1
EXHIBIT 13.1
FINANCIAL RESULTS AND CORPORATE INFORMATION
FINANCIAL DATA
SELECTED FINANCIAL DATA 19
QUARTERLY RESULTS OF OPERATIONS 38
MD&A
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION 20
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 25
CONSOLIDATED STATEMENTS OF INCOME 26
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY 27
CONSOLIDATED STATEMENTS OF CASH FLOWS 28
NOTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29
REPORTS
REPORT OF INDEPENDENT AUDITORS 37
REPORT OF MANAGEMENT 37
CORPORATE INFORMATION
DIRECTORS AND OFFICERS 39
SHAREHOLDER INFORMATION 40
SELECTED FINANCIAL DATA
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
=====================================================================================================
Net sales $3,643,599 $3,478,604 $3,481,450 $3,280,418 $2,893,900
Income before income taxes
and minority interest 158,085 237,668 275,974 417,368 371,508
Net income 135,119 138,950 164,798 254,478 223,415
Basic earnings per share 2.41 2.06 2.10 3.09 2.58
Diluted earnings per share 2.32 2.03 2.07 3.02 2.53
Cash dividends per common share -- .225 .300 .300 .300
------------------------------------------------------------------
DECEMBER 31, 1997 1996 1995 1994 1993
=====================================================================================================
Working capital $ 887,367 $ 946,127 $ 900,922 $ 831,856 $ 730,757
Total assets 1,756,097 1,786,184 1,651,619 1,649,461 1,391,711
Long-term debt 639,355 854,099 254,178 131,799 134,207
Stockholders' equity 507,157 381,234 895,289 990,505 846,617
------------------------------------------------------------------
The earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." For further discussion regarding the calculation of earnings per share,
see Note 1 to the Consolidated Financial Statements.
On June 7, 1996, Reebok completed the sale of substantially all of the
operating assets and business of its subsidiary, Avia Group International, Inc.
("Avia"); accordingly, subsequent to that date, the operations of Avia are no
longer included in the Company's financial results. 1997 results include an
income tax benefit of $40,000 related to the conclusion in 1997 of outstanding
tax matters associated with the sale of Avia. 1997 also includes total special
after-tax charges of $39,161 relating to restructuring activities in the
Company's global operations.
Financial data for 1995 includes total special after-tax charges of
$44,934, of which $33,699 relates to the sale of Avia and $11,235 relates to
facilities consolidation, severance and other related costs associated with the
streamlining of certain segments of the Company's operations.
Financial data for 1993 includes a special after-tax charge of $7,037
related to the sale of Ellesse U.S.A., Inc. and Boston Whaler, Inc.
REEBOK INTERNATIONAL LTD. 19
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. PROSPECTIVE INFORMATION IS BASED
ON MANAGEMENT'S THEN CURRENT EXPECTATIONS OR FORECASTS. SUCH INFORMATION IS
SUBJECT TO THE RISK THAT SUCH EXPECTATIONS OR FORECASTS, OR THE ASSUMPTIONS
UNDERLYING SUCH EXPECTATIONS OR FORECASTS, BECOME INACCURATE. FACTORS THAT COULD
AFFECT THE COMPANY'S ACTUAL RESULTS AND COULD CAUSE SUCH RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN FORWARD-LOOKING STATEMENTS MADE BY OR ON
BEHALF OF THE COMPANY INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND
THOSE DESCRIBED IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-K UNDER THE
HEADING "ISSUES AND UNCERTAINTIES".
OPERATING RESULTS 1997
Net sales for the year ended December 31, 1997 were $3.644 billion, a 4.7%
increase from the year ended December 31, 1996 sales of $3.479 billion, which
included $49.4 million of sales from the Company's Avia subsidiary that was sold
in June 1996. The Reebok Division's worldwide sales (including Greg Norman) were
$3.131 billion in 1997, a 5.0% increase from comparable sales of $2.982 billion
in 1996. The stronger U.S. dollar has adversely impacted Reebok Brand worldwide
sales comparisons with the prior year. On a constant dollar basis, sales for the
Reebok Brand worldwide increased 8.3% in 1997 as compared to 1996. The Reebok
Division's U.S. footwear sales increased 3.0% to $1.229 billion in 1997 from
$1.193 billion in 1996. The increase in the Reebok Division's U.S. footwear
sales is attributed primarily to increases in the running, walking and men's
cross-training categories. The increase in sales in these categories was
partially offset by decreases in Reebok's basketball, outdoor and women's
fitness categories. The underlying quality of Reebok footwear sales in the U.S.
improved from last year. Sales to athletic specialty accounts increased
approximately 31%, and the amount of off-price sales declined from 7.6% of total
Reebok footwear sales in 1996 to 3.2% of total Reebok footwear sales in 1997.
The Reebok Division's U.S. apparel sales increased by 37.2% to $431.9 million
from $314.9 million in 1996. The increase resulted primarily from increases in
branded core basics, licensed and graphic categories. The Reebok Division's
International sales (including footwear and apparel) were $1.471 billion in
1997, approximately equal to the Division's International sales in 1996 of
$1.474 billion. The International sales comparison was negatively impacted by
changes in foreign currency exchange rates. On a constant dollar basis, for the
year ended December 31, 1997, the International sales gain was 6.4%. All
International regions generated sales increases over the prior year on a
constant dollar basis. For International sales, increases in the running,
classic and walking categories were offset by decreases in the basketball and
tennis categories. Generally in the industry there is a slowdown in branded
athletic footwear and apparel at retail, and there is a significant amount of
promotional product offered across all distribution channels. As a result of
this situation and the expected ongoing negative impact from currency
fluctuations, it will be difficult to increase reported sales for the Reebok
Brand in 1998.
Rockport's sales for 1997 increased by 14.5% to $512.5 million from $447.6
million in 1996. Exclusive of the Ralph Lauren footwear business, which was
acquired in May 1996, Rockport's sales increased 7.3% in 1997. International
revenues, which grew by 46.0%, accounted for approximately 21.0% of Rockport's
sales (excluding Ralph Lauren Footwear) in 1997, as compared to 16.0% in 1996.
Increased sales in the walking and men's categories were partially offset by
decreased sales in the women's lifestyle category. The decrease in the women's
lifestyle category was the result of a strategic initiative to re-focus the
women's business around an outdoor, adventure and travel positioning and reduce
the product offerings in the refined women's dress shoe segment. Rockport
continues to attract younger customers to the brand with the introduction of a
wider selection of dress and casual products. The Ralph Lauren footwear business
performed well in 1997 and is beginning to generate sales growth in its
traditional segments, reflecting the benefits of improved product design and
development and increased distribution. Rockport plans to expand the current
product line of Ralph Lauren Polo Sport athletic footwear during 1998 with
additional products which will be available at retail during 1999.
The Company's gross margin declined from 38.4% in 1996 to 37.0% in 1997.
Margins are being negatively impacted by both start-up costs and initially
higher manufacturing costs on the Company's new technology products (DMX 2000
and 3D Ultralite). In addition, the decline reflects a significant impact from
currency fluctuations as a result of the stronger U.S. dollar and a decrease in
full-margin at-once business as a result of an over-inventoried promotional
retail environment. The Company estimates that 100 basis points of the margin
decline is due to currency. Looking forward, the Company expects margins to
continue to be under pressure through at least the first half of 1998. However,
the Company believes that if the technology product line expands and gains
greater critical mass and with improving production capabilities, the new
technology products are capable of generating margin improvement.
Selling, general and administrative expenses decreased as a percentage of
sales from 30.6% in 1996 to 29.4% in 1997. The reduction is primarily due to the
absence of certain advertising and marketing expenses associated with the 1996
Summer Olympics. In addition, non-brand building general and administrative
infrastructure expenses declined. Research, design and development expenses
increased 27.0% for the year and retail operating expenses increased in support
of new store openings. At December 31, 1997, the Company operated 157 Reebok,
Rockport and Greg Norman retail stores in the U.S. as compared to 141 at the end
of 1996.
As described in Note 2 to the Consolidated Financial Statements, the
Company recorded special pre-tax charges of $58.2 million relating to
restructuring activities in the Company's global operations. The restructuring
should enable the Company to achieve operating efficiencies, including improved
inventory management, credit management, purchasing power and customer service
and should provide the organization with access to a single global data base of
company, supplier and customer information. The restruc-
20 REEBOK INTERNATIONAL LTD.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
turing initiatives should also improve logistics, allow the Company to focus its
spending on those key athletes and teams who are more closely aligned with its
brand positioning and produce cost savings once completed during 1999.
Interest expense increased as a result of the additional debt the Company
incurred to finance the shares acquired during the 1996 Dutch Auction share
repurchase.
As described in Note 14 to the Consolidated Financial Statements, the
Internal Revenue Service notified the Company in August 1997 that it had
approved the Company's tax treatment of certain losses related to the sale of
its Avia subsidiary. Accordingly, the Company recorded a tax benefit in the
quarter ended September 30, 1997 totaling $40.0 million. Excluding the favorable
impact of this special income tax credit, the Company's effective tax rate was
33.2% in 1997, as compared with 35.4% in 1996. The decrease in the rate is
attributable to a change in the mix of the earnings between domestic and
international subsidiaries. The Company expects its effective tax rate in 1998
to be further reduced to 31.0% - 32.0% as a result of the change in geographic
mix of earnings and ongoing efforts to improve cash flow through various tax
planning initiatives.
