operating results and net income (loss) per share for the
quarterly periods in the two years ended December 31, 1999 is set forth below.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 1999
Net sales..................................... $785,784 $697,393 $793,937 $622,758
Gross profit.................................. 298,018 264,801 309,260 243,879
Net income (loss)............................. 17,905 4,568 3,266 (14,694)
Basic earnings (loss) per share............... .32 .08 .06 (.26)
Diluted earnings (loss) per share............. .32 .08 .06 (.26)
YEAR ENDED DECEMBER 1998
Net sales..................................... $880,123 $760,567 $878,335 $705,567
Gross profit.................................. 314,051 280,328 331,994 260,754
Net income (loss)............................. (3,358) 6,146 28,229 (7,090)
Basic earnings (loss) per share............... (.06) .11 .50 (.13)
Diluted earnings (loss) per share............. (.06) .11 .50 (.13)
</TABLE>
Net income for the fourth quarter of 1999 includes a special charge of
$15,120 after taxes, or $0.27 per diluted share, pertaining to the settlement of
litigation and for restructuring activities in the Company's global operations.
Net income for the third quarter of 1999 includes a special charge of
$24,320 after taxes, or $0.43 per diluted share, for restructuring activities in
the company's global operations.
Net income for the first quarter of 1998 includes a special charge of
$23,674 after taxes, or $0.42 per diluted share, for personnel-related expenses
and certain other expenses associated with the restructuring or adjustment of
under-performing marketing contracts.
51
<PAGE> 55
REEBOK INTERNATIONAL LTD.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Reebok International Ltd.
We have audited the accompanying consolidated balance sheets of Reebok
International Ltd. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Reebok International Ltd. and subsidiaries at December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
- ------------------------------------
Boston, Massachusetts
February 2, 2000
52
<PAGE> 56
REEBOK INTERNATIONAL LTD.
REPORT OF MANAGEMENT
FINANCIAL STATEMENTS
The management of Reebok International Ltd. and its subsidiaries has
prepared the accompanying financial statements and is responsible for their
integrity and fair presentation. The statements, which include amounts that are
based on management's best estimates and judgments, have been prepared in
conformity with accounting principles generally accepted in the United States
and are free of material misstatement. Management has also prepared other
information in the annual report and is responsible for its accuracy and
consistency with the financial statements.
INTERNAL CONTROL SYSTEM
Reebok International Ltd. and its subsidiaries maintain a system of
internal control over financial reporting, which is designed to provide
reasonable assurance to the Company's management and Board of Directors as to
the integrity and fair presentation of the financial statements. Management
continually monitors the system of internal control for compliance, and actions
are taken to correct deficiencies as they are identified. Even an effective
internal control system, no matter how well designed, has inherent
limitations -- including the possibility of the circumvention or overriding of
controls -- and therefore can provide only reasonable assurance with respect to
financial statement preparation. Further, because of changes in conditions,
internal control system effectiveness may vary over time.
The Company maintains an internal auditing program that monitors and
assesses the effectiveness of the internal controls system and recommends
possible improvements thereto. The Company's accompanying financial statements
have been audited by Ernst & Young LLP, independent auditors, whose audit was
made in accordance with auditing standards generally accepted in the United
States and included a review of the system of internal accounting controls to
the extent necessary to determine the audit procedures required to support their
opinion on the consolidated financial statements. Management believes that, as
of December 31, 1999, the Company's system of internal control is adequate to
accomplish the objectives discussed herein.
<TABLE>
<S> <C>
Reebok International Ltd.,
/s/ PAUL FIREMAN /s/ KENNETH WATCHMAKER
- ---------------------------------------- ---------------------------------------
Paul Fireman Kenneth Watchmaker
Chairman Executive Vice President,
President and Chief Executive Officer Chief Financial Officer and Treasurer
</TABLE>
53
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change of accountants nor any disagreements with
accountants on any matter of accounting principles or practices or financial
disclosure required to be reported under this Item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item with respect to the Registrant's
directors is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on May 2, 2000,
which will be filed with the SEC on or before March 30, 2000 (the "2000 Proxy
Statement"), under the headings "Information with Respect to Nominees",
"Transactions with Management and Affiliates" and "Compliance with Section 16(a)
of the Securities Exchange Act of 1934". Information called for by this Item
with respect to the Registrant's executive officers is set forth under
"Executive Officers of Registrant" in Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
from the 2000 Proxy Statement under the headings "Compensation of Directors",
"Executive Compensation", "Supplemental Executive Retirement Plan", "Employee
Agreements", "Report of Compensation Committee on Executive Compensation" and
"Performance Graphs".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
from the 2000 Proxy Statement under the heading "Beneficial Ownership of
Shares".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
from the 2000 Proxy Statement under the heading "Transactions with Management
and Affiliates".
54
<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
The following consolidated financial statements and financial
statement schedule of the Company are included in Item 14(d):
<TABLE>
<CAPTION>
FORM 10-K
PAGE
---------
<S> <C>
Consolidated Balance Sheets at December 31, 1999 and
1998.................................................... 34
For each of the three years ended December 31, 1999, 1998
and 1997:
Consolidated Statements of Income....................... 35
Consolidated Statements of Stockholders' Equity......... 36
Consolidated Statements of Cash Flows................... 37
Notes to Consolidated Financial Statements................ 38
</TABLE>
2. Financial Statement Schedules
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts.......... S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the SEC are not required under the related
instructions or are inapplicable, and therefore have been omitted.
3. Exhibits
Listed below are all the Exhibits filed as part of this report.
Certain Exhibits are incorporated by reference from documents previously
filed by the Company with the SEC pursuant to Rule 12b-32 under the
Securities Exchange Act of 1934, as amended.
55
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
3.1 Restated Articles of Organization of the Company, as
amended(1)
3.2 By-laws, as amended(5)(6)(8)(18)
4.1 Indenture, dated as of September 15, 1988, as amended and
restated by the First Supplemental Indenture, dated as of
January 22, 1993, between the Company and Citibank N.A., as
Trustee(4)(12)
4.2 Common Stock Rights Agreement dated as of June 14, 1990
between the Company and The First National Bank of Boston,
as Rights Agent, as amended(7)(9)(10)
4.3 Amendment No. 3 dated as of January 1, 1999 to Common Stock
Rights Agreement dated as of June 14, 1990 between the
Company and The First National Bank of Boston, as Rights
Agent, as amended(21)
10.1 Distributorship Agreement between Reebok International
Limited and the Company(2)
10.2 Trademark License Agreement between Reebok International
Limited and the Company(2)
10.3 Lease Agreement, dated March 1, 1988, as amended, between
the Company and North Stoughton Industrial Park Development
Trust(5)(13)
10.4 Purchase and Sale Agreement between the Company and Pentland
Group plc dated March 8, 1991(8)
10.5 Agreements with various banks in Hong Kong reflecting
arrangements for letter of credit facilities(8)
10.6 Credit Agreement, dated August 23, 1996, among the Company,
the Lenders and Co-Agents named therein and Credit Suisse,
as Administrative Agent, as amended by the First Amendment
dated as of August 23, 1996(15)
10.7 Amended and Restated Credit and Guarantee Agreement, dated
as of July 1, 1997, among the Company, Reebok International
Limited, the Lenders and Co-Agents named therein, Citibank
N.A. as Documentation Agent and Credit Suisse, as
Administrative Agent(17)
10.8 Amendment No. 2 dated as of September 30, 1998 to the
Amended and Restated Credit and Guarantee Agreement dated as
of July 1, 1997, among the Company, Reebok International
Limited, the Lenders and Co-Agents named therein, Citibank
N.A. as Documentation Agent and Credit Suisse, as
Administrative Agent(22)
10.9 Participation Agreement dated as of March 27, 1998 among the
Company, as Lessee and as Guarantor, Credit Suisse Leasing
92A, L.P., as Lessor, the Lenders named therein, Credit
Suisse First Boston, as Administrative Agent and Wachovia
Bank, N.A. as Syndication Agent(19)
10.10 First Amendment dated as of September 30, 1998 to
Participation Agreement dated as of March 27, 1998 among the
Company, as Lessee and Guarantor, Credit Suisse Leasing 92A,
L.P., as Lessor, the Lenders named therein, Credit Suisse
First Boston, as Administrative Agent and Wachovia Bank,
N.A. as Syndication Agent(22)
10.11 Lease dated as of March 27, 1998 between Credit Suisse
Leasing 92A, L.P., as Lessor, and the Company, as Lessee(19)
10.12 Guaranty from the Company dated as of March 27, 1998(19)
10.13 Reebok International Ltd. 1994 Equity Incentive Plan, as
amended(16)(17)*
10.14 Amendment to Reebok International Ltd. 1994 Equity Incentive
Plan dated April 19, 1999(23)*
10.15 Reebok International Ltd. Equity and Deferred Compensation
Plan for Directors, as amended(13)(18)*
10.16 Amendment to Reebok International Ltd. Equity and Deferred
Compensation Plan for Directors dated as of April 19,
1999(23)*
</TABLE>
56
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
10.17 Reebok International Ltd. 1985 Stock Option Plan, as
amended(11)*
10.18 Reebok International Ltd. 1987 Stock Option Plan for
Directors, as amended(12)*
10.19 Reebok International Ltd. 1987 Stock Bonus Plan(3)*
10.20 Reebok International Ltd. Excess Benefits Plan(8)*
10.21 Reebok International Ltd. Supplemental Executive Retirement
Plan(14)*
10.22 Amendment to Supplemental Executive Retirement Plan dated as
of February 23, 1999(23)*
10.23 Reebok International Ltd. Executive Performance Incentive
Plan, as amended(14)(16)*
10.24 Stock Option Agreement with Paul B. Fireman(8)*
10.25 Split-Dollar Life Insurance Agreement with Paul B.
Fireman(11)*
10.26 Letter Agreement with Paul R. Duncan dated December 29,
1997(18)*
10.27 Employment Agreement with Kenneth Watchmaker(12)*
10.28 Amended and Restated Change of Control Agreement with
Kenneth Watchmaker*
10.29 Supplemental Retirement Program for Kenneth Watchmaker(12)*
10.30 Change of Control Agreement with Angel Martinez(17)*
10.31 Employment Agreement dated April 17, 1996 with Roger
Best(16)*
10.32 Employment Agreement dated September 11, 1997 with Roger
Best(18)*
10.33 Amended and Restated Change of Control Agreement with James
R. Jones, III*
10.34 Change of Control Agreement with Barry Nagler(17)*
10.35 Change of Control Agreement with David A. Pace*
10.36 Form of Non-Competition Agreements signed by James R. Jones,
III, Angel Martinez, Robert Meers, Barry Nagler, Kenneth
Watchmaker, Anthony Tiberii, Terry R. Pillow, Paul R.
