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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 1-9340
REEBOK INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2678061
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
100 TECHNOLOGY CENTER DRIVE, STOUGHTON, MASSACHUSETTS 02072
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (781) 401-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of each exchange
each class on which registered
Common Stock, par value, $.01 per share New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 11, 1999, the aggregate market value of the registrant's voting
stock held by non-affiliates of the registrant was approximately $799,931,073.
As of March 11, 1999, 55,969,886 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the fiscal year ended December 31,
1998 (certain parts as indicated herein in Parts I, II and IV).
Definitive Proxy Statement dated March 26, 1999 for the Annual Meeting
of Shareholders to be held on May 4, 1999 (certain parts as indicated herein in
Part III).
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PART I
Item 1. Business.
Reebok International Ltd., a Massachusetts corporation organized on
July 26, 1979, is a global company engaged primarily in the design and marketing
of sports and fitness products, including footwear and apparel, as well as the
design and marketing of footwear and apparel for non-athletic "casual" use. The
Company has four major brand groups: the Reebok Division, which is primarily
responsible for the Company's REEBOK(R) brand, the Greg Norman Division, which
is responsible for the GREG NORMAN(R) brand, and the Company's subsidiaries, The
Rockport Company, Inc. ("Rockport") which is responsible for the ROCKPORT(R)
brand, and Ralph Lauren Footwear Co., Inc. which is responsible for footwear
sold under the RALPH LAUREN(R) and POLO SPORT(R) brands. (Reebok International
Ltd. is referred to herein, together with its subsidiaries, as "Reebok" or the
"Company" unless the context requires otherwise.)
During calendar year 1998, net income for the Company decreased to
$23.9 million, or $.42 per diluted share (inclusive of a $35 million (pre-tax)
special charge in the first quarter for personnel-related expenses in connection
with ongoing business re-engineering efforts and the restructuring of certain
underperforming marketing contracts) from $135.1 million, or $2.32 per diluted
share (inclusive of special charges related to the Company's global
restructuring activities and the restructuring of a number of marketing
contracts, as well as a special tax benefit related to a favorable ruling
concerning outstanding tax matters associated with the June 1996 sale of the
Company's Avia subsidiary), for the year ended December 31, 1997. Net sales for
the Company decreased by 11.5%, from $3.644 billion in 1997 to $3.225 billion in
1998.
The following is a discussion of the business of each of the Company's
operating units.
REEBOK DIVISION
The Reebok Division designs, produces and markets sports, 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 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 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, sports and fitness videos
and related products and services.
The Reebok Division has recently been reorganized into six strategic
business units (SBU's), each of which will have responsibility for product and
marketing for the unit's business, as well as certain responsibility for
profitability and cash flow for the unit. The SBU's are:
The Classic Footwear SBU, which will focus on lifestyle footwear;
The Performance Footwear SBU, which will be responsible for Baseball,
Basketball, Cross-Training, Football, Golf, Running, Soccer, Tennis and
Adventure/Outdoor footwear categories;
The Fitness SBU, which will be responsible for men's and women's
Fitness and Walking footwear categories, the Division's existing
exercise equipment business and other related sports and fitness
products (under the Division's licensing program) and Reebok
University;
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The Global Apparel SBU, which is responsible for sports and fitness
apparel worldwide;
The Kids' Products SBU, which will focus on children's products sold
under the REEBOK and WEEBOK brands; and
The Retail Operations SBU, which will be responsible for Reebok retail
stores, as well as developing retail merchandising and promotional
concept.
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 fitness and lifestyle categories, the
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
Division engages in product research, development and design activities in the
Company's Stoughton, Massachusetts headquarters, where it has a state-of-the-art
50,000 square foot product development facility which is dedicated to the design
and development of technologically-advanced athletic and fitness footwear, and
in its various Far East offices. Reebok also has product development centers in
the Far East to enable its development activities to be more closely integrated
with production. There are development centers in Korea and in China and a new
development center was opened in Taiwan in 1998.