The $10.5 million increase in other expense in 1997 relates primarily to
currency losses due to the stronger U.S. dollar.
Year-to-year earnings per share comparisons benefited from the Company's
share repurchase programs including the Dutch Auction share repurchase which was
completed in August 1996. Weighted average common shares outstanding (dilutive)
for the year ended December 31, 1997 declined by 15.0% to 58.3 million shares,
as compared to 68.6 million shares for the year ended December 31, 1996.
The Company's footwear and apparel production operations are subject to
the usual risks of doing business abroad, such as import duties, quotas and
other threats to free trade, foreign currency fluctuations, labor unrest and
political instability. The Company believes that it has the ability to develop,
over time, adequate substitute sources of supply for the products obtained from
present foreign suppliers. If, however, events should prevent the Company from
acquiring products from its suppliers in Indonesia, China, Thailand or the
Philippines, or significantly increase the cost to the Company of such products,
the Company's operations could be seriously disrupted until alternative
suppliers are found.
For several years, imports from China to the U.S., including footwear,
have been threatened with higher or prohibitive tariff rates, either through
statutory action or intervention by the Executive Branch, due to concern over
China's trade policies, human rights, foreign weapons sales practices and its
foreign policy. Further debate on these issues is expected to continue in 1998.
However, the Company does not currently anticipate that restrictions on imports
from China will be imposed by the U.S. during 1998. If adverse action is taken
with respect to imports from China, it could have an adverse effect on some or
all of the Company's product lines, which could result in a negative financial
impact. The Company has put in place contingency plans which should allow it to
diversify some of its sourcing to countries other than China if any such adverse
action occurred. In addition, the Company does not believe that it would be more
adversely impacted by any such adverse action than its major competitors. The
actual effect of any such action will, however, depend on a number of factors,
including how reliant the Company, as compared to its competitors, is on
production in China and the effectiveness of the contingency plans put in place.
The European Union ("EU") imposed import quotas on certain footwear from
China in 1994. The effect of such quota scheme on Reebok has not been
significant because the quota scheme provides an exemption for certain
higher-priced special technology athletic footwear, which exemption is available
for most REEBOK products. This exemption does not, however, cover most of
Rockport's products. Nevertheless, the volume of quota available to Reebok and
Rockport in 1998 is expected to be sufficient to meet the anticipated sales for
ROCKPORT products in EU member countries. If, however, such quota is not
sufficient, there could be an adverse effect on Rockport's international sales.
In addition, the EU has imposed antidumping duties against certain textile
upper footwear from China and Indonesia. A broad exemption from the dumping
duties is provided for athletic textile footwear which covers most REEBOK
models. If the athletic footwear exemption remains in its current form, few
REEBOK product lines will be affected by the duties; however, ROCKPORT products
would be subject to these duties. Nevertheless, the Company believes that those
REEBOK and ROCKPORT products affected by the duties can generally be sourced
from other countries not subject to such duties. If, however, the Company was
unable to implement such alternative sourcing arrangements, certain of its
product lines could be adversely affected by these duties.
The EU also has imposed antidumping duties on certain leather upper
footwear from China, Thailand and Indonesia. These duties will apply only to low
cost footwear, below the import prices of most Reebok and Rockport products.
Thus the Company does not anticipate that its products will be impacted by such
duties.
The EU continues to review the athletic footwear exemption which applies
to both the quota scheme and antidumping duties discussed above. The Company,
through relevant trade associations, is working to prevent imposition of a more
limited athletic footwear exemption. Should revisions be adopted narrowing such
exemption, certain of the Company's product lines could be affected adversely,
although the Company does not believe that its products would be more severely
affected than those of its major competitors.
Various other countries have taken or are considering steps to restrict
footwear imports or impose additional customs duties or other impediments, which
actions affect the Company as well as other footwear importers. The Company, in
conjunction with other footwear importers, is aggressively challenging such
restrictions. Such restrictions have in some cases had a significant adverse
effect on the Company's sales in some of such countries, most notably Argentina,
although they have not had a material adverse effect on the Company as a whole.
REEBOK INTERNATIONAL LTD. 21
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OPERATING RESULTS 1996
Net sales for the year ended December 31, 1996 were $3.479 billion,
approximately equal to the net sales for the year ended December 31, 1995 of
$3.482 billion. Excluding Avia sales, net sales for the year ended December 31,
1996 were $3.429 billion, 2.3% higher than the $3.352 billion for the same
period in 1995. The Reebok Division's worldwide sales were $2.982 billion in
1996 and $2.984 billion in 1995. Growth in this Division's U.S. apparel sales as
well as growth in their International sales was offset by a decrease in U.S.
footwear sales. U.S. footwear sales of the Reebok Division decreased 12.7% to
$1.193 billion from $1.367 billion in 1995. The decrease was due primarily to
decreases in substantially all categories other than walking and soccer which
had increases in sales. U.S. apparel sales of the Reebok Division increased by
42.0% to $314.9 million from $221.7 million in 1995. The increase resulted from
increases in licensed and branded apparel, particularly in T-shirts, all purpose
bottoms, warm-ups, tops and outerwear. International sales of the Reebok
Division (including footwear and apparel) were $1.474 billion in 1996, an
increase of 5.7% from $1.395 billion in 1995. Strong apparel sales and increases
in footwear sales of basketball, walking and classic products were partially
offset by decreases in the running, cross-training and outdoor footwear
categories. The stronger U.S. dollar adversely impacted sales comparisons with
the prior year. On a constant dollar basis for the year ended December 31, 1996,
the International sales gain was 8.8%. On a local currency basis, thereby
eliminating the impact of changes in foreign currency exchange rates, the United
Kingdom, Japan, Korea and South Africa had increases in sales whereas there were
decreases in sales in France, Canada and Belgium and in the Division's sales to
certain Latin American distributors.
Rockport's sales for 1996 increased by 21.6% to $447.6 million from $368.1
million in 1995. This increase reflects an emphasis on Rockport's walking
technology and the successful introduction of new products in 1996. Increased
sales in the men's casual dress and performance walking categories were
partially offset by decreased sales in the women's lifestyle and outdoor
categories. Rockport's 1996 results include the Ralph Lauren footwear business.
In May 1996, Rockport entered into a licensing arrangement for the North
American license for Ralph Lauren footwear and also acquired Ralph Lauren
Footwear, Inc., the former North American footwear licensee for Ralph Lauren.
Rockport is expected to acquire the Ralph Lauren footwear licensing rights for
the rest of the world over the next several years. Sales of Ralph Lauren
footwear were $31.9 million in 1996 for the seven month period from May 1996
(the date of acquisition) through December 1996. Rockport's International
business increased by 21.0% in 1996. Exclusive of sales of Ralph Lauren
footwear, Rockport's International sales accounted for 16% of its total sales
during 1996.
For the year ended December 31, 1996, the Company's sales include $49.4
million of sales of Avia, a decrease of 61.9% from the $129.6 million of sales
of Avia for 1995. On June 7, 1996, Reebok completed the sale of substantially
all of the operating assets and business of Avia. Accordingly, subsequent to
that date, the operations of Avia are no longer included in the Company's
financial results.
Gross margins declined from 39.3% in 1995 to 38.4% in 1996. The decline in
margins includes the effect of costs incurred with respect to new products and
technologies. These costs include the impact of start-up tooling, shorter
production runs and increased air freight. The margin decline also reflects a
substantial shift in the overall mix of the U.S. business due to increased
apparel sales and decreased footwear sales. U.S. apparel sales in 1996 accounted
for 20.8% of the Reebok business in the U.S. as compared to 14.0% in 1995. Since
U.S. apparel sales contribute lower gross margins than the U.S. footwear
business, the shift in domestic mix negatively impacts overall gross margins.
International margins were negatively impacted in 1996 as compared with the
prior year due to a strong U.S. dollar as against most international currencies.
Selling, general and administrative expenses increased as a percentage of
sales from 28.7% in 1995 to 30.6% in 1996. Advertising and marketing expenses
increased by $66.2 million during 1996 with approximately $30.0 million of that
increase attributable to Reebok's Olympic participation. Continued investment in
brand-building expenses, including product development, retail presence, sports
marketing and on-field presence also contributed to the increase. In addition,
retail operating expenses increased in support of the U.S. retail store
expansion. At December 31, 1996, the Company operated 141 U.S. Reebok, Rockport
and Greg Norman retail stores as compared to 117 at the end of 1995. Primarily
all of these U.S. retail stores are located in factory direct outlet malls.
Amortization of intangibles decreased due to the write-down in the fourth
quarter of 1995 of the carrying value of Avia to estimated fair value on sale.
Minority interest represents the minority shareholders' proportionate
share of the net income of certain of the Company's consolidated subsidiaries.
Interest expense increased from $25.7 million in 1995 to $42.2 million in
1996 as a result of increased borrowings to fund the purchase of approximately
17.0 million shares of the Company's common stock in connection with the
Company's Dutch Auction self-tender offer which was completed in August 1996.