Duncan, David A. Perdue and David A. Pace(18)*
10.37 Employment Agreement dated September 8, 1998 between Carl J.
Yankowski and the Company(20)*
10.38 Promissory Note dated September 11, 1998 by Carl J.
Yankowski to the Company(20)*
10.39 Letter Agreement dated July 14, 1998 between Robert Meers
and the Company(20)*
10.40 Letter Agreement dated December 23, 1999 between Carl J.
Yankowski and the Company*
10.41 Agreement dated as of April 19, 1999 between the Company and
Paul Fireman(25)*
10.42 Consent dated as of April 19, 1999 from Paul Fireman to the
Company(25)*
10.43 Consent dated as of April 19, 1999 from Ken Watchmaker to
the Company(25)*
12.1 Statement Re Computation of Ratio of Earnings to Fixed
Charges
21.1 List of Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Management Contract or Compensatory Plan or Arrangement.
(1) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 30,
1987 and incorporated by reference herein and as an Exhibit to Registration
Statement No. 11-13370 and incorporated by reference herein.
(2) Filed as an Exhibit to Registration Statement No. 2-98367 and incorporated
by reference herein.
(3) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 28,
1988 and incorporated by reference herein.
57
<PAGE> 61
(4) Filed as an Exhibit to Reebok International Ltd. Form 8-K filed on
September 29, 1988 and incorporated by reference herein.
(5) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 30,
1989 and incorporated by reference herein.
(6) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 26,
1990 and incorporated by reference herein.
(7) Filed as an Exhibit to Reebok International Ltd. Form 8-A filed on July 31,
1990 and incorporated by reference herein.
(8) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 28,
1991 and incorporated by reference herein.
(9) Filed as an Exhibit to Reebok International Ltd. Form 8 Amendment to
Registration Statement on Form 8-A filed on April 4, 1991 and incorporated
by reference herein.
(10) Filed as an Exhibit to Reebok International Ltd. Form 8 Amendment to
Registration Statement on Form 8-A filed on December 13, 1991 and
incorporated by reference herein.
(11) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 27,
1992 and incorporated by reference herein.
(12) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 26,
1993 and incorporated by reference herein.
(13) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 30,
1995 and incorporated by reference herein.
(14) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 29,
1996 and incorporated by reference herein.
(15) Filed as an Exhibit to Reebok International Ltd. Form 10-Q for the quarter
ended September 30, 1996 and incorporated herein by reference.
(16) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 27,
1997 and incorporated by reference herein.
(17) Filed as an Exhibit to Reebok International Ltd. Form 10-Q for the quarter
ended June 30, 1997 and incorporated herein by reference.
(18) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 25,
1998 and incorporated by reference herein.
(19) Filed as an Exhibit to Reebok International Ltd. Form 10-Q for the quarter
ended March 31, 1998 and incorporated herein by reference.
(20) Filed as an Exhibit to Reebok International Ltd. Form 10-Q for the quarter
ended September 30, 1998 and incorporated herein by reference.
(21) Filed as an Exhibit to Reebok International Ltd. Form 8-A/A filed on
February 24, 1999 and incorporated by reference herein.
(22) Filed as an Exhibit to Reebok International Ltd. Form 8-K filed on October
22, 1998 and incorporated by reference herein.
(23) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March 24,
1999 and incorporated by reference herein.
(24) Filed as an Exhibit to Reebok International Ltd. Form 10-Q for the quarter
ended March 31, 1999 and incorporated by reference herein.
(25) Filed as an Exhibit to Reebok International Ltd. Form 10-Q for the quarter
ended June 30, 1999 and incorporated by reference herein.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the last quarter of
1999.
58
<PAGE> 62
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section
of this report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a separate section
of this report.
59
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REEBOK INTERNATIONAL LTD.
By: /s/ KENNETH WATCHMAKER
------------------------------------
Kenneth I. Watchmaker
Executive Vice President,
Chief Financial Officer
and Treasurer
Dated: March 30, 2000
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
<TABLE>
<C> <S>
/s/ PAUL B. FIREMAN Director, Chairman of the Board and
- -------------------------------------------------------- President (Chief Executive Officer)
Paul B. Fireman
/s/ KENNETH I. WATCHMAKER Executive Vice President, Chief Financial
- -------------------------------------------------------- Officer (Chief Financial and Accounting
Kenneth I. Watchmaker Officer) and Treasurer
/s/ PAUL R. DUNCAN Director and Executive Vice President
- --------------------------------------------------------
Paul R. Duncan
/s/ WILLIAM F. GLAVIN Director
- --------------------------------------------------------
William F. Glavin
/s/ MANNIE L. JACKSON Director
- --------------------------------------------------------
Mannie L. Jackson
/s/ RICHARD G. LESSER Director
- --------------------------------------------------------
Richard G. Lesser
/s/ THOMAS M. RYAN Director
- --------------------------------------------------------
Thomas M. Ryan
/s/ GEOFFREY NUNES Director
- --------------------------------------------------------
Geoffrey Nunes
</TABLE>
Dated: March 30, 2000
60
<PAGE> 64
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
REEBOK INTERNATIONAL LTD.
<TABLE>
<CAPTION>
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE
AT BEGINNING COSTS AND OTHER FROM AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS ALLOWANCES(A) PERIOD
- ----------- ------------ ---------- ---------- ------------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts.... $47,383 $17,436 $0 $18,602 $46,217
YEAR ENDED DECEMBER 31, 1998
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts.... $44,003 $ 8,228 $0 $ 4,848 $47,383
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts.... $43,527 $16,471 $0 $15,995 $44,003
</TABLE>
- ---------------
(A) Uncollectible accounts written off, net of recoveries.
S-1
<PAGE> 65
EXHIBIT INDEX
EXHIBIT LOCATION
3.1 Restated Articles of Organization Incorporated by reference
of the Company, as amended
3.2 By-laws, as amended Incorporated by reference
4.1 Indenture, dated September 15, Incorporated by reference
1988, as amended and restated by
the First Supplemental Indenture,
dated as of January 22, 1993,
between the Company and Citibank
N.A., as Trustee
4.2 Common Stock Rights Agreement Incorporated by reference
dated as of June 14, 1990 between
the Company and The First National
Bank of Boston, as Rights Agent,
as amended
4.3 Amendment No. 3 dated as of Incorporated by reference
January 1, 1999 to Common Stock
Rights Agreement dated as of June
14, 1990 between the Company and
The First National Bank of Boston,
as Rights Agent, as amended
10.1 Distributorship Agreement between Incorporated by reference
Reebok International Limited and
the Company
10.2 Trademark License Agreement Incorporated by reference
between Reebok International
Limited and the Company
10.3 Lease Agreement, dated March 1, Incorporated by reference
1988, as amended, between the
Company and North Stoughton
Industrial Park Development Trust
10.4 Purchase and Sale Agreement Incorporated by reference
between the Company and Pentland
Group plc dated March 8, 1991
10.5 Agreements with banks in Hong Kong Incorporated by reference
reflecting arrangements for letter
of credit facilities
10.6 Credit Agreement, dated August 23, Incorporated by reference
1996, among the Company, the
Lenders and Co-Agents named
therein and Credit Suisse, as
Administrative Agent, as amended
by the First Amendment dated as of
August 23, 1996
10.7 Amended and Restated Credit and Incorporated by reference
Guarantee
<PAGE> 66
Agreement, dated as of July 1,
1997, among the Company, Reebok
International Limited, the Lenders
and Co-Agents named therein,
Citibank N.A. as Documentation
Agent and Credit Suisse, as
Administrative Agent.
10.8 Amendment No. 2 dated as of Incorporated by reference
September 30, 1998 to the Amended
and Restated Credit and Guarantee
Agreement dated as of July 1,
1997, among the Company, Reebok
International Limited, the Lenders
and Co-Agents named therein,
Citibank N.A. as Documentation
Agent and Credit Suisse, as
Administrative Agent
10.9 Participation Agreement dated as Incorporated by reference
of March 27, 1998 among the
Company, as Lessee and as
Guarantor, Credit Suisse Leasing
92A, L.P., as Lessor, the Lenders
named therein, Credit Suisse First
Boston, as Administrative Agent
and Wachovia Bank, N.A. as
Syndication Agent
10.10 First Amendment dated as of Incorporated by reference
September 30, 1998 to
Participation Agreement dated as
of March 27, 1998 among the
Company, as Lessee and Guarantor,
Credit Suisse Leasing 92A, L.P.,
as Lessor, the Lenders named
therein, Credit Suisse First
Boston, as Administrative Agent
and Wachovia Bank, N.A. as
Syndication Agent
10.11 Lease dated as of March 27, 1998 Incorporated by reference
between Credit Suisse Leasing 92A,
L.P., as Lessor, and the Company,
as Lessee
10.12 Guaranty from the Company dated as Incorporated by reference
of March 27, 1998
10.13 Reebok International Ltd. 1994 Incorporated by reference
Equity Incentive Plan, as amended
10.14 Amendment to Reebok International Incorporated by reference
Ltd. 1994 Equity Incentive Plan
dated April 19, 1999
10.15 Reebok International Ltd. Equity Incorporated by reference
and Deferred Compensation Plan for
Directors, as amended
10.16 Amendment to Reebok International Incorporated by reference
Ltd. Equity and Deferred
Compensation Plan for Directors
dated as of April 19, 1999
10.17 Reebok International Ltd. 1985 Incorporated by reference
Stock Option Plan, as amended
2
<PAGE> 67
10.18 Reebok International Ltd. 1987 Incorporated by reference
Stock Option Plan for Directors,
as amended
10.19 Reebok International Ltd. 1987 Incorporated by reference
Stock Bonus Plan
10.20 Reebok International Ltd. Excess Incorporated by reference
Benefits Plan
10.21 Reebok International Ltd. Incorporated by reference
Supplemental Executive Retirement
Plan
10.22 Amendment to Supplemental Incorporated by reference
Executive Retirement Plan dated as
of February 23, 1999
10.23 Reebok International Ltd. Incorporated by reference
Executive Performance Incentive
Plan, as amended
10.24 Stock Option Agreement with Paul Incorporated by reference
B. Fireman
10.25 Split-Dollar Life Insurance Incorporated by reference
Agreement with Paul B. Fireman
10.26 Letter Agreement with Paul R. Incorporated by reference
Duncan dated December 29, 1997
10.27 Employment Agreement with Kenneth Incorporated by reference
Watchmaker
10.28 Amended and Restated Change of Filed herewith
Control Agreement with Kenneth
Watchmaker
10.29 Supplemental Retirement Program Incorporated by reference
for Kenneth Watchmaker
10.30 Change of Control Agreement with Incorporated by reference
Angel Martinez
10.31 Employment Agreement dated April Incorporated by reference
17, 1996 with Roger Best
10.32 Employment Agreement dated Incorporated by reference
September 11, 1997 with Roger Best
10.33 Amended and Restated Change of Filed herewith
Control Agreement with James R.