Reebok's most significant proprietary technology is its DMX(R)
technology which provides superb cushioning utilizing an active air flow system.
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. This structure is set up to take into account performance
attributes, aesthetics and price among the various versions. Reebok currently
offers a broad array of products which incorporate the different versions of DMX
at various price-points, and in numerous footwear categories. For example, the
Company's DMX 10 technology incorporates a ten-pod, heel to forefoot, active air
transfer system delivering cushioning when and where it is needed. The DMX(R) 10
technology was first introduced at retail in April 1997 in the Run DMX. In
February 1998, Reebok debuted at retail DMX 6, a six-pod, heel to forefoot,
active air transfer system, in a running shoe, Run DMX 6. During 1998, the
Company further expanded its offering of products featuring DMX technology, and
began offering DMX Lite products which combine the cushioning benefits of the
DMX technology with the lightweight advantages of the 3D ULTRALITE technology
(discussed below). In November 1998, Reebok introduced The Answer II, an Allen
Iverson signature basketball shoe which combines DMX and 3D ULTRALITE. The
Fusion shoe, which combines the DMX 10 pod system with 3D ULTRALITE was
introduced in early 1999. The Company plans to introduce other DMX Lite products
in 1999.
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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 1998, the Company
expanded its introduction of 3D ULTRALITE technology at retail in a variety of
footwear categories.
Finally, Reebok has incorporated advanced technology into its apparel
products with the introduction of HYDROMOVE(R) technology in certain performance
apparel. This moisture management system helps keep athletes warm in cold
weather and dry and cool in hot weather. Performance apparel incorporating the
HYDROMOVE technology first became available at retail at the end of 1996. During
1998 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 and print media and
utilizes its relationships with major sports figures in a variety of sports to
maintain and enhance visibility for the REEBOK brand. The Reebok Division's
advertising program in 1998 was directed toward both the trade and the ultimate
consumers of REEBOK(R) products. The major advertising campaigns in 1998
included the "Creating Possibilities" campaign which focused on Reebok's
proprietary DMX and 3D ULTRALITE technologies and their ability to create
possibilities for athletes, one athlete at a time, and the "Clones" ad campaign
which featured Reebok breaking out from the competition with its DMX technology
and proclaimed the DMX(R) 10 running shoe as "The Best Running Shoe in the
History of the World".
Consistent with the Division's effort to broaden its consumer appeal,
"Reebok Unlimited" has been adopted as the marketing umbrella for the brand,
representing unlimited possibilities and the "unlimited" array of products that
Reebok offers consumers for the various aspects of their life, from performance
products to lifestyle and children's products. Under this umbrella, the Division
is currently testing and developing a new brand position "The Human Movement"
reflecting increasing consumer frustration with professional sports and its
current emphasis on unhealthy economic and competitive attitudes over the love
of sport itself. This humanity positioning is the very essence of the original
values of the REEBOK brand, grounded in the Reebok Human Rights Awards, Reebok's
efforts to improve factory working conditions and Reebok's focus on comfort and
performance product benefits that consumers can feel. Consistent with this
positioning, the Division continues to be significantly involved in athletic
endorsements and sport sponsorships, but has focused on fewer key sponsorships,
achieving more of a balance in its marketing activities and promoting fitness
and other activities, as well as sports.
Some of the key athlete endorsements in 1998 included Reebok's
endorsement arrangement with Allen Iverson of the Philadelphia 76ers, with whom
Reebok markets a signature line of footwear and apparel. Other endorsements in
basketball in 1998 came from professional players such as Shawn Kemp, Kenny
Anderson and Steve Smith. In addition, Reebok sponsors a number of college
basketball programs and has a sponsorship agreement with the Harlem
Globetrotters.