Year-to-year earnings per share comparisons benefited from the Company's
share repurchase programs and the repurchase of shares pursuant to the Dutch
Auction. Weighted average common shares outstanding (dilutive) for the year
ended December 31, 1996 declined to 68.6 million, compared to 79.5 million
shares for the year ended December 31, 1995.
REEBOK BRAND BACKLOG
The Reebok Brand backlog (including Greg Norman apparel) of open customer orders
for the period January 1, 1998 through June 30, 1998 was essentially flat as
compared to the same period last year. On a constant dollar basis, the Reebok
Brand back-
22 REEBOK INTERNATIONAL LTD.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
log increased 3.4%. North American backlog for the Reebok Brand, which includes
the U.S. and Canada, increased 2.8% and the International backlog decreased
5.7%. On a constant dollar basis, the International backlog increased 4.4%.
Reebok U.S. footwear backlog increased 2.1% and Reebok U.S. apparel backlog
(including Greg Norman apparel) decreased 1.7% as compared to the same period
last year. Management believes the slowdown in the Reebok Division's domestic
footwear and apparel bookings is the result of retailers becoming more cautious
in placing future orders, given current market conditions. The Company continues
to see improvement in the shape of the Reebok Brand U.S. footwear order book,
with athletic specialty backlog up 57% for the next six months and the volume
channel down 11%. The percentage changes in open backlog are not necessarily
indicative of future sales trends. The reasons for this are that many orders are
cancelable, sales by company-owned retail stores can vary from year-to-year and
the ratio of orders booked early to at-once shipments can vary from period to
period. For example, the percentage of Reebok U.S. footwear futures to total
Reebok U.S. footwear sales was approximately 87% in 1997 as compared to 78% in
1996.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's financial position remains strong. Working capital was $887.4
million at December 31, 1997 and $946.1 million at December 31, 1996. The
current ratio at December 31, 1997 was 2.5 to 1 compared to 2.8 to 1 at December
31, 1996. The decline in the current ratio is primarily the result of the
medium-term notes of $50.0 million due in 1998, which were previously classified
as long-term debt, being classified as a current liability at December 31, 1997
and the pre-payment of $100.0 million of long-term debt during 1997.
Accounts receivable decreased by $28.8 million from December 31, 1996, a
decrease of 4.8%. This is the result of the Reebok Division reducing the average
days sales outstanding in U.S. receivables by 7 days as compared to last year
end. Inventory increased by $19.2 million, or 3.5% from December 31, 1996. U.S.
footwear inventories of the Reebok Brand increased 24% at year end in dollars
versus a year ago but only 5% in pairs, reflecting higher average per unit costs
due to the inclusion of a greater percentage of technology products and a
greater percentage of on-time delivery from the Far East factories as they began
to catch up with demand, given the general slowdown in the industry. Reebok U.S.
apparel inventories were down 23.7% and Reebok retail outlet inventories were
down 12% despite adding ten additional stores over the course of the year and
achieving same store sales increases of 7.3% in 1997.
During the year ended December 31, 1997, cash and cash equivalents
decreased $22.6 million and outstanding borrowings decreased by $138.7 million.
The Company elected to make pre-payments of $50.0 million in February 1997 and
$50.0 million in May 1997 on its long-term debt facility used to fund the Dutch
Auction share repurchase in August 1996. Cash provided by operations during 1997
was $126.9 million, as compared to cash provided by operations of $280.3 million
during 1996. The change in operating cash flow year-to-year is attributable to
improved inventory management practices which had a significant impact in
reducing 1996 inventory levels from the prior year thereby generating
significant cash in that year. Cash generated from operations, together with the
Company's existing credit lines and other financial resources, is expected to
adequately finance the Company's current and planned 1998 cash requirements.
However, the Company's actual experience may differ from the expectations set
forth in the preceding sentence. Factors that might lead to a difference
include, but are not limited to, future events that might have the effect of
reducing the Company's available cash balances (such as unexpected operating
losses or increased capital or other expenditures), as well as future events
that might reduce or eliminate the availability of external financial resources.
As a result of the current industry conditions and the Company's near-term
business outlook, the Company has announced plans to further restructure its
operations in order to manage its business more efficiently in the near-term.
Key initiatives will include simplifying and flattening the organizational
structure by eliminating management layers, combining and redefining business
units and centralizing operations. The intention is to focus the business on
fewer near-term opportunities, postpone certain longer-term investments, and
simplify the process flows to gain greater efficiencies. As a result of this
effort, the Company expects to take a special charge in the first quarter of
1998 of between $25 million to $35 million on a pre-tax basis. The on-going
effect of the restructuring will be to reduce operating costs to a level more
commensurate with the anticipated short-term business outlook.
The Company has conducted a comprehensive global review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and has developed an implementation plan to address the issue. During 1997, the
Company started its global implementation of SAP software which will replace
substantially all legacy systems. The Company presently believes that, with
modifications to existing software and converting to SAP software, the year 2000
issue will not pose significant operational problems for the Company's computer
systems as so modified and converted. The Company expects the global
implementation of SAP to be substantially completed by 1999 and the
implementation is currently on schedule. However, if such modifications and
conversions are not completed timely or effectively, the year 2000 problem could
have a material impact on the operations of the Company.
Lawsuits arise during the normal course of business. The Company does not
expect the outcome of any existing litigation to have a significant impact on
its financial position or future results of operations.
The Company enters into forward currency exchange contracts and options to
hedge its exposure for merchandise purchased in U.S. dollars that will be sold
to customers in other currencies. Realized and unrealized gains and losses on
these contracts are included in net income except that gains and losses on
contracts which hedge specific foreign currency commitments are deferred and
accounted for as a part of the transaction.
REEBOK INTERNATIONAL LTD. 23
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company also uses forward currency exchange contracts and options to
hedge significant intercompany assets and liabilities denominated in other than
the functional currency. Contracts used to hedge intercompany balances are
marked to market and the resulting transaction gain or loss is included in the
determination of net income.
Foreign currency losses realized from settlements of transactions included
in net income for the year ended December 31, 1997 were $8.1 million. Realized
gains and losses from settlements of transactions for the years ended December
31, 1996 and 1995 were not significant. The Company has used forward exchange
contracts and options as an element of its risk management strategy for several
years.
At December 31, 1997, the Company had forward currency exchange contracts
and options, all having maturities of less than one year, with a notional amount
aggregating $357.9 million. The contracts involved twelve different foreign
currencies. No single currency represented more than 20% of the aggregate
notional amount. The notional amount of the contracts intended to hedge
merchandise purchases was $165.3 million. Deferred gains (losses) on these
contracts were not material at December 31, 1997 and 1996.
The Company uses interest rate swap agreements to manage its exposure to
interest rate movements by effectively converting a portion of its variable rate
long-term debt from floating to fixed rates. These agreements involve the
exchange of variable rate payments for fixed rate payments without the effect of
leverage and without the exchange of the underlying principal amount. Interest
rate differentials paid or received under these swap agreements are recognized
over the life of the contracts as adjustments to interest expense. At December
31, 1997, the notional amount of interest rate swaps outstanding was $245.0
million.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
hedging instruments. The Company places cash equivalents with high credit major
financial institutions and, by policy, limits the amount of credit exposure to
any one financial institution.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to hedging instruments. The counterparties to
these contracts are major financial institutions. The Company continually
monitors its positions and the credit ratings of its counterparties and places
dollar and term limits on the amount of contracts it enters into with any one
party.
24 REEBOK INTERNATIONAL LTD.
7
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31 1997 1996
================================================================================================
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 209,766 $ 232,365
Accounts receivable, net of allowance for
doubtful accounts (1997, $44,003; 1996, $43,527) 561,729 590,504
Inventory 563,735 544,522
Deferred income taxes 75,186 69,422
Prepaid expenses and other current assets 54,404 26,275
---------------------------
Total current assets 1,464,820 1,463,088
---------------------------
Property and equipment, net 156,959 185,292
NON-CURRENT ASSETS:
Intangibles, net of amortization 65,784 69,700
Deferred income taxes 19,371 7,850
Other 49,163 60,254
---------------------------
134,318 137,804
---------------------------
Total Assets $ 1,756,097 $ 1,786,184
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 40,665 $ 32,977
Current portion of long-term debt 121,000 52,684
Accounts payable 192,142 196,368
Accrued expenses 219,386 169,344
Income taxes payable 4,260 65,588
---------------------------
Total current liabilities 577,453 516,961
---------------------------
Long-term debt, net of current portion 639,355 854,099
Minority interest 32,132 33,890
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; authorized 250,000,000 shares;
issued 93,115,835 shares in 1997, 92,556,295 shares in 1996 931 926
Retained earnings 1,145,271 992,563
Less 36,716,227 shares in treasury at cost (617,620) (617,620)
Unearned compensation (140) (283)
Foreign currency translation adjustment (21,285) 5,648
---------------------------
507,157 381,234
---------------------------
Total Liabilities and Stockholders' Equity $ 1,756,097 $ 1,786,184
===========================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
REEBOK INTERNATIONAL LTD. 25
8
CONSOLIDATED STATEMENTS OF INCOME
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31 1997 1996 1995
===============================================================================================
Net sales $ 3,643,599 $ 3,478,604 $ 3,481,450
Other income (expense) (6,158) 4,325 3,126
-------------------------------------------
3,637,441 3,482,929 3,484,576
-------------------------------------------
COSTS AND EXPENSES:
Cost of sales 2,294,049 2,144,422 2,114,084
Selling, general and administrative expenses 1,069,433 1,065,792 999,731
Special charges 58,161 72,098
Amortization of intangibles 4,157 3,410 4,067
Interest expense 64,366 42,246 25,725
Interest income (10,810) (10,609) (7,103)