Jones, III
10.34 Change of Control Agreement with Incorporated by reference
Barry Nagler
10.35 Change of Control Agreement with Filed herewith
David A. Pace
10.36 Form of Non-Competition Agreements Incorporated by reference
signed by James R. Jones, III,
Angel Martinez, Robert Meers,
Barry Nagler, Kenneth Watchmaker,
<PAGE> 68
Anthony J. Tiberii, Terry R.
Pillow, Paul R. Duncan, David A.
Perdue and David A. Pace
10.37 Employment Agreement dated Incorporated by reference
September 8, 1998 between Carl J.
Yankowski and the Company
10.38 Promissory Note dated September Incorporated by reference
11, 1998 by Carl J. Yankowski
10.39 Letter Agreement dated July 14, Incorporated by reference
1998 between Robert Meers and the
Company
10.40 Letter Agreement dated December Filed herewith
23, 1999 between Carl J. Yankowski
and the Company
10.41 Agreement dated as of April 19, Incorporated by reference
1999 between the Company and Paul
Fireman
10.42 Consent dated as of April 19, 1999 Incorporated by reference
from Paul Fireman to the Company
10.43 Consent dated as of April 19, 1999 Incorporated by reference
from Ken Watchmaker to the Company
12.1 Statement Re Computation of Ratio Filed herewith
of Earnings to Fixed Charges
21.1 List of Subsidiaries of the Filed herewith
Company
23.1 Consent of Ernst & Young LLP Filed herewith
27.1 Financial Data Schedule Filed herewith
<PAGE> 1
EXHIBIT 10.28: Amended and Restated Change of Control Agreement with Kenneth
Watchmaker
REEBOK INTERNATIONAL LTD.
Amended and Restated Change of Control Agreement
AGREEMENT, made the 29th day of May, 1997, by and between Kenneth I.
Watchmaker ("Executive") and Reebok International Ltd. (the "Company"), and
amended and restated as of this 15th day of February 2000.
WITNESSETH
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its shareholders
for the Company to agree to provide benefits under circumstances described below
to Executive; and
WHEREAS, the Board recognizes that the possibility of a change of
control of the Company, followed by a termination of the Executive's employment
or a reduction in his responsibility or compensation, is unsettling to the
Executive and wishes to make arrangements at this time to help assure his
continuing dedication to his duties to the Company and its shareholders,
notwithstanding any attempts by outside parties to gain control of the Company;
and
WHEREAS, the Board believes it important, should the Company receive
proposals from outside parties, to enable the Executive, without being
distracted by the uncertainties of his own employment situation, to perform his
regular duties,
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1. In the event that any individual, corporation, partnership, company, or other
entity (a "Person"), which term shall include a "group" (within the meaning of
section 13(d) of the Securities Exchange Act of 1934 (the "Act")), begins a
tender or exchange offer, circulates a proxy to the Company's shareholders, or
takes other steps to effect a "Change of Control" (as defined in paragraph 3
below), Executive agrees that he will not voluntarily leave the employ of the
Company and will render the services contemplated in the recitals to this
Agreement until such Person has terminated the efforts to effect a Change of
Control or until a Change of Control has occurred.
2. If, within 24 months following a Change of Control, Executive's employment
with the Company terminates other than as a result of the death, total
disability or retirement of the Executive at or after his normal retirement
date, (i) by the Company other than for "Cause" (as
<PAGE> 2
defined in paragraph 4 below), or (ii) by Executive for "Good Reason" (as
defined in paragraph 4 below), then:
a. The Company will pay to Executive within 30 days of such
termination of employment a lump-sum cash payment equal to
300% of the aggregate of (i) his then-current annual base
salary (or, if his base salary has been reduced at any time
after the Change of Control, his base salary in effect prior
to the reduction), (ii) his target bonus for the then-current
year or, if higher, his bonus for the most recent calendar
year ended before the Change of Control, (iii) the amount of
his then-current annual automobile allowance and (iv) the
annual cost of life insurance then furnished to him by the
Company.
b. All of Executive's outstanding stock options, restricted
shares and other similar incentive interests and rights will
become immediately and fully vested and exercisable.
c. Executive will be treated for purposes of the Company's
Supplemental Executive Retirement Plan (the "SERP") as having
three additional Years of Continuous Service. The Company
will, within 30 days of his termination, pay to him, in a
single lump-sum cash payment, the present value of his benefit
under the SERP. Present value will be determined by applying
the "applicable mortality table" and "applicable interest
rate" then in effect for purposes of section 417(e)(3)(A) of
the Internal Revenue Code or any successor provision.
d. The Company will pay to Executive, in a single lump-sum cash
payment, an amount equal to the difference, if any, between
(i) the total distribution that he receives following his
termination under the Company's Profit-Sharing and Retirement
Plan and its Excess Benefits Plan and (ii) the total
distribution that he would have received under such plans had
he accumulated three additional Years of Service for Vesting
prior to termination. The payment will be made at the same
time that he receives his distribution from those plans.
e. Executive, together with his dependents, will continue
following such termination of employment to participate fully,
with no contribution to the cost required of him or them, in
all accident and health plans maintained or sponsored by the
Company immediately prior to the Change of Control, or receive
substantially the equivalent coverage (or the full value
thereof in cash) from the Company, until the third anniversary
of such termination.
2
<PAGE> 3
f. The Company will promptly reimburse Executive for any and all
legal fees and expenses incurred by him as a result of such
termination of employment, including without limitation all
fees and expenses incurred in connection with efforts to
enforce the provisions of this Agreement (provided such
efforts result in Executive's recovery of any sum from the
Company, whether through court award or settlement).
3. A Change of Control will occur for purposes of this Agreement if (i) any
Person who does not currently own directly or indirectly 10% or more of the
combined voting power of the Company's outstanding securities becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Act) of securities of the
Company representing more than 30% (or, if higher, the aggregate percentage of
the combined voting power of the Company's then-outstanding securities held by
or for the benefit of Paul Fireman and his family) of the combined voting power
of the company's then-outstanding securities, (ii) there is a change of control
of the Company of a kind which would be required to be reported under Item 6(e)
of Schedule 14A of Regulation 14A promulgated under the Act (or a similar item
in a similar schedule or form), whether or not the Company is then subject to
such reporting requirement, (iii) the Company is a party to a merger,
consolidation, sale of assets or other reorganization, or a proxy contest, as a
consequence of which members of the Board in office immediately prior to such
transaction or event constitute less than a majority of the Board thereafter,
(iv) individuals who, at the date hereof, constitute the Board (the "Continuing
Directors") cease for any reason to constitute a majority thereof, provided,
however, that any director who is not in office at the date hereof but whose
election by the Board or whose nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the date hereof or whose election
or nomination for election was previously so approved shall be deemed to be a
Continuing Director for purposes of this Agreement, or (v) Paul Fireman ceases
for any reason to be Chief Executive Officer of the Company.
Notwithstanding the foregoing provisions of this paragraph 3, a "Change
of Control" will not be deemed to have occurred solely because of (i) the
acquisition of securities of the Company (or any reporting requirement under the
Act relating thereto) by an employment benefit plan maintained by the Company
for its employees or (ii) the occurrence of a leveraged buy-out or
recapitalization of the Company in which Executive participates as an equity
investor.
4. a. "Cause" means only: conviction of the Executive for a felony
or a crime involving moral turpitude.
b. "Good Reason" means any one or more of the following:
3
<PAGE> 4
(i) Failure by the Company to maintain Executive in the positions,
with the titles, that he held immediately prior to the Change
of Control or downgrading of his responsibilities or
authority. If, following the Change of Control, the Company is
part of a controlled group of entities, Executive's
responsibilities and authority will be deemed for this purpose
to have been reduced unless he is given and retains the same
responsibilities and authority with the entity that controls
the group as he held with the Company immediately prior to the
Change of Control.
(ii) Reduction of Executive's base salary or failure in any year to
pay to him a bonus at least equal to his target bonus for the
year in which the Change of Control occurs.
(iii) Material reduction in the health, disability or life insurance
benefits that the Company was providing Executive immediately
prior to the Change of Control.
(iv) Failure by the Company to provide Executive with the
opportunity to participate in any executive compensation or
benefit plan or program that is then generally available to
other senior executives of the Company.
(v) Relocation of Executive's principal place of business more
than 30 miles from the its location immediately prior to the
Change of Control.
5. In the event that it is determined that any payment or benefit provided by
the Company to or for the benefit of Executive, either under this Agreement or
otherwise, will be subject to the excise tax imposed by section 4999 of the
Internal Revenue Code or any successor provision ("section 4999"), the Company
will, prior to the date on which any amount of the excise tax must be paid or
withheld, make an additional lump-sum payment (the "gross-up payment") to
Executive. The gross-up payment will be sufficient, after giving effect to all
federal, state and other taxes and charges (including interest and penalties, if
any) with respect to the gross-up payment, to make Executive whole for all taxes
(including withholding taxes) and any associated interest and penalties, imposed
under or as a result of section 4999.