To promote the sale of its cross training footwear in 1998, Reebok used
endorsements by prominent athletes such as National Football League ("NFL")
players Derrick Thomas, John Elway, Herman Moore and Ben Coates, as well as
Major League Baseball ("MLB") players Juan Gonzalez , Nomar Garciaparra, Mo
Vaughn and Roger Clemens. To promote its cleated football and baseball shoes,
the Company also has endorsement contracts with numerous MLB and NFL players,
and sponsors a number of college football programs.
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The Company has an agreement with NFL Properties under which Reebok has
been designated a "Pro Line" licensee for the U.S. and international markets
with the right to produce and market uniforms and sideline apparel bearing NFL
team logos. Pursuant to this agreement, in 1998 Reebok supplied uniforms and
sideline apparel to the San Francisco 49ers, Detroit Lions, New York Giants, New
Orleans Saints, Kansas City Chiefs and Atlanta Falcons. This arrangement ended
with the 1998 season. In addition to the Pro Line license, Reebok has an
agreement with the NFL under which Reebok is one of only three brands authorized
to provide NFL players with footwear that has visible logos.
In soccer, Reebok has a number of sponsorship agreements including
contracts with Dennis Bergkamp of Arsenal and the Netherlands, Spain's Raul who
plays for European Cup holder Real Madrid and Spain, and Argentinean Gabriel
Batistuta of Fiorentina. The Company also has major sponsorship agreements with
the Liverpool Football Club, one of the world's best known club soccer teams,
and, beginning in 1999, with the Argentina National Football Association, who
are two time World Cup winners. In addition, Reebok sponsors the national teams
of Colombia and Chile, as well as such club teams as Aston Villa (UK), Borussia
Moenchengladbach (Germany), Palmeiras (Brazil), Brondby (Denmark) and the Bolton
Wanderers of England, for which the sponsorship includes naming rights to the
team's new soccer arena, the Reebok Stadium. Reebok is also the official uniform
supplier of U.S. Major League Soccer team, the New England Revolution.
Tennis promotions in 1998 included endorsement contracts with
well-known professionals including Venus Williams, Patrick Rafter and Michael
Chang. Promotional efforts in running included endorsement contracts with such
prominent runners as Ato Boldon, Kim Batten and Marie Jose Perec.
To promote its women's sports and fitness products, Reebok sponsored
athletes such as Rebecca Lobo of the WNBA, as well as Michelle Akers and Julie
Foudy of the U.S. national soccer team, Lisa Fernandez of the U.S. national
softball team and Liz Masakayan, pro beach volleyball player. In addition,
Reebok sponsors a variety of college basketball and volleyball teams.
In 1998 the Reebok Division also continued its promotional and
educational efforts in the fitness area. Through Reebok University and its
network of Master trainers and Alliance fitness instructors, the 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(R) fitness videos, as well as the marketing and sale of
REEBOK fitness equipment products such as the STEP REEBOK exercise platform, the
CYCLE REEBOK studio cycle, the REEBOK Body Trec, the REEBOK ACD line of home
treadmills and the REEBOK home bike collection.
To gain further visibility for the REEBOK brand, Reebok has entered
into certain key sport sponsorships, such as an arrangement under which Reebok
was designated the official footwear and apparel sponsor of the Russian Olympic
Committee and approximately 25 individual associated Russian sports federations;
this arrangement was extended through the Sydney 2000 Summer Olympic Games. In
addition, Reebok will be an official sponsor of the Sydney 2000 Olympic Games
and the official sports brand of the 1998 and 2000 Australian Olympic teams, as
well as an official sponsor and supplier of sports footwear and apparel to the
national Olympic teams from New Zealand, Poland and South Africa. Reebok also
has school-wide sponsorship arrangements with colleges such as University of
Texas, University of Virginia and University of Wisconsin. In 1998, the Reebok
Division also ran marketing promotions on its Internet website.