-------------------------------------------
3,479,356 3,245,261 3,208,602
-------------------------------------------
Income before income taxes and minority interest 158,085 237,668 275,974
Income taxes 12,490 84,083 99,753
-------------------------------------------
Income before minority interest 145,595 153,585 176,221
Minority interest 10,476 14,635 11,423
-------------------------------------------
Net income $ 135,119 $ 138,950 $ 164,798
===========================================
Basic earnings per share $ 2.41 $ 2.06 $ 2.10
===========================================
Diluted earnings per share $ 2.32 $ 2.03 $ 2.07
===========================================
Dividends per common share $ -- $ 0.225 $ 0.300
===========================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
26 REEBOK INTERNATIONAL LTD.
9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DOLLAR AMOUNTS IN THOUSANDS
---------------------------------------------------------------
Foreign
Common Stock Additional Currency
------------------------ Paid-in Retained Treasury Unearned Translation
Shares Par Value Capital Earnings Stock Compensation Adjustment
====================================================================================================================================
------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 117,155,611 $1,172 $ 167,953 $1,428,058 $(603,241) $(2,598) $ (839)
------------------------------------------------------------------------------------------
Net income 164,798
Adjustment for foreign
currency translation 12,475
Issuance of shares to certain employees 43,545 1,558 (1,558)
Amortization of unearned compensation 1,008
Shares repurchased and retired (6,639,600) (66) (182,569) (42,835)
Shares retired (67,200) (1) (1,385) (554) 1,940
Shares issued under employee
stock purchase plans 161,377 2 4,253
Shares issued upon exercise
of stock options 361,400 4 6,004
Put option contracts outstanding (15) (39,108)
Premium received from unexercised
equity put options 3,233
Income tax reductions relating to
exercise of stock options 953
Dividends declared (23,353)
------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 111,015,133 1,096 0 1,487,006 (603,241) (1,208) 11,636
------------------------------------------------------------------------------------------
Net income 138,950
Adjustment for foreign
currency translation (5,988)
Treasury shares repurchased (14,379)
Issuance of shares to certain employees 43,278 1,505 (55)
Amortization of unearned compensation 292
Shares repurchased and retired (18,931,403) (190) (672,900) 688
Shares issued under employee
stock purchase plans 157,134 2 4,042
Shares issued upon exercise
of stock options 272,153 3 6,930
Put option contracts expired 15 39,825
Income tax reductions relating to
exercise of stock options 2,385
Dividends declared (15,180)
------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 92,556,295 926 0 992,563 (617,620) (283) 5,648
------------------------------------------------------------------------------------------
Net income 135,119
Adjustment for foreign
currency translation (26,933)
Issuance of shares to certain employees 9,532 431 (431)
Amortization of unearned compensation 566
Shares repurchased and retired (313) 8
Shares issued under employee
stock purchase plans 151,210 1 4,362
Shares issued upon exercise
of stock options 399,111 4 10,040
Income tax reductions relating to
exercise of stock options 2,756
------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 93,115,835 $ 931 $ 0 $1,145,271 $(617,620) $ (140) $(21,285)
------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
REEBOK INTERNATIONAL LTD. 27
10
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMOUNTS IN THOUSANDS
YEAR ENDED DECEMBER 31 1997 1996 1995
=====================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 135,119 $ 138,950 $ 164,798
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 47,423 42,927 39,579
Minority interest 10,476 14,635 11,423
Deferred income taxes (17,285) (6,333) (1,573)
Special charges 55,697 62,743
Changes in operating assets and liabilities, exclusive
of those arising from business acquisitions:
Accounts receivable (13,915) (107,082) 16,157
Inventory (47,937) 77,286 (29,531)
Prepaid expenses (28,613) 22,650 7,841
Other 24,458 11,042 (18,830)
Accounts payable and accrued expenses 20,759 67,769 (25,327)
Income taxes payable (59,257) 18,419 (55,553)
-------------------------------------
Total adjustments (8,194) 141,313 6,929
-------------------------------------
Net cash provided by operating activities 126,925 280,263 171,727
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to acquire property and equipment (23,910) (29,999) (63,610)
Proceeds from business divestitures 6,887
-------------------------------------
Net cash used for investing activities (23,910) (23,112) (63,610)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) of notes payable to banks 27,296 (36,947) 2,426
Proceeds from issuance of common stock to employees 17,163 13,362 11,216
Dividends paid (20,922) (23,679)
Repayments of long-term debt (156,966) (1,290) (112,445)
Net proceeds from long-term debt 632,108 230,000
Proceeds from premium on equity put options 717 3,233
Dividends to minority shareholders (3,900) (7,426) (2,885)
Repurchases of common stock (686,266) (225,470)
-------------------------------------
Net cash used for financing activities (116,407) (106,664) (117,604)
-------------------------------------
Effect of exchange rate changes on cash (9,207) 1,485 5,944
-------------------------------------
Net increase (decrease) in cash and cash equivalents (22,599) 151,972 (3,543)
Cash and cash equivalents at beginning of year 232,365 80,393 83,936
-------------------------------------
Cash and cash equivalents at end of year $ 209,766 $ 232,365 $ 80,393
-------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 59,683 $ 38,738 $ 23,962
Income taxes paid 115,985 77,213 152,690
-------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
28 REEBOK INTERNATIONAL LTD.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
The Company and its subsidiaries design and market sports and fitness products,
including footwear and apparel, as well as footwear and apparel for non-athletic
"casual" use, under various trademarks, including REEBOK, the GREG NORMAN Logo
and ROCKPORT and footwear under RALPH LAUREN and POLO SPORT.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and accounts are
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECOGNITION OF REVENUES
Sales are recognized upon shipment of products.
ADVERTISING
Advertising production costs are expensed the first time the advertisement is
run. Media (TV and print) placement costs are expensed in the month the
advertising appears. Advertising expense (including cooperative advertising)
amounted to $164,870, $201,584 and $157,573 for the years ended December 31,
1997, 1996 and 1995, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In 1996, the Company adopted Statement of Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123"). As permitted by
Statement 123, the Company continues to account for its stock-based plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and provides pro forma disclosures of the compensation expense
determined under the fair value provisions of Statement 123.
CASH EQUIVALENTS
Cash equivalents are defined as highly liquid investments with maturities of
three months or less at date of purchase.
INVENTORY VALUATION
Inventory, substantially all finished goods, is recorded at the lower of cost
(first-in, first-out method) or market.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed principally
on the straight line method over the assets' estimated useful lives. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful lives of the assets.
INTANGIBLES
Excess purchase price over the fair value of assets acquired is amortized using
the straight line method over periods ranging from 5 to 40 years. Other
intangibles are amortized using the straight line method over periods ranging
from 3 to 40 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of most of the Company's foreign subsidiaries are
translated at current exchange rates. Revenues, costs and expenses are
translated at the average exchange rates for the period. Translation adjustments
resulting from changes in exchange rates are reported as a separate component of
stockholders' equity. Other foreign currency transaction gains and losses are
included in the determination of net income.
For those foreign subsidiaries operating in a highly inflationary economy
or having the U.S. dollar as their functional currency, net nonmonetary assets
are translated at historical rates and net monetary assets are translated at
current rates. Translation adjustments are included in the determination of net
income.
INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement No. 109,
"Accounting for Income Taxes" ("Statement 109"). Tax provisions and credits are
recorded at statutory rates for taxable items included in the consolidated
statements of income regardless of the period for which such items are reported
for tax purposes. Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and liabilities.
NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("Statement 128"). Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and have been restated, to conform to Statement 128 requirements.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("Statement 130"). The Company will adopt the
provisions of Statement 130 during fiscal 1998. At that time, the Company will
be required to disclose comprehensive income. Comprehensive income is generally
defined as all changes in stockholders' equity exclusive of transactions with
owners such as capital investments and dividends.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"), which is required to be adopted for years beginning after
December 15, 1997. Management of the Company does not expect the adoption of
Statement 131 to have a material impact on the Company's financial statement
disclosures.
29
REEBOK INTERNATIONAL LTD.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform to the 1997
presentation.