Determinations under this Section 5 will be made by Ernst & Young
unless Executive has reasonable objections to the use of that firm, in which
case the determinations will be made by a comparable firm chosen by Executive
after consultation with the Company (the firm making the determinations to be
referred to as the "Firm"). The determinations of the Firm will be binding upon
the Company and Executive except as the determinations are established in
resolution
4
<PAGE> 5
(including by settlement) of a controversy with the Internal Revenue Service to
have been incorrect. All fees and expenses of the Firm will be paid by the
Company.
If the Internal Revenue Service asserts a claim that, if successful,
would require the Company to make a gross-up payment or an additional gross-up
payment, the Company and Executive will cooperate fully in resolving the
controversy with the Internal Revenue Service. The Company will make or advance
such gross-up payments as are necessary to prevent Executive from having to bear
the cost of payments made to the Internal Revenue Service in the course of, or
as a result of, the controversy. The Firm will determine the amount of such
gross-up payments or advances and will determine after final resolution of the
controversy whether any advances must be returned by Executive to the Company.
The Company will bear all expenses of the controversy and will gross Executive
up for any additional taxes that may be imposed upon Executive as a result of
its payment of such expenses.
6. If the Company is at any time before or after a Change of Control merged or
consolidated into or with any other corporation or other entity (whether or not
the Company is the surviving entity), or if substantially all of the assets
thereof are transferred to another corporation or other entity, the provisions
of this Agreement will be binding upon and inure to the benefit of the
corporation or other entity resulting from such merger or consolidation or the
acquirer of such assets, and this paragraph 6 will apply in the event of any
subsequent merger or consolidation or transfer of assets.
In the event of any merger, consolidation, or sale of assets described
above, nothing contained in this Agreement will detract from or otherwise limit
Executive's right to participate or privilege of participation in any stock
option or purchase plan or any bonus, profit sharing, pension, group insurance,
hospitalization, or other incentive or benefit plan or arrangement which may be
or become applicable to executives of the corporation resulting from such merger
or consolidation or the corporation acquiring such assets of the Company.
In the event of any merger, consolidation or sale of assets described
above, references to the Company in this Agreement shall unless the context
suggests otherwise be deemed to include the entity resulting from such merger or
consolidation or the acquirer of such assets of the Company.
7. All payments required to be made by the Company hereunder to Executive or his
dependents, beneficiaries, or estate will be subject to the withholding of such
amounts relating to tax and/or other payroll deductions as may be required by
law.
5
<PAGE> 6
8. There shall be no requirement on the part of the Executive to seek other
employment or otherwise mitigate damages in order to be entitled to the full
amount of any payments and benefits to which Executive is entitled under this
Agreement, and the amount of such payments and benefits shall not be reduced by
any compensation or benefits received by Executive from other employment.
9. Nothing contained in this Agreement shall be construed as a contract of
employment between the Company and the Executive, or as a right of the Executive
to continue in the employ of the Company, or as a limitation of the right of the
Company to discharge the Executive with or without Cause; the Executive may,
subject to the terms and conditions of this Agreement, have the right to receive
upon termination of his employment the payments and benefits provided in this
Agreement and shall not be deemed to have waived any rights he may have either
at law or in equity in respect of such discharge.
10. No amendment, change, or modification of this Agreement may be made except
in writing, signed by both parties.
Payments made by the Company pursuant to this Agreement shall be in
lieu of payments and other benefits, if any, to which Executive may be entitled
under any other severance agreement or severance plan of the Company.
The provisions of this Agreement shall be binding upon and shall inure
to the benefit of Executive, his executors, administrators, legal
representatives and assigns, and the Company and its successors.
The validity, interpretation, and effect of this Agreement shall be
governed by the laws of The Commonwealth of Massachusetts.
The Company shall have no right of set-off or counterclaims, in respect
of any claim, debt, or obligation, against any payments to Executive, his
dependents, beneficiaries or estate provided for in this Agreement.
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
No right or interest to or in any payments or benefits hereunder shall
be assignable by the Executive; provided, however, that this provision shall not
preclude him from designating one or more beneficiaries to receive any amount
that may be payable after his death and shall not preclude
-6-
<PAGE> 7
the legal representative of his estate from assigning any right hereunder to the
person or persons entitled thereto under his will or, in the case of intestacy,
to the person or persons entitled thereto under the laws of intestacy applicable
to his estate. The term "beneficiaries" as used in this Agreement shall mean a
beneficiary or beneficiaries so designated to receive any such amount, or if no
beneficiary has been so designated, the legal representative of the Executive's
estate.
No right, benefit, or interest hereunder, shall be subject to
anticipation, alienation, sale, assignment, encumbrance, charge, pledge,
hypothecation, or set-off in respect of any claim, debt, or obligation, or to
execution, attachment, levy, or similar process, or assignment by operation of
law. Any attempt, voluntary or involuntary, to effect any action specified in
the immediately preceding sentence shall, to the full extent permitted by law,
be null, void, and of no effect.
IN WITNESS WHEREOF, Reebok International Ltd. and Executive have each
caused this Agreement to be duly executed and delivered as of the date set forth
above.
REEBOK INTERNATIONAL LTD.
By: /s/ Paul Fireman
-------------------------------
Agreed:
/s/ Ken Watchmaker
- ---------------------------
-7-
<PAGE> 1
EXHIBIT 10.33: Amended and Restated Change of Control Agreement with James R.
Jones III.
REEBOK INTERNATIONAL LTD.
Amended and Restated Change of Control Agreement
AGREEMENT, made the 29th day of May, 1997, by and between James Jones
("Executive") and Reebok International Ltd. (the "Company"), and amended and
restated as of this 15th day of February 2000.
WITNESSETH
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its shareholders
for the Company to agree to provide benefits under circumstances described below
to Executive; and
WHEREAS, the Board recognizes that the possibility of a change of
control of the Company, followed by a termination of the Executive's employment
or a reduction in his responsibility or compensation, is unsettling to the
Executive and wishes to make arrangements at this time to help assure his
continuing dedication to his duties to the Company and its shareholders,
notwithstanding any attempts by outside parties to gain control of the Company;
and
WHEREAS, the Board believes it important, should the Company receive
proposals from outside parties, to enable the Executive, without being
distracted by the uncertainties of his own employment situation, to perform his
regular duties,
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1. In the event that any individual, corporation, partnership, company, or other
entity (a "Person"), which term shall include a "group" (within the meaning of
section 13(d) of the Securities Exchange Act of 1934 (the "Act")), begins a
tender or exchange offer, circulates a proxy to the Company's shareholders, or
takes other steps to effect a "Change of Control" (as defined in paragraph 3
below), Executive agrees that he will not voluntarily leave the employ of the
Company and will render the services contemplated in the recitals to this
Agreement until such
<PAGE> 2
Person has terminated the efforts to effect a Change of Control or until a
Change of Control has occurred.
2. If, within 24 months following a Change of Control, Executive's employment
with the Company terminates other than as a result of the death, total
disability or retirement of the Executive at or after his normal retirement
date, (i) by the Company other than for "Cause" (as defined in paragraph 4
below), or (ii) by Executive for "Good Reason" (as defined in paragraph 4
below), then:
a. The Company will pay to Executive within 30 days of such
termination of employment a lump-sum cash payment equal to
300% of the aggregate of (i) his then-current annual base
salary (or, if his base salary has been reduced at any time
after the Change of Control, his base salary in effect prior
to the reduction), (ii) his target bonus for the then-current
year or, if higher, his bonus for the most recent calendar
year ended before the Change of Control, (iii) the amount of
his then-current annual automobile allowance and (iv) the
annual cost of life insurance then furnished to him by the
Company.
b. All of Executive's outstanding stock options, restricted
shares and other similar incentive interests and rights will
become immediately and fully vested and exercisable.
c. Executive will be treated for purposes of the Company's
Supplemental Executive Retirement Plan (the "SERP") as having
three additional Years of Continuous Service. The Company
will, within 30 days of his termination, pay to him, in a
single lump-sum cash payment, the present value of his benefit
under the SERP. Present value will be determined by applying
the "applicable mortality table" and "applicable interest
rate" then in effect for purposes of section 417(e)(3)(A) of
the Internal Revenue Code or any successor provision.
d. The Company will pay to Executive, in a single lump-sum cash
payment, an amount equal to the difference, if any, between
(i) the total distribution that he receives following his
termination under the Company's Profit-Sharing and Retirement
Plan and its Excess Benefits Plan and (ii) the total
distribution that he would have received under such plans had
he accumulated three additional Years of Service for Vesting
prior to termination. The payment will be made at the same
time that he receives his distribution from those plans.
-2-
<PAGE> 3
e. Executive, together with his dependents, will continue
following such termination of employment to participate fully,
with no contribution to the cost required of him or them, in
all accident and health plans maintained or sponsored by the
Company immediately prior to the Change of Control, or receive
substantially the equivalent coverage (or the full value
thereof in cash) from the Company, until the third anniversary
of such termination.
f. The Company will promptly reimburse Executive for any and all
legal fees and expenses incurred by him as a result of such
termination of employment, including without limitation all
fees and expenses incurred in connection with efforts to
enforce the provisions of this Agreement (provided such
efforts result in Executive's recovery of any sum from the
Company, whether through court award or settlement).
3. A Change of Control will occur for purposes of this Agreement if (i) any
Person who does not currently own directly or indirectly 10% or more of the
combined voting power of the Company's outstanding securities becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Act) of securities of the
Company representing more than 30% (or, if higher, the aggregate percentage of
the combined voting power of the Company's then-outstanding securities held by
or for the benefit of Paul Fireman and his family) of the combined voting power
of the company's then-outstanding securities, (ii) there is a change of control
of the Company of a kind which would be required to be reported under Item 6(e)
of Schedule 14A of Regulation 14A promulgated under the Act (or a similar item
in a similar schedule or form), whether or not the Company is then subject to
such reporting requirement, (iii) the Company is a party to a merger,
consolidation, sale of assets or other reorganization, or a proxy contest, as a
consequence of which members of the Board in office immediately prior to such
transaction or event constitute less than a majority of the Board thereafter,
(iv) individuals who, at the date hereof, constitute the Board (the "Continuing
Directors") cease for any reason to constitute a majority thereof, provided,
however, that any director who is not in office at the date hereof but whose
election by the Board or whose nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the date hereof or whose election
or nomination for election was previously so approved shall be deemed to be a
Continuing Director for purposes of this Agreement, or (v) Paul Fireman ceases
for any reason to be Chief Executive Officer of the Company.