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During 1998 the Reebok Division brought its message on product
performance and brand essence directly to the consumer. As part of this
strategy, the Division launched a direct-to-the-consumer campaign called "Try on
the Future" in 1998 which involved a nationwide mobile tour designed to give
consumers the opportunity to experience and "try on" Reebok's new products and
technologies. The campaign generated positive responses from consumers regarding
REEBOK products.
U.S. OPERATIONS
The Reebok Division's U.S. operations unit is responsible for all
footwear and apparel products sold in the United States by the Division. This
unit is also responsible for operations in Canada which are managed by a
wholly-owned subsidiary. Sales of footwear in the United States totaled
approximately $1.062 billion in 1998 compared to $1.229 billion in 1997.
REEBOK(R) brand apparel sales (including GREG NORMAN(R) apparel) in the U.S. in
1998 totalled approximately $362.2 million, compared to approximately $431.9
million in 1997.
In the U.S., 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 field service representatives employed by Reebok who travel to
assist in retail merchandising efforts and provide information to consumers and
retailers regarding the features of the Company's products.
The Division's U.S. distribution strategy emphasizes high-quality
retailers and seeks to avoid lower-margin mass merchandisers and discount
outlets. REEBOK(R) footwear is distributed primarily through specialty athletic
retailers, sporting goods stores and department stores, with specialty products,
such as golf products and equipment, also being distributed in certain specialty
channels. Distribution of the Company's apparel line is predominantly through
department, sporting goods and specialty stores. The Reebok Division also sells
its products through REEBOK(R) concept or company stores, see discussion under
"Retail" below.
INTERNATIONAL OPERATIONS
The Reebok Division's international sales are coordinated from the
Company's corporate headquarters in Stoughton, Massachusetts, which is also
where the Division's regional operations responsible for Latin America are
located. There are also regional offices in Leusden, Holland, which is
responsible for Europe; in Hong Kong, which is responsible for Far East
operations; and in Delhi, India, which is responsible for India, the Middle East
and Africa. The Canadian operations of the Division are managed through a
wholly-owned subsidiary headquartered outside of Toronto, Canada. The Division
markets REEBOK(R) products internationally through wholly-owned subsidiaries in
Austria, Belgium, Canada, France, Germany, Ireland, The Netherlands, Italy,
Poland, Portugal, Russia, Switzerland and the United Kingdom and majority-owned
subsidiaries in Japan, India, South Korea, Spain and South Africa. In November
1998, the Company formed a wholly-owned subsidiary to assume responsibility for
the distribution of REEBOK and ROCKPORT products in Sweden, Denmark and Norway,
following the bankruptcy of Reebok's former distributor for this territory. The
Company anticipates divesting its minority stake in its Brazilian distributor,
which will thereafter function as an independent distributor. REEBOK products
are also marketed internationally through 28 independent distributors and joint
ventures in which the Company holds a minority interest. The Company or its
wholly-owned U.K. subsidiary holds partial ownership interests in 6 of these
international distributors, with its percentage of ownership ranging from 30 to
35 percent. Through this international distribution network products bearing the
REEBOK brand are actively marketed in approximately 170 countries and
territories.
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In 1998 Reebok continued restructuring its international logistics
operations. This global restructuring effort includes reducing the number of
European warehouses in operation, establishing a shared services company to
centralize European administrative operations, and implementing a global
management information system. The global restructuring initiative, a major
portion of which is expected to be completed in 1999, should enable the Company
to achieve operational efficiencies and to manage its business on a global basis
more cost-effectively. In November 1998 Reebok began receiving limited product
in its new 700,000 square foot distribution center in Rotterdam, which will
ultimately receive all inbound product for European distribution. The facility
began limited shipping in January 1999 for one Reebok European distributor and
other European distributors will be gradually phased in through 1999 and 2000.
Reebok's shared services company has also begun operation and provides
administrative support to a few European distributors. The shared services
company will expand its operation to additional European distributors during
1999.