2
SPECIAL CHARGES
The financial results for 1997 include special pre-tax charges of $58,161
($39,200 after tax or $0.67 per diluted share) relating to restructuring
activities in the Company's global operations. The restructuring charge relates
to facilities consolidation and elimination, asset write-downs, personnel
related expenses and the termination or restructuring of certain underperforming
marketing contracts that no longer reflect the Company's brand positioning. The
restructuring activities include reducing the number of European warehouses from
19 to 3; establishing a shared services company that will centralize European
administrative operations; and implementing a global management information
system. The charge will cover certain one-time costs, of which approximately 70%
will affect cash. In connection with the plan, the Company may incur other
additional costs that are not recognizable at this time or cannot be reasonably
estimated. The components of the charge are as follows:
1997 BALANCE
ORIGINAL UTILIZATION DEC. 31, 1997
-------- ----------- -------------
Marketing
contracts $ 25,000 $ -- $ 25,000
Fixed asset
write-downs 16,500 (9,600) 6,900
Employee
retention and
severance 9,200 (800) 8,400
Termination
of leases 6,500 (700) 5,800
Other 961 -- 961
--------- ---------- ---------
$ 58,161 ($ 11,100) $ 47,061
========= ========== =========
The fixed asset write-downs relate to assets that will be abandoned or
sold.
The restructuring should enable the Company to achieve operating
efficiencies, including improved inventory management, credit management,
purchasing power and customer service and should provide the organization with
access to a single global data base of company, supplier and customer
information. The restructuring initiative should also improve logistics, allow
the Company to focus its spending on those key athletes and teams who are more
closely aligned with its brand positioning and produce cost savings once
completed during 1999.
In 1995, the Company recorded a special pre-tax charge of $72,098 ($44,934
after tax or $0.56 per diluted share) principally related to the adjustment of
the carrying value of Avia to its estimated fair value on sale. Actual amounts
recorded in 1996 did not differ materially from the Company's estimates.
3
DUTCH AUCTION SELF-TENDER STOCK REPURCHASE
On July 28, 1996, the Board of Directors authorized the purchase by the Company
of up to 24.0 million shares of the Company's common stock pursuant to a Dutch
Auction self-tender offer. The tender offer price range was from $30.00 to
$36.00 net per share in cash. The self-tender offer commenced on July 30, 1996
and expired on August 27, 1996. As a result of the self-tender offer, the
Company repurchased approximately 17.0 million common shares at a price of
$36.00 per share. Concurrent with the Dutch Auction share repurchase, the
Company's Board of Directors elected to suspend subsequent declarations of
quarterly cash dividends on the Company's stock. Accordingly, the last dividend
declared was for shareholders of record as of September 11, 1996. Suspension of
the dividend will conserve substantial cash which the Company plans to utilize
to reduce debt incurred as a result of the share repurchase.
4
PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
DECEMBER 31 1997 1996
- ----------- ---- ----
Land $ 9,037 $ 29,283
Buildings 75,380 75,044
Machinery and equipment 221,114 204,354
Leasehold improvements 48,663 48,757
---------- -----------
354,194 357,438
Less accumulated depreciation
and amortization 197,235 172,146
---------- -----------
$ 156,959 $ 185,292
========== ===========
5
INTANGIBLES
INTANGIBLES CONSIST OF THE FOLLOWING:
DECEMBER 31 1997 1996
- ----------- ---- ----
Excess of purchase price over
fair value of assets acquired
(net of accumulated
amortization of $8,098 in
1997 and $6,326 in 1996) $ 25,481 $ 27,696
Other intangible assets:
Purchased technology 52,827 52,827
Company tradename
and trademarks 47,254 49,092
Other 13,699 13,693
---------- -----------
113,780 115,612
Less accumulated amortization 73,477 73,608
---------- -----------
40,303 42,004
---------- -----------
$ 65,784 $ 69,700
========== ===========
30
REEBOK INTERNATIONAL LTD.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
6
SHORT-TERM BORROWINGS
The Company has various arrangements with numerous banks which provide an
aggregate of approximately $1,053,000 of uncommitted facilities, substantially
all of which are available to the Company's foreign subsidiaries. Of this
amount, $407,328 is available for short-term borrowings and bank overdrafts,
with the remainder available for letters of credit for inventory purchases. In
addition to amounts reported as notes payable to banks, approximately $317,718
was outstanding for open letters of credit for inventory purchases at December
31, 1997.
On August 23, 1996, in conjunction with the repurchase of its shares
pursuant to the Dutch Auction self-tender offer, the Company entered into a new
credit agreement underwritten by a syndicate of major banks. The agreement
included a $750,000 revolving credit facility, expiring on August 31, 2002 which
replaced the Company's previous $300 million credit line. The balance of the
facility was a $640,000 six-year term loan (see Note 8).
On July 1, 1997, the Company amended and restated the credit agreement.
The amendment reduced the revolving credit portion of the facility from $750,000
to $400,000. The revolving credit facility is available to finance the
short-term working capital needs of the Company as well as support the issuance
of letters of credit for inventory purchases, if required. At December 31, 1997
and December 31, 1996, there were no borrowings outstanding under the revolving
credit portion of this agreement. As part of the agreement, the Company is
required to pay certain commitment fees on the unused portion of the revolving
credit facility as well as comply with various financial and other covenants. As
part of the amendment, the commitment fees the Company is required to pay on the
unused portion of the revolving credit facility as well as the borrowing margins
over the London Interbank Offer Rate on the used portion of the revolving credit
facility were reduced. The amendment further removed or relaxed various
covenants. All other material terms and conditions of the credit agreement
remained unchanged.
The Company utilizes a commercial paper program under which it can borrow
up to $200,000 for periods not to exceed 270 days. This program is supported, to
the extent available, by the unused portion of the $400,000 revolving credit
facility. At December 31, 1997, the Company had no commercial paper obligations
outstanding.
The weighted average interest rate on notes payable to banks was 7.1% and
5.5% at December 31, 1997 and 1996, respectively.
7
LEASING ARRANGEMENTS
The Company leases various offices, warehouses, retail store facilities and
certain of its data processing and warehouse equipment under lease arrangements
expiring between 1998 and 2007. Minimum annual rentals under operating leases
for the five years subsequent to December 31, 1997 and in the aggregate are as
follows:
1998 $ 35,809
1999 30,196
2000 20,319
2001 12,268
2002 8,308
2003 and thereafter 15,756
-----------
Total minimum lease obligations $ 122,656
===========
Total rent expense for all operating leases amounted to $45,827, $46,751
and $40,602 for the years ended December 31, 1997, 1996 and 1995, respectively.
8
LONG-TERM DEBT
LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
DECEMBER 31 1997 1996
- ----------- ---- ----
Variable Rate Term Loan due
August 31, 2002 with
interest payable quarterly $ 497,398 $ 640,000
Medium-term notes, bearing
interest at rates
approximating 6.75%, due
May 15, 2000, with interest
payable semiannually on
May 15 and November 15 100,000 100,000
6.75% debentures due
September 15, 2005, with
interest payable
semiannually on March 15
and September 15 98,953 98,803
Medium-term notes, bearing
interest at rates
approximating 6%, due
July 15, 1998, with interest
payable semiannually on
February 15 and August 15 30,000 30,000
Medium-term notes, bearing
interest at rates
approximating 6%, due
February 11, 1998, with
interest payable
semiannually on February 15
and August 15 20,000 20,000
Bank and other notes payable 14,004 17,980
----------- -----------
760,355 906,783
Less current portion 121,000 52,684
----------- -----------
$ 639,355 $ 854,099
=========== ===========
31
REEBOK INTERNATIONAL LTD.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
On August 23, 1996, the Company entered into a $1,700,000 credit agreement
underwritten by a syndicate of major banks of which $950,000 was available in
the form of a six-year term loan facility for the purpose of financing the
Company's acquisition of common stock pursuant to the Dutch Auction self-tender
offer (see Note 3). Based on the number of shares tendered, the Company borrowed
$640,000 from this facility. The undrawn portion of $310,000 was immediately
canceled upon funding of the share repurchase. The credit agreement included
various covenants including restrictions on asset acquisitions, capital
expenditures and future indebtedness, and the requirement to maintain a minimum
interest coverage ratio. Under the terms of the agreement there are various
options under which the interest is calculated. On July 1, 1997, the Company
amended and restated the credit agreement. This amendment left the remaining
portion of the six-year term loan of $522,398 (as of December 31, 1997) on
substantially the same payment schedule, after adjusting for the $100,000 in
optional prepayments made in 1997. The amendment also removed or relaxed
covenants pertaining to restrictions on asset acquisitions and sales, capital
expenditures, future indebtedness and investments and reduced the borrowing
margins charged by the banks on the variable rate term loan. All other material
terms and conditions of the credit agreement remain unchanged.
At December 31, 1997 and December 31, 1996, the effective rate of interest
on the variable term loan was approximately 6.19% and 6.20%, respectively. In
addition, the Company is amortizing fees and expenses associated with the credit
agreement over the life of the agreement.
Maturities of long-term debt during the five-year period ending December
31, 2002 are $121,000 in 1998, $95,576 in 1999, $185,000 in 2000, $110,000 in
2001 and $147,398 in 2002.
9
EMPLOYEE BENEFIT PLANS
The Company sponsors defined contribution retirement plans covering
substantially all of its domestic employees and certain employees of its foreign
subsidiaries. Contributions are determined at the discretion of the Board of
Directors. Aggregate contributions made by the Company to the plans and charged
to operations in 1997, 1996 and 1995 were $13,696, $11,755 and $11,644,
respectively.