Notwithstanding the foregoing provisions of this paragraph 3, a "Change
of Control" will not be deemed to have occurred solely because of (i) the
acquisition of securities of the Company (or any reporting requirement under the
Act relating thereto) by an employment benefit plan maintained by the Company
for its employees or (ii) the occurrence of a leveraged buy-out or
recapitalization of the Company in which Executive participates as an equity
investor.
4. a. "Cause" means only: conviction of the Executive for a felony
or a crime involving moral turpitude.
-3-
<PAGE> 4
b. "Good Reason" means any one or more of the following:
(i) Failure by the Company to maintain Executive in the
positions, with the titles, that he held immediately
prior to the Change of Control or downgrading of his
responsibilities or authority. If, following the
Change of Control, the Company is part of a
controlled group of entities, Executive's
responsibilities and authority will be deemed for
this purpose to have been reduced unless he is given
and retains the same responsibilities and authority
with the entity that controls the group as he held
with the Company immediately prior to the Change of
Control.
(ii) Reduction of Executive's base salary or failure in
any year to pay to him a bonus at least equal to his
target bonus for the year in which the Change of
Control occurs.
(iii) Material reduction in the health, disability or life
insurance benefits that the Company was providing
Executive immediately prior to the Change of Control.
(iv) Failure by the Company to provide Executive with the
opportunity to participate in any executive
compensation or benefit plan or program that is then
generally available to other senior executives of the
Company.
(v) Relocation of Executive's principal place of business
more than 30 miles from the its location immediately
prior to the Change of Control.
5. In the event that it is determined that any payment or benefit provided by
the Company to or for the benefit of Executive, either under this Agreement or
otherwise, will be subject to the excise tax imposed by section 4999 of the
Internal Revenue Code or any successor provision ("section 4999"), the Company
will, prior to the date on which any amount of the excise tax must be paid or
withheld, make an additional lump-sum payment (the "gross-up payment") to
Executive. The gross-up payment will be sufficient, after giving effect to all
federal, state and other taxes and charges (including interest and penalties, if
any) with respect to the gross-up payment, to make Executive whole for all taxes
(including withholding taxes) and any associated interest and penalties, imposed
under or as a result of section 4999.
Determinations under this Section 5 will be made by Ernst & Young
unless Executive has reasonable objections to the use of that firm, in which
case the determinations will be made by a comparable firm chosen by Executive
after consultation with the Company (the firm making the determinations to be
referred to as the "Firm"). The determinations of the Firm will be binding upon
the Company and Executive except as the determinations are established in
resolution
-4-
<PAGE> 5
(including by settlement) of a controversy with the Internal Revenue Service to
have been incorrect. All fees and expenses of the Firm will be paid by the
Company.
If the Internal Revenue Service asserts a claim that, if successful,
would require the Company to make a gross-up payment or an additional gross-up
payment, the Company and Executive will cooperate fully in resolving the
controversy with the Internal Revenue Service. The Company will make or advance
such gross-up payments as are necessary to prevent Executive from having to bear
the cost of payments made to the Internal Revenue Service in the course of, or
as a result of, the controversy. The Firm will determine the amount of such
gross-up payments or advances and will determine after final resolution of the
controversy whether any advances must be returned by Executive to the Company.
The Company will bear all expenses of the controversy and will gross Executive
up for any additional taxes that may be imposed upon Executive as a result of
its payment of such expenses.
6. If the Company is at any time before or after a Change of Control merged or
consolidated into or with any other corporation or other entity (whether or not
the Company is the surviving entity), or if substantially all of the assets
thereof are transferred to another corporation or other entity, the provisions
of this Agreement will be binding upon and inure to the benefit of the
corporation or other entity resulting from such merger or consolidation or the
acquirer of such assets, and this paragraph 6 will apply in the event of any
subsequent merger or consolidation or transfer of assets.
In the event of any merger, consolidation, or sale of assets described
above, nothing contained in this Agreement will detract from or otherwise limit
Executive's right to participate or privilege of participation in any stock
option or purchase plan or any bonus, profit sharing, pension, group insurance,
hospitalization, or other incentive or benefit plan or arrangement which may be
or become applicable to executives of the corporation resulting from such merger
or consolidation or the corporation acquiring such assets of the Company.
In the event of any merger, consolidation or sale of assets described
above, references to the Company in this Agreement shall unless the context
suggests otherwise be deemed to include the entity resulting from such merger or
consolidation or the acquirer of such assets of the Company.
7. All payments required to be made by the Company hereunder to Executive or his
dependents, beneficiaries, or estate will be subject to the withholding of such
amounts relating to tax and/or other payroll deductions as may be required by
law.
8. There shall be no requirement on the part of the Executive to seek other
employment or otherwise mitigate damages in order to be entitled to the full
amount of any payments and benefits to which Executive is entitled under this
Agreement, and the amount of such payments and benefits shall not be reduced by
any compensation or benefits received by Executive from other employment.
5
<PAGE> 6
9. Nothing contained in this Agreement shall be construed as a contract of
employment between the Company and the Executive, or as a right of the Executive
to continue in the employ of the Company, or as a limitation of the right of the
Company to discharge the Executive with or without Cause; the Executive may,
subject to the terms and conditions of this Agreement, have the right to receive
upon termination of his employment the payments and benefits provided in this
Agreement and shall not be deemed to have waived any rights he may have either
at law or in equity in respect of such discharge.
10. No amendment, change, or modification of this Agreement may be made except
in writing, signed by both parties.
Payments made by the Company pursuant to this Agreement shall be in
lieu of payments and other benefits, if any, to which Executive may be entitled
under any other severance agreement or severance plan of the Company.
The provisions of this Agreement shall be binding upon and shall inure
to the benefit of Executive, his executors, administrators, legal
representatives and assigns, and the Company and its successors.
The validity, interpretation, and effect of this Agreement shall be
governed by the laws of The Commonwealth of Massachusetts.
The Company shall have no right of set-off or counterclaims, in respect
of any claim, debt, or obligation, against any payments to Executive, his
dependents, beneficiaries or estate provided for in this Agreement.
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
No right or interest to or in any payments or benefits hereunder shall
be assignable by the Executive; provided, however, that this provision shall not
preclude him from designating one or more beneficiaries to receive any amount
that may be payable after his death and shall not preclude the legal
representative of his estate from assigning any right hereunder to the person or
persons entitled thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy applicable to his
estate. The term "beneficiaries" as used in this Agreement shall mean a
beneficiary or beneficiaries so designated to receive any such amount, or if no
beneficiary has been so designated, the legal representative of the Executive's
estate.
No right, benefit, or interest hereunder, shall be subject to
anticipation, alienation, sale, assignment, encumbrance, charge, pledge,
hypothecation, or set-off in respect of any claim, debt, or obligation, or to
execution, attachment, levy, or similar process, or assignment by operation
6
<PAGE> 7
of law. Any attempt, voluntary or involuntary, to effect any action specified in
the immediately preceding sentence shall, to the full extent permitted by law,
be null, void, and of no effect.
IN WITNESS WHEREOF, Reebok International Ltd. and Executive have each
caused this Agreement to be duly executed and delivered as of the date set forth
above.
REEBOK INTERNATIONAL LTD.
By:/s/ Paul Fireman
------------------------------
Agreed:
/s/ Jimmy Jones
- ---------------------
7
<PAGE> 1
EXHIBIT 10.35: Change of Control Agreement with
David A. Pace
REEBOK INTERNATIONAL LTD.
Change of Control Agreement
AGREEMENT, made as of the 8th day of December 1999, by and between
David A. Pace ("Executive") and Reebok International Ltd. (the "Company").
WITNESSETH
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its shareholders
for the Company to agree to provide benefits under circumstances described below
to Executive; and
WHEREAS, the Board recognizes that the possibility of a change of
control of the Company, followed by a termination of the Executive's employment
or a reduction in his responsibility or compensation, is unsettling to the
Executive and wishes to make arrangements at this time to help assure his
continuing dedication to his duties to the Company and its shareholders,
notwithstanding any attempts by outside parties to gain control of the Company;
and
WHEREAS, the Board believes it important, should the Company receive
proposals from outside parties, to enable the Executive, without being
distracted by the uncertainties of his own employment situation, to perform his
regular duties,
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1. In the event that any individual, corporation, partnership, company, or other
entity (a "Person"), which term shall include a "group" (within the meaning of
section 13(d) of the Securities Exchange Act of 1934 (the "Act")), begins a
tender or exchange offer, circulates a proxy to the Company's shareholders, or
takes other steps to effect a "Change of Control" (as defined in paragraph 3
below), Executive agrees that he will not voluntarily leave the employ of the
Company and will render the services contemplated in the recitals to this
Agreement until such Person has terminated the efforts to effect a Change of
Control or until a Change of Control has occurred.
<PAGE> 2
2. If, within 24 months following a Change of Control, Executive's employment
with the Company terminates other than as a result of the death, total
disability or retirement of the Executive at or after his normal retirement
date, (i) by the Company other than for "Cause" (as defined in paragraph 4
below), or (ii) by Executive for "Good Reason" (as defined in paragraph 4
below), then:
a. The Company will pay to Executive within 30 days of such
termination of employment a lump-sum cash payment equal to
300% of the aggregate of (i) his then-current annual base
salary (or, if his base salary has been reduced at any time
after the Change of Control, his base salary in effect prior
to the reduction), (ii) his target bonus for the then-current
year or, if higher, his bonus for the most recent calendar
year ended before the Change of Control, (iii) the amount of
his then-current annual automobile allowance and (iv) the
annual cost of life insurance then furnished to him by the
Company.
b. All of Executive's outstanding stock options, restricted
shares and other similar incentive interests and rights will
become immediately and fully vested and exercisable.
c. Executive will be treated for purposes of the Company's
Supplemental Executive Retirement Plan (the "SERP") as having
three additional Years of Continuous Service. The Company
will, within 30 days of his termination, pay to him, in a
single lump-sum cash payment, the present value of his benefit
under the SERP. Present value will be determined by applying
the "applicable mortality table" and "applicable interest
rate" then in effect for purposes of section 417(e)(3)(A) of
the Internal Revenue Code or any successor provision.
d. The Company will pay to Executive, in a single lump-sum cash
payment, an amount equal to the difference, if any, between
(i) the total distribution that he receives following his
termination under the Company's Profit-Sharing and Retirement
Plan and its Excess Benefits Plan and (ii) the total
distribution that he would have received under such plans had
he accumulated three additional Years of Service for Vesting
prior to termination. The payment will be made at the same
time that he receives his distribution from those plans.
e. Executive, together with his dependents, will continue
following such termination of employment to participate fully,
with no contribution to the cost required of him or them, in
all accident and health plans
2
<PAGE> 3
maintained or sponsored by the Company immediately prior to
the Change of Control, or receive substantially the equivalent
coverage (or the full value thereof in cash) from the Company,
until the third anniversary of such termination.
f. The Company will promptly reimburse Executive for any and all
legal fees and expenses incurred by him as a result of such
termination of employment, including without limitation all
fees and expenses incurred in connection with efforts to
enforce the provisions of this Agreement (provided such
efforts result in Executive's recovery of any sum from the
Company, whether through court award or settlement).