During 1998 the contribution of the Division's International operations
unit to overall sales of REEBOK(R) products (including GREG NORMAN(R) apparel)
decreased to $1.267 billion from $1.471 billion in 1997. The Division's 1998
international sales were negatively impacted by adverse financial conditions in
Latin America, the Far East and Russia, as well as foreign currency exchange
rates. These sales figures do not reflect the full wholesale value of all REEBOK
products sold outside the United States in 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
$1.454 billion in wholesale value, consisting of approximately 29.6 million
pairs of shoes totalling approximately $828.8 million in wholesale value of
footwear sold outside the United States in 1998 (compared with approximately
33.2 million pairs totalling approximately $1.098 billion in 1997) and
approximately $625.1 million in wholesale value of REEBOK apparel (including
GREG NORMAN apparel) sold outside the United States in 1998 (compared with
approximately $680.5 million in 1997).
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(R) brand into new sports and fitness markets and enhancing the reputation
of the Company's brands and technologies. The Company has pursued strategic
alliances with licensees who Reebok believes are leaders and innovators in their
product categories and who share Reebok's commitment to offering superior,
innovative products. The Company believes that its licensing program reinforces
Reebok's reputation as a market leader.
The Company's licensing program includes such products as a full line
of athletic gloves, all 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, and
REEBOK school supplies. Through licensees, Reebok also sells REEBOK fitness
videos and REEBOK fitness 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. The
initial home fitness products debuted at the Super Show in Atlanta in February
1998. Home fitness products include the REEBOK ACD line of home treadmills,
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the REEBOK elliptical cross-trainer and the REEBOK home bike collection.
Reebok's line of club fitness products include the REEBOK Body Trec(TM), REEBOK
Body Peak, REEBOK Studio Cycle and the REEBOK Ridge Rocker. Through its
licensee, Reebok also launched a line of strength equipment products in April
1998 in Europe and introduced a line of REEBOK strength products in the U.S. at
the end of 1998. Reebok has also entered into various license agreements for the
sale of the REEBOK fitness equipment products internationally.
As part of the Company's licensing program, WEEBOK(R) infant and
toddler apparel and accessories and a line of WEEBOK(R) footwear are sold by
licensees. WEEBOK is a fashion-oriented, kid specific brand, which offers
apparel in sizes 0-7 and footwear in sizes 0-12.
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 5 floors of the Lincoln Square
project. A REEBOK concept store, as well as ROCKPORT and GREG NORMAN concept
stores, is 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.
RETAIL
The Company operates in the United States approximately 175 factory
direct stores (including REEBOK, ROCKPORT and GREG NORMAN stores and combination
stores, in which stores for all three brands are located at a single site) 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(R) "concept" or company retail store
in New York City. The store sells a wide selection of current, in-line
REEBOK(R), footwear and apparel. Internationally, there are a number of REEBOK
retail stores owned by the Company, its subsidiaries or its independent
distributors. The Company continues to open retail stores either directly or
through its distributors in numerous international markets. 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.
The Company is currently working to develop a retail store concept to
showcase the REEBOK brand at retail and expects to incorporate this design into
independently-owned retail stores, dedicated exclusively to the sale of Reebok
products. In 1998 the Company tested one such concept in a store in the United
States and further testing will be done in 1999.
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 increased by approximately $21.4 million in 1998,
to $533.9 million from $512.5 million in 1997. Rockport's sales include $73.2
million of sales of the RALPH LAUREN footwear business in 1998 and $64.0 million
in 1997.
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Designed to address the different aspects of customers' lives, the
ROCKPORT product line includes casual, dress, outdoor performance, golf and
fitness walking shoes. In 1998, Rockport continued to focus on its men's
business with extension of its World Tour product into additional patterns. In
addition, Rockport expanded its customer base by introducing new styles and
contemporary collections to attract younger consumers. Rockport also prepared
for a renewed focus on its women's business in 1999, with the introduction in
1998 of its Journey 21 collection, a casual woman's shoe collection featuring
Rockport's Soul Sensation(TM) footbed, which provides relaxation and comfort
through a system of air channels that deliver massage-like stimulation. Rockport
plans to introduce in 1999 other women's footwear products incorporating this
new footbed.