10
STOCK PLANS
The Company has stock plans which provide for the grant of options to purchase
shares of the Company's common stock to key employees, other persons or entities
who make significant contributions to the success of the Company, and eligible
members of the Company's Board of Directors. The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations in accounting for its employee
stock options. Under APB 25, as long as the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Under the 1994 Equity Incentive Plan, options may be incentive stock
options or "non-qualified options" under applicable provisions of the Internal
Revenue Code. The exercise price of any stock option granted may not be less
than fair market value at the date of grant except in the case of grants to
participants who are not executive officers of the Company and in certain other
limited circumstances. The exercise period cannot exceed ten years from the date
of grant. The vesting schedule for options granted under the 1994 Equity
Incentive Plan is determined by the Compensation Committee of the Board of
Directors. The 1994 Equity Incentive Plan also permits the Company to grant
restricted stock to key employees and other persons or entities who make
significant contributions to the success of the Company. The restrictions and
vesting schedule for restricted stock granted under this Plan are determined by
the Compensation Committee of the Board of Directors. The Company also has an
option plan for its Directors. Under this plan, a fixed amount of options are
granted annually to all non-employee Directors. Grants of options under the
Directors plan vest in equal annual installments over three years.
The Company has two employee stock purchase plans. Under the 1987 Employee
Stock Purchase Plan, eligible employees are granted options to purchase shares
of the Company's common stock through voluntary payroll deductions during two
option periods, running from January 1 to June 30 and from July 1 to December
31, at a price equal to the lower of 85% of market value at the beginning or end
of each period. Under the 1992 Employee Stock Purchase Plan, for certain
foreign-based employees, eligible employees are granted options to purchase
shares of the Company's common stock during two option periods, running from
January 1 to June 30 and from July 1 to December 31, at the market price at the
beginning of the period. The option becomes exercisable 90 days following the
date of grant and expires on the last day of the option period. Accordingly, no
options are outstanding at December 31, 1997 and 1996. During 1997, 1996 and
1995, respectively, 151,210, 157,134 and 161,377 shares were issued pursuant to
these plans.
In June 1990, the Company adopted a shareholders' rights plan and declared
a dividend distribution of one common stock purchase right ("Right") for each
share of common stock outstanding. Each Right entitles the holder to purchase
one share of the Company's common stock at a price of $60 per share, subject to
adjustment. The Rights will be exercisable only if a person or group of
affiliated or associated persons acquires beneficial ownership of 10% or more of
the outstanding shares of the Company's common stock or commences a tender or
exchange offer that would result in a person or group owning 10% or more of the
outstanding common stock, or in the event that the Company is subsequently
acquired in a merger or other business combination. When the Rights become
exercisable, each holder would have the right to purchase, at the then-current
exercise price, common stock of the surviving company having a market value of
two times the exercise price of the Right. The Company can redeem the Rights at
$.01 per Right at any time prior to expiration on June 14, 2000.
At December 31, 1997, 13,705,700 shares of common stock were reserved for
issuance under the Company's various stock plans and 70,105,308 shares were
reserved for issuance under the shareholders' rights plan.
32
REEBOK INTERNATIONAL LTD.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
THE FOLLOWING SCHEDULE SUMMARIZES THE CHANGES IN STOCK OPTIONS DURING THE THREE
YEARS ENDED DECEMBER 31, 1997:
NUMBER OF SHARES UNDER OPTION
-----------------------------
WEIGHTED
AVERAGE
NON-QUALIFIED OPTION EXERCISE
STOCK OPTIONS PRICE PER SHARE PRICE
------------- --------------- -----
Outstanding at
December 31,
1994 5,879,575 $ 8.75 - $39.77 $ 22.83
Granted 1,361,502 28.75 - 36.75 34.90
Exercised (361,400) 8.75 - 33.25 16.75
Canceled (722,760) 11.38 - 39.77 30.57
---------- ----------------- ---------
Outstanding at
December 31,
1995 6,156,917 8.75 - $38.88 24.96
Granted 4,436,947 26.75 - 41.63 31.32
Exercised (272,153) 8.75 - 37.02 25.41
Canceled (406,005) 11.38 - 37.02 31.10
---------- ----------------- ---------
Outstanding at
December 31,
1996 9,915,706 8.75 - $41.63 27.54
Granted 1,205,704 33.75 - 49.25 35.51
Exercised (399,111) 8.75 - 36.75 25.72
Canceled (534,680) 24.00 - 41.63 33.14
---------- ----------------- ---------
Outstanding at
December 31,
1997 10,187,619 $ 10.63 - $49.25 $ 28.26
========== ======== ====== =========
At December 31, 1997, the exercise prices for outstanding options ranged
from $10.63 - $49.25. Within that range, 2,771,254 options were outstanding
between $10.63 and $19.37. All of these options were exercisable at December 31,
1997. The weighted average exercise price and average remaining contractual life
of these options is $17.43 and 2.5 years, respectively. Additionally, 7,416,365
options were outstanding between $20.46 and $49.25. Included in this range are
1,552,954 options exercisable at a weighted average exercise price of $30.23.
The weighted average exercise price and average remaining contractual life of
these outstanding options is $32.33 and 8 years, respectively.
Shares granted in 1996 include a July grant to certain senior executives
made in conjunction with the Dutch Auction. The options do not begin to vest
until the end of 1998, and vesting extends for a period of up to five years
ending in December 2002. These option grants provide that if an optionee sells
before the end of 1998 any shares acquired through the exercise of options which
were held prior to the Dutch Auction, the optionee will forfeit an identical
number of shares subject to option under the July 1996 grant. In addition,
during 1996 the Company reinstituted December as the month in which it grants
its annual stock options to employees. The 1995 and 1994 annual employee option
grants were issued in February 1996 and March 1995, respectively.
At December 31, 1997, 1996 and 1995, options to purchase 4,324,208,
3,983,278 and 3,956,545 shares of common stock were exercisable, and 3,032,790,
1,225,051 and 3,369,311 shares, respectively, were available for future grants
under the Company's stock equity plans.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1995,
1996 and 1997, respectively: risk-free interest rates ranging from 5.2% to 7.7%;
dividend yields of .89%, .68% and .0%; volatility factors of the expected market
price of the Company's common stock of .27 in 1995 and 1996 and .35 in 1997; and
a weighted-average expected life of the option of 4.2 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
THE COMPANY'S PRO FORMA INFORMATION FOLLOWS (IN THOUSANDS, EXCEPT FOR EARNINGS
PER SHARE INFORMATION):
1997 1996 1995
---- ---- ----
Pro forma net
income $ 127,506 $ 134,017 $ 163,404
Pro forma basic
earnings
per share $ 2.31 $ 2.03 $ 2.09
Pro forma
diluted
earnings
per share $ 2.23 $ 2.00 $ 2.07
The weighted average fair value of options granted in 1997, 1996 and 1995
is $13.09, $10.76 and $11.63, respectively.
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 2001.
11
ACQUISITION OF COMMON STOCK
On October 19, 1995, the Board of Directors authorized the repurchase of up to
an additional $200,000 in Reebok common stock in open market or
privately-negotiated transactions. This authorization was in addition to the
share repurchase programs of $200,000 each adopted by the Company in July 1992,
July 1993 and October 1994. As of December 31, 1997, the Company had
approximately $129,800 available for future repurchases of common stock under
these programs.
During 1996 and 1995, the Company issued equity put options as part of its
share repurchase program. These options provided the Company with an additional
source to supplement open market purchases of its common stock. At December 31,
1997 and 1996, no shares of outstanding common stock are subject to repurchase
under the terms and conditions of these options.
33
REEBOK INTERNATIONAL LTD.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
12
BUSINESS ACQUISITIONS AND DIVESTITURES
On May 23, 1996, the Company finalized a long-term exclusive footwear licensing
arrangement with Ralph Lauren to design, develop, manufacture, market and
distribute men's, women's and children's footwear under the Ralph Lauren label.
The agreement requires payment of certain annual minimum amounts for royalties
and other compensation. The territory for the license initially includes North
America and is expected to expand worldwide as existing Ralph Lauren licenses
expire subject to reaching agreement with Ralph Lauren as to business plans for
the additional territories. In conjunction with the licensing arrangement,
Reebok's subsidiary, The Rockport Company, Inc., acquired Ralph Lauren's prior
licensee for the U.S. and Canada, Ralph Lauren Footwear, Inc.
On June 7, 1996, Reebok completed the sale of substantially all of the
operating assets and business of its subsidiary, Avia Group International, Inc.
13
FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company to estimate the
fair value of its financial instruments:
Cash and cash equivalents and notes payable to banks: the carrying amounts
reported in the balance sheet approximate fair value. Long-term debt: the fair
value of the Company's medium-term notes and debentures is estimated based on
quoted market prices. The fair value of other long-term debt is estimated using
discounted cash flow analyses, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements. Unrealized gains or losses on
foreign currency exchange contracts and options: the fair value of the Company's
foreign currency exchange contracts is estimated based on current foreign
exchange rates. Fair market value of interest rate swaps: the fair value of the
Company's interest rate swaps is estimated based on current interest rates.