3. A Change of Control will occur for purposes of this Agreement if (i) any
Person who does not currently own directly or indirectly 10% or more of the
combined voting power of the Company's outstanding securities becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Act) of securities of the
Company representing more than 30% (or, if higher, the aggregate percentage of
the combined voting power of the Company's then-outstanding securities held by
or for the benefit of Paul Fireman and his family) of the combined voting power
of the company's then-outstanding securities, (ii) there is a change of control
of the Company of a kind which would be required to be reported under Item 6(e)
of Schedule 14A of Regulation 14A promulgated under the Act (or a similar item
in a similar schedule or form), whether or not the Company is then subject to
such reporting requirement, (iii) the Company is a party to a merger,
consolidation, sale of assets or other reorganization, or a proxy contest, as a
consequence of which members of the Board in office immediately prior to such
transaction or event constitute less than a majority of the Board thereafter, or
(iv) individuals who, at the date hereof, constitute the Board (the "Continuing
Directors") cease for any reason to constitute a majority thereof, provided,
however, that any director who is not in office at the date hereof but whose
election by the Board or whose nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the date hereof or whose election
or nomination for election was previously so approved shall be deemed to be a
Continuing Director for purposes of this Agreement.
Notwithstanding the foregoing provisions of this paragraph 3, a "Change
of Control" will not be deemed to have occurred solely because of (i) the
acquisition
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<PAGE> 4
of securities of the Company (or any reporting requirement under the Act
relating thereto) by an employment benefit plan maintained by the Company for
its employees or (ii) the occurrence of a leveraged buy-out or recapitalization
of the Company in which Executive participates as an equity investor.
4. a. "Cause" means only: conviction of the Executive for a felony
or a crime involving moral turpitude.
b. "Good Reason" means any one or more of the following:
(i) Failure by the Company to maintain Executive in the
positions, with the titles, that he held immediately
prior to the Change of Control or downgrading of his
responsibilities or authority. If, following the
Change of Control, the Company is part of a
controlled group of entities, Executive's
responsibilities and authority will be deemed for
this purpose to have been reduced unless he is given
and retains the same responsibilities and authority
with the entity that controls the group as he held
with the Company immediately prior to the Change of
Control.
(ii) Reduction of Executive's base salary or failure in
any year to pay to him a bonus at least equal to his
target bonus for the year in which the Change of
Control occurs.
(iii) Material reduction in the health, disability or life
insurance benefits that the Company was providing
Executive immediately prior to the Change of Control.
(iv) Failure by the Company to provide Executive with the
opportunity to participate in any executive
compensation or benefit plan or program that is then
generally available to other senior executives of the
Company.
(v) Relocation of Executive's principal place of business
more than 30 miles from the its location immediately
prior to the Change of Control.
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<PAGE> 5
5. In the event that it is determined that any payment or benefit provided by
the Company to or for the benefit of Executive, either under this Agreement or
otherwise, will be subject to the excise tax imposed by section 4999 of the
Internal Revenue Code or any successor provision ("section 4999"), the Company
will, prior to the date on which any amount of the excise tax must be paid or
withheld, make an additional lump-sum payment (the "gross-up payment") to
Executive. The gross-up payment will be sufficient, after giving effect to all
federal, state and other taxes and charges (including interest and penalties, if
any) with respect to the gross-up payment, to make Executive whole for all taxes
(including withholding taxes) and any associated interest and penalties, imposed
under or as a result of section 4999.
Determinations under this Section 5 will be made by Ernst & Young
unless Executive has reasonable objections to the use of that firm, in which
case the determinations will be made by a comparable firm chosen by Executive
after consultation with the Company (the firm making the determinations to be
referred to as the "Firm"). The determinations of the Firm will be binding upon
the Company and Executive except as the determinations are established in
resolution (including by settlement) of a controversy with the Internal Revenue
Service to have been incorrect. All fees and expenses of the Firm will be paid
by the Company.
If the Internal Revenue Service asserts a claim that, if successful,
would require the Company to make a gross-up payment or an additional gross-up
payment, the Company and Executive will cooperate fully in resolving the
controversy with the Internal Revenue Service. The Company will make or advance
such gross-up payments as are necessary to prevent Executive from having to bear
the cost of payments made to the Internal Revenue Service in the course of, or
as a result of, the controversy. The Firm will determine the amount of such
gross-up payments or advances and will determine after final resolution of the
controversy whether any advances must be returned by Executive to the Company.
The Company will bear all expenses of the controversy and will gross Executive
up for any additional taxes that may be imposed upon Executive as a result of
its payment of such expenses.
6. If the Company is at any time before or after a Change of Control merged or
consolidated into or with any other corporation or other entity (whether or not
the Company is the surviving entity), or if substantially all of the assets
thereof are
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<PAGE> 6
transferred to another corporation or other entity, the provisions of this
Agreement will be binding upon and inure to the benefit of the corporation or
other entity resulting from such merger or consolidation or the acquirer of such
assets, and this paragraph 6 will apply in the event of any subsequent merger or
consolidation or transfer of assets.
In the event of any merger, consolidation, or sale of assets described
above, nothing contained in this Agreement will detract from or otherwise limit
Executive's right to participate or privilege of participation in any stock
option or purchase plan or any bonus, profit sharing, pension, group insurance,
hospitalization, or other incentive or benefit plan or arrangement which may be
or become applicable to executives of the corporation resulting from such merger
or consolidation or the corporation acquiring such assets of the Company.
In the event of any merger, consolidation or sale of assets described
above, references to the Company in this Agreement shall unless the context
suggests otherwise be deemed to include the entity resulting from such merger or
consolidation or the acquirer of such assets of the Company.
7. All payments required to be made by the Company hereunder to Executive or his
dependents, beneficiaries, or estate will be subject to the withholding of such
amounts relating to tax and/or other payroll deductions as may be required by
law.
8. There shall be no requirement on the part of the Executive to seek other
employment or otherwise mitigate damages in order to be entitled to the full
amount of any payments and benefits to which Executive is entitled under this
Agreement, and the amount of such payments and benefits shall not be reduced by
any compensation or benefits received by Executive from other employment.
9. Nothing contained in this Agreement shall be construed as a contract of
employment between the Company and the Executive, or as a right of the Executive
to continue in the employ of the Company, or as a limitation of the right of the
Company to discharge the Executive with or without Cause; the Executive may,
subject to the terms and conditions of this Agreement, have the right to receive
upon termination of his employment the payments and benefits provided in this
Agreement and shall not be deemed to have waived any rights he may have either
at law or in equity in respect of such discharge.
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<PAGE> 7
10. No amendment, change, or modification of this Agreement may be made except
in writing, signed by both parties.
Payments made by the Company pursuant to this Agreement shall be in
lieu of payments and other benefits, if any, to which Executive may be entitled
under any other severance agreement or severance plan of the Company.
The provisions of this Agreement shall be binding upon and shall inure
to the benefit of Executive, his executors, administrators, legal
representatives and assigns, and the Company and its successors.
The validity, interpretation, and effect of this Agreement shall be
governed by the laws of The Commonwealth of Massachusetts.
The Company shall have no right of set-off or counterclaims, in respect
of any claim, debt, or obligation, against any payments to Executive, his
dependents, beneficiaries or estate provided for in this Agreement.
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
No right or interest to or in any payments or benefits hereunder shall
be assignable by the Executive; provided, however, that this provision shall not
preclude him from designating one or more beneficiaries to receive any amount
that may be payable after his death and shall not preclude the legal
representative of his estate from assigning any right hereunder to the person or
persons entitled thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy applicable to his
estate. The term "beneficiaries" as used in this Agreement shall mean a
beneficiary or beneficiaries so designated to receive any such amount, or if no
beneficiary has been so designated, the legal representative of the Executive's
estate.
No right, benefit, or interest hereunder, shall be subject to
anticipation, alienation, sale, assignment, encumbrance, charge, pledge,
hypothecation, or set-off in respect of any claim, debt, or obligation, or to
execution, attachment, levy, or similar process, or assignment by operation of
law. Any attempt, voluntary or
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<PAGE> 8
involuntary, to effect any action specified in the immediately preceding
sentence shall, to the full extent permitted by law, be null, void, and of no
effect.
IN WITNESS WHEREOF, Reebok International Ltd. and Executive have each
caused this Agreement to be duly executed and delivered as of the date set forth
above.
REEBOK INTERNATIONAL LTD.
By: /s/ Paul Fireman
--------------------------------------
Agreed:
/s/ David Pace
- ----------------------------------
-8-
<PAGE> 1
Exhibit 10.40: Letter Agreement Dated December 23, 1999 between the Company and
Carl J. Yankowski.
To: Carl Yankowski
127 Farm Road
Dover, MA 02030
From: Jimmy Jones
Date: December 23, 1999
As we have discussed, your active employment with Reebok International
Ltd. (the "Company" or "Reebok") ended effective December 1, 1999 (the
"Separation Date"). You have previously resigned your position as a Director of
the Company and any positions you may have as an officer of Reebok or any of its
subsidiaries. In recognition of your service and the contributions that you have
made to Reebok, I would like to formalize our understanding of the terms of your
separation in this letter agreement (the "Agreement").