Internationally, the ROCKPORT brand continues to grow. In 1998 the
ROCKPORT brand's international revenues grew in excess of 20% through expansion
within its existing markets and opening of new markets.
Rockport focused in 1998 on the expansion of its retail presence
through an increase in the United States in the number of its ROCKPORT shops -
independent retail shops dedicated exclusively to the sale of ROCKPORT products
- - from 21 to 34, the opening of a number of Rockport shop-in-shops and increased
placement of Rockport fixturing with third-party retailers. In addition,
Rockport emphasized retail in its international business by opening additional
"concept" or retail shops outside of the United States, operated by Rockport
distributors or third party retailers.
Rockport continued its "uncompromise" marketing campaign with ads
highlighting people who are comfortable with their particular individuality,
coupled with the tag line "Be comfortable. Uncompromise(TM). Start with your
feet." In 1998 this campaign featured such personalities as Tony nominee John
Leguizamo and the world's most famous drag queen, Ru Paul dressed as a man. In
addition, Rockport promoted its connection to adventure travel through
sponsorship of the Earthwatch Institute, a non-profit organization that conducts
research expeditions throughout the world. During 1998 Rockport continued
expanding its offerings on its Internet website, and grew its
business-to-business direct purchase program which enables employees at
participating companies to purchase ROCKPORT products through Rockport's
website.
Rockport markets its products to authorized retailers throughout the
United States primarily through a locally-based employee sales staff, although
Rockport utilizes independent sales agencies for certain products.
Internationally, Rockport markets its products through approximately 30 locally
based distributors in approximately 50 foreign countries and territories. A
majority of the international distributors are either subsidiaries of the
Company or joint venture partners or independent distributors which also sell
REEBOK brand products.
Rockport distributes its products predominantly through select
higher-quality national and local shoe store chains, department stores,
independent shoe stores, and outdoor outfitters, emphasizing retailers that
provide substantial point-of-sale assistance and carry a full product line.
Rockport also sells its products through independently-owned ROCKPORT dedicated
retail shops, as well as ROCKPORT concept or company stores. Rockport has
concept or company retail stores in San Francisco, California, Boston,
Massachusetts, Newport, Rhode Island, King of Prussia, Pennsylvania and New York
City. In addition, there are a number of ROCKPORT shops - independent stores
which sell Rockport products exclusively - in the U.S. as well as
internationally. Rockport has not pursued mass merchandisers or discount outlets
for the distribution of its products.
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RALPH LAUREN(R) BRAND
In 1998 the RALPH LAUREN footwear business, which was acquired in May
1996, continued to grow. A broader range of products was offered in the POLO
SPORT(R) athletic footwear line. In addition, RALPH LAUREN Footwear extended its
design and development work to include the RLX(TM) collection, consisting of
high performance athletic footwear, and the Lauren(TM) collection for women; for
both categories, product will be introduced at retail in 1999.
RALPH LAUREN footwear is marketed to authorized retailers principally
through an employee staff, although RALPH LAUREN Footwear retained independent
sales agencies in 1998 for sales of certain products to specialty distribution
points. Products are distributed primarily through higher-quality department
stores and, in the case of POLO SPORT footwear, through specialty athletic
retailers. Products are also sold through space licensing arrangements at RALPH
LAUREN/POLO retail stores. The Ralph Lauren Footwear Company operates "concept"
footwear departments in RALPH LAUREN/POLO stores in a number of locations in the
United States, including New York City, and Beverly Hills, California and new
departments in Chicago, Illinois, and Palm Beach, Florida, which opened at the
end of 1998. In addition, the Ralph Lauren footwear subsidiary has footwear
retail operations in approximately 19 RALPH LAUREN/POLO factory direct stores
and operates one factory direct store in Tannersville, Pennsylvania.