THE CARRYING AMOUNTS AND FAIR VALUE OF THE COMPANY'S FINANCIAL INSTRUMENTS ARE
AS FOLLOWS:
CARRYING AMOUNT FAIR VALUE
--------------- ----------
DECEMBER 31 1997 1996 1997 1996
- ----------- ---- ---- ---- ----
Long-term debt $760,355 $ 906,783 $ 759,049 $881,372
Unrealized gains on
foreign currency
exchange contracts
and options 4,619 173 6,256 1,394
Interest rate swaps 0 0 344 1,420
FOREIGN EXCHANGE FORWARDS AND OPTIONS
The Company enters into forward currency exchange contracts and options to hedge
its exposure for merchandise purchased in U.S. dollars that will be sold to
customers in other currencies. Realized and unrealized gains and losses on these
contracts are included in net income except that gains and losses on contracts
which hedge specific foreign currency commitments are deferred and accounted for
as a part of the transaction. The Company also uses forward currency exchange
contracts and options to hedge significant intercompany assets and liabilities
denominated in other than the functional currency. Contracts used to hedge
intercompany balances are marked to market and the resulting transaction gain or
loss is included in the determination of net income.
Foreign currency losses realized from settlements of transactions included
in net income for the year ended December 31, 1997 were $8.1 million. Realized
gains and losses from settlements of transactions for the years ended December
31, 1996 and 1995 were not significant. The Company has used forward exchange
contracts and options as an element of its risk management strategy for several
years.
At December 31, 1997, the Company had option and forward currency exchange
contracts, all having maturities of less than one year, with a notional amount
aggregating $357,913. The contracts involved 12 different foreign currencies. No
single currency represented more than 20% of the aggregate notional amount. The
notional amount of contracts intended to hedge merchandise purchases was
$165,324. Deferred gains (losses) on these contracts were not material at
December 31, 1997 and 1996.
INTEREST RATE SWAPS
The Company uses interest rate swap agreements to manage its exposure to
interest rate movements by effectively converting a portion of its variable rate
long-term debt from floating to fixed rates. These agreements involve the
exchange of variable rate payments for fixed rate payments without the effect of
leverage and without the exchange of the underlying principal amount. Interest
rate differentials paid or received under these swap agreements are recognized
over the life of the contracts as adjustments to interest expense.
During the fourth quarter of 1996, the Company entered into several
amortizing interest rate swaps with a group of financial institutions having an
initial notional value of $320,000 and expiring on December 31, 2000. The
notional amount of the swaps is reduced each year in accordance with the
expected repayment schedule of the Company's variable rate term loan. The terms
of the swaps require the Company to make fixed rate payments on a quarterly
basis whereas the Company will receive variable rate payments based on the three
month U.S. dollar LIBOR. At December 31, 1997 and 1996, the notional amount of
interest rate swaps outstanding was $245,000 and $320,000, respectively. In
January 1998, the Company entered into additional interest rate swaps in the
amount of $150,000 with respect to the variable rate term loan.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and hedging instruments.
The Company places cash equivalents with high credit financial
institutions and, by policy, limits the amount of credit exposure to any one
financial institution.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to hedging instruments. The counterparties to
these contracts are major financial institutions. The Company continually
monitors its positions and the credit ratings of its counterparties and places
dollar and term limits on the amount of contracts it enters into with any one
party.
34
REEBOK INTERNATIONAL LTD.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
14
INCOME TAXES
THE COMPONENTS OF INCOME BEFORE INCOME TAXES AND MINORITY INTEREST ARE AS
FOLLOWS:
1997 1996 1995
---- ---- ----
Domestic $ (32,783) $ (12,720) $ 14,292
Foreign 190,868 250,388 261,682
---------- ----------- -----------
$ 158,085 $ 237,668 $ 275,974
========== =========== ===========
THE PROVISION FOR INCOME TAXES CONSISTS OF THE FOLLOWING:
1997 1996 1995
---- ---- ----
CURRENT:
Federal $ (34,314) $ 1,961 $ 3,998
State (324) 4,534 13,878
Foreign 64,413 83,921 83,450
---------- ----------- -----------
29,775 90,416 101,326
========== =========== ===========
DEFERRED:
Federal (8,940) (1,705) (1,594)
State (1,900) (689) (3,112)
Foreign (6,445) (3,939) 3,133
----------- ------------ -----------
(17,285) (6,333) (1,573)
----------- ------------ -----------
$ 12,490 $ 84,083 $ 99,753
=========== ============ ===========
During 1992, the Company recorded a write-down in the carrying value of
its Avia subsidiary in the amount of $100,000 with no corresponding tax benefit
recognized in that year due to the uncertainty concerning the ultimate
deductibility of the charge. In June 1996, substantially all of the operating
assets and business of Avia were sold. After the sale, in December 1996, the
Company requested a pre-filing determination from the Internal Revenue Service
("IRS") regarding the deductibility of certain losses pertaining to the sale of
Avia. In August 1997, the IRS notified the Company that it had approved the
Company's tax treatment concerning the deductibility of the Avia losses and
accordingly, a corresponding reduction in income taxes totaling $40,000 was
recorded in the third quarter of 1997 and is reflected in the current federal
and state provisions.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $405,265, $517,309 and $410,402 at December 31, 1997, 1996 and
1995, respectively. Those earnings are considered to be indefinitely reinvested.
Upon distribution of those earnings in the form of dividends or otherwise, a
portion would be subject to both U.S. income taxes and foreign withholding
taxes, less an adjustment for applicable foreign tax credits. Determination of
the amount of U.S. income tax liability that would be incurred is not
practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credits would be available to
reduce some portion of any U.S. income tax liability.
INCOME TAXES COMPUTED AT THE FEDERAL STATUTORY RATE DIFFER FROM AMOUNTS PROVIDED
AS FOLLOWS:
1997 1996 1995
---- ---- ----
Tax at statutory
rate 35.0% 35.0% 35.0%
State taxes,
less federal
tax effect 1.5 1.7 2.7
Effect of tax
rates of foreign
subsidiaries and
joint ventures (4.3) (1.6) (2.0)
Tax benefit from
Avia losses (25.3)
Amortization of
intangibles 0.4 0.4 0.4
Other, net 0.6 (0.1) 0.1
---- ---- ----
Provision for
income taxes 7.9% 35.4% 36.2%
==== ==== ====
Net deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
DEFERRED TAX ASSETS ARE ATTRIBUTABLE TO THE FOLLOWING TEMPORARY DIFFERENCES AT
DECEMBER 31 1997 1996
- ----------- ---- ----
Inventory $ 30,238 $ 35,212
Accounts receivable 24,973 23,085
Liabilities 26,714 9,661
Depreciation 6,117 5,528
Other, net 6,515 3,786
--------- ---------
Total $ 94,557 $ 77,272
========= =========
35
REEBOK INTERNATIONAL LTD.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
15
EARNINGS PER SHARE
THE FOLLOWING TABLE SETS FORTH THE COMPUTATION OF BASIC AND DILUTED EARNINGS PER
SHARE:
1997 1996 1995
---- ---- ----
NUMERATOR:
Net Income $ 135,119 $ 138,950 $ 164,798
---------- ----------- -----------
DENOMINATOR:
Denominator for
basic earnings
per share --
weighted-
average shares 56,162 67,370 78,317
Dilutive
employee
stock options 2,147 1,247 1,170
---------- ----------- -----------
Denominator for
diluted
earnings per
share --
adjusted
weighted-
average shares
and assumed
conversions 58,309 68,617 79,487
---------- ----------- -----------
Basic earnings
per share $ 2.41 $ 2.06 $ 2.10
---------- ----------- -----------
Diluted earnings
per share $ 2.32 $ 2.03 $ 2.07
========== =========== ===========
16
OPERATIONS BY GEOGRAPHIC AREA
NET SALES TO UNAFFILIATED CUSTOMERS, NET INCOME AND IDENTIFIABLE ASSETS BY
GEOGRAPHIC AREA ARE SUMMARIZED BELOW:
1997 1996 1995
---- ---- ----
NET SALES:
United States $ 2,000,883 $ 1,935,724 $ 2,027,080
United Kingdom 661,358 566,196 492,843
Europe 510,981 623,209 642,622
Other countries 470,377 353,475 318,905
------------ ------------- ------------
$ 3,643,599 $ 3,478,604 $ 3,481,450
============ ============= ============
NET INCOME:
United States $ 83,894 $ 41,522 $ 52,314
United Kingdom 50,441 60,050 74,175
Europe (567) 21,854 28,138
Other countries 1,351 15,524 10,171
------------ ------------- ------------
$ 135,119 $ 138,950 $ 164,798
============ ============= ============
IDENTIFIABLE
ASSETS:
United States $ 938,027 $ 887,217 $ 813,935
United Kingdom 372,526 391,865 291,825
Europe 278,606 282,057 311,903
Other countries 166,938 225,045 233,956
------------ ------------- ------------
$ 1,756,097 $ 1,786,184 $ 1,651,619
============ ============= ============
There are various differences between income before income taxes and
minority interest for domestic and foreign operations as shown in Note 14 and
net income shown above. Sales or transfers between geographic areas are not
material.