We have agreed that you will receive the following severance benefits
in accordance with the terms and conditions of this Agreement:
Severance Benefits
A. Lump Sum Payment
Reebok agrees to pay you for one (1) year of your annual base salary,
which is Eight Hundred Thousand dollars and no cents ($800,000.00), in one lump
sum on January 4, 2000. This payment will be subject to all applicable federal,
state and other employment related deductions, excluding any deductions for
Company employee benefit plans.
B. Bonus
You acknowledge and recognize that Reebok will not make any payments to
you under the Company's 1999 Performance Incentive Plan.
C. Benefits
To the same extent you and your spouse are currently enrolled in such
programs, Reebok will continue your participation and that of your spouse in its
medical and dental insurance programs through January 31, 2000. We understand
that you have secured other insurance coverage through 3Com or Palm, Inc. that
provides for you and your spouse coverage no less favorable than that provided
by the Company as of the Separation Date. Your existing life, AD&D and
supplemental life insurance will end on the Separation Date.
<PAGE> 2
You agree that, with the exception of the foregoing, your participation
in all other Company fringe benefit programs (including without limitation, your
monthly car allowance and tax planning services) will terminate on the
Separation Date.
D. Loan Forgiveness
Pursuant to the terms of Section 5 of the Letter Agreement between you
and Reebok dated as of September 8, 1998 (the "Yankowski Contract"), Reebok has
forgiven the loan for $1,000,000 in its entirety as of December 1, 1999. On
January 4, 2000, Reebok will return the original Note to you marked canceled and
forgiven.
In accordance with Section 5 of the Yankowski Contract, the Company
will also make lump sum payments on December 30, 1999 sufficient, after giving
effect to all federal, state and other applicable taxes, to make you whole for
any taxes that may be incurred as a result of the forgiveness of the loan.
Specifically, Reebok will provide proof of such payment in the amount of
$740,491.10 for federal taxes, $111,835.00 for taxes to the Commonwealth of
Massachusetts and $27,253.92 for Medicare, by providing a copy of a 1999 IRS
Form W-2, and the corresponding Massachusetts form covering this amount, in
addition to all other 1999 Reebok compensation reportable on Form W-2 or the
corresponding state form, and all other payments referenced in this Agreement,
to you on January 4, 2000.
The Company will also make lump sum payments on December 30, 1999
sufficient, after giving effect to all federal, state and other applicable
taxes, to make you whole for any taxes that may be incurred as a result of the
imputation of interest on the loan, and for all interest imputed to you under
Internal Revenue Code Section 7872 since December 31, 1998. This imputed
interest amount has been calculated as $46,041.64. Reebok will provide proof of
such payment in the amount of $32,478.97 for federal taxes, $5,045.33 for taxes
to the Commonwealth of Massachusetts and $1,229.54 for Medicare, by providing a
copy of the above W-2, and the corresponding Massachusetts form, on this amount
to you on January 4, 2000.
As Reebok failed to make you whole for the imputed interest of
$15,752.78 for the time period of September 8, 1998 through December 31, 1998,
Reebok will issue you a check directly on January 3, 2000 in the gross amount of
$11,715.55, which after taking all applicable tax withholdings shall result in
the net amount of $7,309.29. This amount shall be deemed to have made you whole
on the gross-up of this amount.
Upon the making of all payments and the delivery of all required tax
forms under paragraph D of this Agreement, the Company irrevocably waives any
and all right to amend the W-2 forms and corresponding Massachusetts forms
delivered to you, or to amend or modify any other tax returns, or to file
refunds against, or take any position on its employment or income tax returns
that claim an offset to, the amounts paid on your behalf pursuant to this
paragraph D, or that are otherwise in any way inconsistent with the position
that the tax payments paid pursuant to paragraph D are for your sole account.
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<PAGE> 3
E. Stock Options / Change of Control
You should also realize that you have no vested and exercisable stock
options. All unvested stock options held by you will automatically be canceled
as of the Separation Date. However, in the event that a "Change of Control" of
the Company occurs prior to March 1, 2000 (as that term is defined in your
Change of Control Agreement of November 1998 (the "Change of Control
Agreement"), attached hereto as EXHIBIT A and incorporated herein by reference),
you will receive the financial benefits under the Change of Control Agreement in
lieu of the Severance Benefits provided under Section A of this Agreement,
including without limitation, the net financial return, if any, that you would
have received under the Change of Control Agreement with respect to your 500,000
stock options.
D. Miscellaneous
In addition, the Company will reimburse you promptly for reasonable and
customary legal fees incurred by you in connection with efforts to enforce the
provisions of this Agreement in the event that such efforts result in the
recovery by you of any monetary sum from the Company, whether through court
award or settlement. The Company will pay for all reasonable presently
unreimbursed business-related expenses submitted to the Company through the
proper channels (including without limitation, any unreimbursed expenses
incurred in 1999 for tax planning and financial services from Asset Management
Group or Urbach, Kahn & Werlin, PC). You also acknowledge that the lump sum
payment set forth in Section A of this Agreement includes payment for all
previously accrued, but unused, vacation time for 1999. As we discussed, you may
keep the two computers currently in your possession and provided by the Company
to you during your employment for your exclusive use without any additional cost
to you. You shall return the audiovisual equipment on January 4, 2000.
E. Continuing Obligations
You agree that you will comply with the post-termination obligations
set forth in paragraphs 1, 4, 6, 9 and 10 of the Reebok Employee Agreement,
attached hereto as EXHIBIT B and incorporated herein by reference. Furthermore,
each of us agrees, as a condition of this Agreement, not to discuss with any
third party anything related to the termination of that employment or the terms
of this Agreement, except: (i) you may discuss the foregoing your current
employer or with a prospective employer, your attorney or other adviser or
family member; (ii) the Company may share the terms of this Agreement with those
employees who have a legitimate business need to know or to those employees for
the processing of appropriate paperwork; (iii) the Company may reveal any
information necessary for securities filings; (iv) the Company may issue a press
release and speak to third parties not inconsistent with the content of the
statement attached hereto as EXHIBIT C and incorporated herein by reference; and
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<PAGE> 4
(v) you may disclose information not inconsistent with the content of the
statement attached hereto as EXHIBIT C . Notwithstanding the foregoing, nothing
in this paragraph G shall prohibit disclosure of such information to the extent
required by law.
You further agree that until December 1, 2000, you will not accept any
position with any organization which competes with Reebok anywhere in the world
where Reebok products are sold, with the Reebok Brands Division or with other
businesses of Reebok as presently constituted, 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 paragraph, 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 paragraph 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 paragraph are reasonable to protect the legitimate interests
of the Company and the goodwill of the Company.
As part of this Agreement, you agree to cooperate with the reasonable
requests of the Company (including without limitation, responding to inquiries
by and providing relevant information to, the Legal Department, and testifying
both in court and at depositions as to facts related to your employment) at
reasonable times and consistent with your other business obligations in
connection with any litigation or legal dispute currently pending and any future
litigation or legal dispute that relates to the operations of the Company during
the term of your employment with the Company. The Company will reimburse you for
all reasonable out-of-pocket costs incurred by you in connection with your
cooperation hereunder. In addition, any time required by Reebok pursuant to this
paragraph will be compensated at a rate of $3,200 per day.
You also agree that you will not disparage the Company or any of its
employees, products, policies, decisions, advertising, marketing or other
programs. In return, Reebok will not allow any public statements (i.e., press
releases) by the Company which disparage you professionally or personally. Paul
Fireman and I also agree not to make any statements that disparage you
professionally or personally. Reebok will also comply with its standard policy
of having the Human Resources Department respond to any incoming reference
requests or past employment verification and they will only confirm dates of
employment, titles and salary history to any prospective employers.
Each of us agrees that our obligations under this Agreement will
survive the termination of this Agreement.
H. Payment Upon Death
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<PAGE> 5
If you should die while any amounts would still be payable to you
hereunder, all such amounts shall be payable to your estate, heirs, executors or
beneficiaries in accordance with the terms hereof.
F. Indemnification
You shall be indemnified by the Company against expenses incurred in
connection with an action, suit or proceeding by reason of the fact that you
were an officer or director of the Company to the fullest extent permitted by
the Company's bylaws and certificate of incorporation.
Reebok wants to be certain that the payment and provision of the
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.
J. YOUR RELEASE OF ALL CLAIMS
UPON THE MAKING OF ALL PAYMENTS SET FORTH IN PARAGRAPHS A AND D OF THIS
AGREEMENT, THIS AGREEMENT SHALL BE IN COMPLETE AND FINAL SETTLEMENT OF, AND WILL
RELEASE 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 THAT OCCURRED DURING THE COURSE OF YOUR
EMPLOYMENT (OTHER THAN FOR UNPAID PAYMENTS DUE OR UNPAID BENEFITS REQUIRED TO BE
PROVIDED UNDER THIS AGREEMENT), 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, EXCEPT AS PROVIDED IN THE FOLLOWING PARAGRAPH, 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
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<PAGE> 6
AND EXPENSES INCURRED BY REEBOK OR SUCH RELATED PARTY IN DEFENDING SUCH CLAIM,
ACTION OR SUIT, INCLUDING REASONABLE ATTORNEYS' FEES.
NOTWITHSTANDING THE FOREGOING, YOU SHALL RETAIN AND NOT RELINQUISH YOUR
RIGHT TO RECEIVE BENEFITS IN ACCORDANCE WITH THE COMPANY'S RETIREMENT AND
SAVINGS PLANS, INCLUDING BENEFITS UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY
ACT OF 1974, AS AMENDED, OR OTHER APPLICABLE LAW, AND THE RIGHT TO ENFORCE THE
PROVISIONS OF THIS AGREEMENT. YOU SHALL ALSO RETAIN THE RIGHT TO ASSERT ALL
DEFENSES, CLAIMS, COUNTERCLAIMS AND CROSS CLAIMS WHICH YOU MAY HAVE IN THE EVENT
THE COMPANY OR ANY SHAREHOLDER OR THIRD PARTY BRINGS ANY CLAIM AGAINST YOU WITH
REGARD TO YOUR EMPLOYMENT, OR MATTERS COVERED BY THE COMPANY'S RELEASE.
K. THE COMPANY'S RELEASE OF ALL CLAIMS
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The Company, on behalf of itself and its subsidiaries, divisions,
officers, directors, successors, assigns and shareholders hereby releases and
forever discharges you from any and all causes of action, claims, demands or
liabilities (whether or not currently known or suspected to exist by the Company
or those connected with it) that it has had, now has 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 (including any claim for
overpayment of wages, but excluding rights or claims the Company may have in the
future for a breach of the Agreement or for any criminal actions), or pursuant
to any federal, state or local law or regulation. The Company, on behalf of
itself and its subsidiaries, divisions, officers, directors, successors, assigns
and shareholders, also agrees that it will never institute any claim, suit or
action against you in any court or before any regulatory body or agency that in
any way relates to your employment or the termination of your employment (other
than with respect to respect to rights or claims the Company may have for a
breach of the Agreement).
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<PAGE> 7
This Agreement, along with the three attached exhibits, will constitute
the entire agreement between you and the Company with respect to all matters
discussed in this Agreement, and, provided all payments are made as provided
herein and all other material obligations are complied with, will supersede any
and all other prior agreements between you and the Company (including without
limitation, the Yankowski Contract and other agreements relating to your
separation of employment) with respect to matters relating to your employment by
the Company, the termination of your employment, or any other matters covered in
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. 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, in fact, have spoken with an attorney and that you
fully understand the terms of this Agreement. The Company represents that this
Agreement has been duly authorized, validly executed and the undersigned has
full power to bind the Company. 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 day period and
sent by certified mail, return receipt requested, to the attention of 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.
Please indicate your agreement with the foregoing terms by signing your
name in the space provided below and returning the Agreement to my attention.
Upon signing, this Agreement becomes fully effective and binding upon Reebok
and, following expiration of your seven day revocation period, will become fully
effective and binding upon you. If you elect to
revoke within the seven day time period then this Agreement shall be void ab
initio and neither party shall have any further obligations under this
Agreement.
CARL YANKOWSKI REEBOK INTERNATIONAL LTD.
/s/ CARL YANKOWSKI /s/ JIMMY JONES
------------------------- -------------------------
Signature Signature
-7-
<PAGE> 1
EXHIBIT 12.1: STATEMENT RE COMPUTATION OF RATIO OF EARNINGS
REEBOK INTERNATIONAL LTD.
(Amounts in Thousands)
Exhibit 12 - Statement RE: Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
December December
1999 1998
<S> <C> <C>
Earnings
Pretax Income $21,138 $ 35,852
Add:
Interest on indebtedness 49,691 60,671
Amortization of debt discount and issuance costs 344 363
Portions of rent representative of the interest factor 15,395 15,104
------- --------
Income as adjusted $86,568 $111,990
======= ========
Fixed Charges
Interest on indebtedness $49,691 $ 60,671
Amortization of debt discount and issuance costs 344 363
Portions of rent representative of the interest factor 15,395 15,104
------- --------
Fixed charges $65,430 $ 76,138
======= ========
Ratio of earnings to fixed charges 1.32 1.47
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REEBOK INTERNATIONAL LTD.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME JURISDICTION OF
INCORPORATION
OR ORGANIZATION
- --------------------------------------------------------------------------------
<S> <C>
Ralph Lauren Footwear Co., Inc. Massachusetts
- --------------------------------------------------------------------------------
RBK Thailand, Inc. Massachusetts
- --------------------------------------------------------------------------------
Reebok CHC, Inc. Massachusetts
- --------------------------------------------------------------------------------
Reebok Foundation, Inc. Massachusetts
- --------------------------------------------------------------------------------
Reebok International Securities Corp. Massachusetts
- --------------------------------------------------------------------------------
Reebok Securities Holdings Corp. Massachusetts
- --------------------------------------------------------------------------------
The Reebok Worldwide Trading Company, Ltd. Massachusetts
- --------------------------------------------------------------------------------
Reebok Aviation, LLC Delaware
- --------------------------------------------------------------------------------
The Rockport Company, LLC Delaware
- --------------------------------------------------------------------------------
Reebok International, Ltd. Massachusetts
- --------------------------------------------------------------------------------
Avintco, Inc. Delaware
- --------------------------------------------------------------------------------
RFC, Inc. Delaware
- --------------------------------------------------------------------------------
Reebok Austria GMBH Austria
- --------------------------------------------------------------------------------
Rockport Gesellschaft m.b.h. Austria
- --------------------------------------------------------------------------------
Reebok of Belgium SA Belgium
- --------------------------------------------------------------------------------
Reebok do Brasil Servicos a Participacoes Ltda Brazil
- --------------------------------------------------------------------------------
Rockport do Brasil-Comercio, Servicos e Participacoes Ltda. Brazil
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME JURISDICTION OF
INCORPORATION
OR ORGANIZATION
- --------------------------------------------------------------------------------
<S> <C>
R.C. Investments Ltd. Canada
- --------------------------------------------------------------------------------
Reebok Canada, Inc. Canada
- --------------------------------------------------------------------------------
Reebok France SA France
- --------------------------------------------------------------------------------
Rockport France S.a.r.l. France
- --------------------------------------------------------------------------------
AGI Sportartikel GMBH Germany
- --------------------------------------------------------------------------------
American Sports and Leisure Vertriebs GMBH Germany
- --------------------------------------------------------------------------------
Reebok Deutschland GMBH Germany
- --------------------------------------------------------------------------------
Reebok (China) Services Limited Hong Kong
- --------------------------------------------------------------------------------
Reebok Far East Ltd. Hong Kong
- --------------------------------------------------------------------------------
Reebok Trading (FAR EAST) Limited Hong Kong
- --------------------------------------------------------------------------------
Reebok India Company India
- --------------------------------------------------------------------------------
Reebok Technical Services Private Limited India
- --------------------------------------------------------------------------------
Reebok Ireland Limited Ireland
- --------------------------------------------------------------------------------
Reebok Italia S.r.l. Italy
- --------------------------------------------------------------------------------
Rockport International Trading Co. Italy S.r.l. Italy
- --------------------------------------------------------------------------------
Reebok Japan Inc. Japan
- --------------------------------------------------------------------------------
Rockport Japan Inc. Japan
- --------------------------------------------------------------------------------
Reebok Korea Limited Korea
- --------------------------------------------------------------------------------
Reebok Korea Technical Services Company, Ltd. Korea
- --------------------------------------------------------------------------------
Reebok (Mauritius) Company Limited Mauritius
- --------------------------------------------------------------------------------
Rockport Mexico S.A. de C.V. Mexico
- --------------------------------------------------------------------------------
Reebok Distribution B.V. The Netherlands
- --------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME JURISDICTION OF
INCORPORATION
OR ORGANIZATION
- --------------------------------------------------------------------------------
<S> <C>
RBK Sport Europe B.V. The Netherlands
- --------------------------------------------------------------------------------
Reebok International Finance B.V. The Netherlands
- --------------------------------------------------------------------------------
Reebok Europe B.V. The Netherlands
- --------------------------------------------------------------------------------
Rockport (Europe) B.V. The Netherlands
- --------------------------------------------------------------------------------
Reebok Nederland B.V. The Netherlands
- --------------------------------------------------------------------------------
Rockport (Nederland) B.V. The Netherlands
- --------------------------------------------------------------------------------
Reebok (Philippines) Services Co., Inc. Philippines
- --------------------------------------------------------------------------------
Reebok Poland SA Poland
- --------------------------------------------------------------------------------
Reebok Portugal Artigos Desportives Lda Portugal
- --------------------------------------------------------------------------------
Reebok Leisure SA Spain
- --------------------------------------------------------------------------------
Reebok (South Africa) (Proprietary) Limited South Africa
- --------------------------------------------------------------------------------
Reebok Scandinavia AB Sweden
- --------------------------------------------------------------------------------
Reebok (Taiwan) Services Company Taiwan
- --------------------------------------------------------------------------------
Reebok Ukraine Subsidiary Enterprise Ukraine
- --------------------------------------------------------------------------------
J.W. Foster & Sons (Athletic Shoes) Limited United Kingdom
- --------------------------------------------------------------------------------
RBK Holdings Plc United Kingdom
- --------------------------------------------------------------------------------
Reebok Eastern Trading Limited United Kingdom
- --------------------------------------------------------------------------------
Reebok International Limited United Kingdom
- --------------------------------------------------------------------------------
Reebok Sports Limited United Kingdom
- --------------------------------------------------------------------------------
Reebok UK Limited United Kingdom
- --------------------------------------------------------------------------------
The Rockport Company Limited United Kingdom
- --------------------------------------------------------------------------------
Rockport International Limited United Kingdom
- --------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME JURISDICTION OF
INCORPORATION
OR ORGANIZATION
- --------------------------------------------------------------------------------
<S> <C>
Reebok Pensions Management Limited United Kingdom
- --------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 1
Exhibit 23.1: Consent of Ernst & Young LLP
ACCOUNTANTS' CONSENT
We consent to the incorporation by reference in the Registration Statements
on Form S-3 (File Nos. 33-24114, 33-32664, 33-62301 and 333-17955) and Form S-8
(File Nos. 33-6989, 33-15729, 33-53954, 33-14698, 33-15089, 33-32663, 33-54562,
33-53523, 33-53525, 33-53537, 333-67247, 333-67249 and 333-83897) and related
prospectuses of our report dated February 2, 2000, with respect to the
consolidated financial statements and schedule of Reebok International Ltd
included in the Annual Report (Form 10-K) for the year ended December 31, 1999.
Our audits also included the financial statement schedule of Reebok
International Ltd. listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/Ernst & Young LLP
- ---------------------
Boston, Massachusetts
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 281,744
<SECURITIES> 0
<RECEIVABLES> 463,621
<ALLOWANCES> 46,217
<INVENTORY> 414,616
<CURRENT-ASSETS> 1,243,118
<PP&E> 421,685
<DEPRECIATION> 243,574
<TOTAL-ASSETS> 1,564,128
<CURRENT-LIABILITIES> 623,903
<BONDS> 370,302
0
0
<COMMON> 930
<OTHER-SE> 527,886
<TOTAL-LIABILITY-AND-EQUITY> 1,564,128
<SALES> 2,899,872
<TOTAL-REVENUES> 2,891,237
<CGS> 1,783,914
<TOTAL-COSTS> 1,783,914
<OTHER-EXPENSES> 1,036,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,691
<INCOME-PRETAX> 21,138
<INCOME-TAX> 10,093
<INCOME-CONTINUING> 11,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,045
<EPS-BASIC> .20
<EPS-DILUTED> .20
</TABLE>