17
CONTINGENCIES
The Company is involved in various legal proceedings generally incidental to its
business. These include a lawsuit filed by a former distributor in Brazil in
which the plaintiff has asserted a claim for damages in excess of $50,000. While
it is not feasible to predict or determine the outcome of these proceedings,
management does not believe that they should result in a materially adverse
effect on the Company's financial position, results of operations or liquidity.
36
REEBOK INTERNATIONAL LTD.
19
REPORTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
REEBOK INTERNATIONAL LTD.
STOUGHTON, MASSACHUSETTS
We have audited the accompanying consolidated balance sheets of Reebok
International Ltd. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Reebok International Ltd. and subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
- ---------------------
BOSTON, MASSACHUSETTS
FEBRUARY 2, 1998
REPORT OF MANAGEMENT
FINANCIAL STATEMENTS
The management of Reebok International Ltd. and its subsidiaries has prepared
the accompanying financial statements and is responsible for their integrity and
fair presentation. The statements, which include amounts that are based on
management's best estimates and judgments, have been prepared in conformity with
generally accepted accounting principles and are free of material misstatement.
Management has also prepared other information in the annual report and is
responsible for its accuracy and consistency with the financial statements.
INTERNAL CONTROL SYSTEM
Reebok International Ltd. and its subsidiaries maintain a system of internal
control over financial reporting, which is designed to provide reasonable
assurance to the Company's management and Board of Directors as to the integrity
and fair presentation of the financial statements. Management continually
monitors the system of internal control for compliance, and actions are taken to
correct deficiencies as they are identified. Even an effective internal control
system, no matter how well designed, has inherent limitations -- including the
possibility of the circumvention or overriding of controls -- and therefore can
provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, internal control system
effectiveness may vary over time.
The Company maintains an internal auditing program that monitors and
assesses the effectiveness of the internal control system and recommends
possible improvements thereto. The Company's accompanying financial statements
have been audited by Ernst & Young LLP, independent auditors, whose audit was
made in accordance with generally accepted auditing standards and included a
review of the system of internal accounting controls to the extent necessary to
determine the audit procedures required to support their opinion on the
consolidated financial statements. Management believes that, as of December 31,
1997, the Company's system of internal control is adequate to accomplish the
objectives discussed herein.
REEBOK INTERNATIONAL LTD.,
/s/ Paul Fireman /s/ Kenneth Watchmaker
- ------------------- ----------------------
PAUL FIREMAN KENNETH WATCHMAKER
CHAIRMAN, EXECUTIVE VICE PRESIDENT
PRESIDENT AND CHIEF AND CHIEF FINANCIAL OFFICER
EXECUTIVE OFFICER
37
REEBOK INTERNATIONAL LTD.
20
QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 1997 QUARTER QUARTER QUARTER QUARTER
- ------------------------ ------- ------- ------- -------
Net sales $ 930,041 $841,059 $1,009,053 $ 863,446
Gross profit 356,229 323,511 370,211 299,599
Net income 40,184 20,322 73,968 645
Basic earnings per share .72 .36 1.32 .01
Diluted earnings per share .69 .35 1.26 .01
--------- -------- ---------- ---------
YEAR ENDED DECEMBER 1996
- ------------------------
Net sales $ 902,923 $817,572 $ 970,080 $ 788,029
Gross profit 351,132 312,268 380,530 290,252
Net income 48,415 19,813 50,612 20,110
Basic earnings per share .65 .27 .76 .36
Diluted earnings per share .64 .27 .75 .35
Cash dividends per common share .075 .075 .075 .000
--------- -------- ---------- ---------
Net income for the fourth quarter of 1997 includes a special charge of
$18,000 after taxes, or $0.31 per diluted share, for the restructuring of a
number of marketing contracts.
Net income for the third quarter of 1997 includes a tax credit of $40,000,
or $0.68 per diluted share, as well as a special charge of $21,161 after taxes,
or $0.36 per diluted share, for facilities consolidation and elimination, asset
adjustments and personnel-related expenses associated with global restructuring
activities.
On June 7, 1996, Reebok completed the sale of substantially all of the
operating assets of its subsidiary Avia. Accordingly, subsequent to that date,
the operations of Avia are no longer included in the Company's financial
results.
The earnings per share amounts are presented to comply with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." For further
discussion regarding the calculation of earnings per share, see Note 1 to the
Consolidated Financial Statements.
38
REEBOK INTERNATIONAL LTD.
21
DIRECTORS & OFFICERS
BOARD OF DIRECTORS
PAUL FIREMAN
Chairman, President & Chief Executive Officer
Reebok International Ltd.
PAUL R. DUNCAN
Executive Vice President
Reebok International Ltd.
M. KATHERINE DWYER
President
Revlon Consumer Products, USA
Revlon, Inc.
WILLIAM F. GLAVIN
President Emeritus
Babson College
MANNIE L. JACKSON
Chairman & Chief Executive Officer
Harlem Globetrotters International, Inc.
BERTRAM M. LEE, SR.
Chairman of the Board
Albimar Communications, Inc.
RICHARD G. LESSER
Executive Vice President & Chief Operating Officer
TJX Companies, Inc.
WILLIAM M. MARCUS
Executive Vice President & Treasurer
American Biltrite, Inc.
ROBERT MEERS
Executive Vice President
Reebok International Ltd.
President & Chief Executive Officer
Reebok Division
GEOFFERY NUNES
Retired Senior Vice President & General Counsel
Millipore Corporation
CORPORATE OFFICERS
PAUL FIREMAN
Chairman, President & Chief Executive Officer
PAUL R. DUNCAN
Executive Vice President
ANGEL R. MARTINEZ
Executive Vice President
President & Chief Executive Officer
The Rockport Company, Inc.
ROBERT MEERS
Executive Vice President
President & Chief Executive Officer
Reebok Division
KENNETH WATCHMAKER
Executive Vice President
Chief Financial Officer
BARRY NAGLER
Senior Vice President
General Counsel
LEO S. VANNONI
Treasurer
39
REEBOK INTERNATIONAL LTD.
22
SHAREHOLDER INFORMATION
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. is the Transfer Agent and Registrar for the Company's common
stock and maintains the shareholder accounting records. The Transfer Agent
should be contacted on questions of changes in address, name or ownership, lost
certificates and consolidation of accounts. When corresponding with the Transfer
Agent, shareholders should state the exact name(s) in which the stock is
registered and certificate number as well as old and new information about the
account.
BankBoston, N.A.
c/o Boston EquiServe
Post Office Box 8040
Boston, MA 02266-8040
Phone: (781) 575-3400
Facsimile: (781) 828-8813
Toll-free number outside Massachusetts: (800) 733-5001
http://www.equiserve.com
FORM 10-K
For a copy of the Form 10-K Annual Report, filed with the Securities and
Exchange Commission, write to:
Office of Investor Relations
Reebok International Ltd.
100 Technology Center Drive
Stoughton, MA 02072
WEB SITE
http://www.reebok.com
CORPORATE HEADQUARTERS
Reebok International Ltd.
100 Technology Center Drive
Stoughton, MA 02072
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:00 a.m., local time, on
Tuesday, May 5, 1998 at BankBoston, Second Floor Long Lane Conference Room, 100
Federal Street, Boston, Massachusetts.
Shareholders of record on March 11, 1998 are entitled to vote at the meeting.
STOCK INFORMATION
The Company's common stock is quoted on the New York Stock Exchange under the
symbol RBK. The following table, derived from data supplied by the NYSE, sets
forth the quarterly high and low sales prices during 1997 and 1996.
1997 1996
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
First 52 7/8 40 5/8 31 3/8 25 3/8
Second 49 7/8 37 1/8 33 3/4 26
Third 52 1/4 43 5/8 36 7/8 29 1/4
Fourth 49 1/2 27 5/8 45 1/4 32 1/2
The number of record holders of the Company's common stock at February 20, 1998
was 7,050.
REEBOK, the Vector Logo [REEBOK LOGO], THE PUMP, DMX, the Human Rights Logo and
HEXALITE are registered trademarks, and HYDROMOVE, ATTACK LIFE, PRO FUNCTION and
3D ULTRALITE are trademarks of Reebok.
ROCKPORT is a registered trademark and UNCOMPROMISE is a trademark of The
Rockport Company, Inc.
GREG NORMAN is a registered trademark and the Greg Norman Logo is a trademark of
Great White Shark Enterprises, Inc.
RALPH LAUREN and POLO SPORT are registered trademarks of Polo/Ralph Lauren
Corporation.
(C)1998 Reebok International Ltd. All Rights Reserved.
[RECYCLE LOGO] Portions of this Annual Report are printed on recycled paper.
DESIGN: BELK MIGNOGNA ASSOCIATES, NEW YORK
PHOTOGRAPHY: (PAGES 1 - 5) DAVIES + STARR, (PAGES 14, 16) ROB HOWARD
QUOTE OPPOSITE PAGE 12: (C)1997 THE ECONOMIST NEWSPAPER GROUP, INC. REPRINTED
WITH PERMISSION. FURTHER REPRODUCTION PROHIBITED.
40
REEBOK INTERNATIONAL LTD.