GREG NORMAN(R) BRAND
The Company's Greg Norman Division produces a collection of apparel and
accessories marketed under the GREG NORMAN(R) name and logo. The GREG NORMAN
Collection has grown from a golf apparel line to a broader line of men's casual
sportswear. The GREG NORMAN product line has been expanded to include a wide
range of apparel products -- from leather jackets and sweaters to activewear and
swimwear -- at a variety of upper-end price-points. In the Fall of 1999, the
Greg Norman Division plans to introduce a Greg Norman Boys' Collection to
complement the men's apparel line. The Greg Norman Division intends to grow the
GREG NORMAN brand further by offering a variety of lifestyle products and
expanding into international markets. It is anticipated that the Division will
accomplish such expansion through various licensing and distribution
arrangements. In 1998 Greg Norman footwear, leather and hosiery products were
sold through licensees of the Company. The Division anticipates entering into a
number of new agreements which will broaden the scope of products offered and
expand distribution internationally.
The GREG NORMAN brand is marketed through its endorsement by pro golfer
Greg Norman, and a marketing and advertising campaign designed to emphasize his
aggressive, bold, charismatic and "winning" style. The current tag line for the
brand and marketing focus is the theme "Attack Life(TM)".
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. There are two GREG NORMAN concept or company retail stores in New York
City. In 1998, the GREG NORMAN Collection significantly expanded its shelf space
at third-party retailers and a number of new GREG NORMAN dedicated shops within
third-party retailers were opened.
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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 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, Thailand and the Philippines were the Company's
primary sources for footwear, accounting for approximately 42%, 25%, 18%, and
6%, respectively, of the Company's total footwear production during 1998 (based
on the number of units produced). The Company's largest manufacturer, which has
several factory locations, accounted for approximately 14% of the Company's
total footwear production in 1998.
Reebok's wholly-owned Hong Kong subsidiary, and a network of affiliates
in China, Indonesia, India, Thailand, Taiwan, South Korea and the Philippines,
provide quality assurance, quality control, and inspection services with respect
to footwear purchased by the Reebok Division's U.S. and International
operations. In addition, this network of affiliates inspects certain components
and materials purchased by unrelated manufacturers for use in footwear
production. The network of affiliates also facilitates the shipment of footwear
from the shipping point to point of destination, as well as arranging for the
issuance to the unrelated footwear manufacturers of letters of credit, which are
the primary means used to pay manufacturers for finished products. The Company's
apparel group utilizes the services of independent third parties, as well as the
Company's Hong Kong subsidiary and its network of affiliates in the Far East, to
assist in the placement, inspection and shipment of apparel and accessories
orders internationally. Production of apparel in the United States is through
independent contractors which are retained and managed by the Company's apparel
group. ROCKPORT(R) footwear products are produced by independent contractors
which are retained and managed through country managers employed by Rockport.
The remainder of the Company's order placement, quality control and inspection
work abroad is handled by a combination of employees and independent contractors
in the various countries in which its products are made.
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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 whether the principal
component is leather or some other material and on the construction.
As with its international sales operations, the Company's footwear and
apparel production operations are subject to the usual risks of doing business
abroad, such as import duties, quotas and other threats to free trade, foreign
currency fluctuations and restrictions, labor unrest and political instability.
See "TRADE POLICY" below. The Company believes that it has the ability to
develop, over time, adequate substitute sources of supply for the products
obtained from present foreign suppliers. If, however, events should prevent the
Company from acquiring products from its suppliers in China, Indonesia, Thailand
or the Philippines, or significantly increase the cost to the Company of such
products, the Company's operations could be seriously disrupted until
alternative suppliers were found, with a significant negative financial impact.
TRADE POLICY
For several years, imports from China to the U.S., including footwear,
have been threatened with higher or prohibitive tariff rates, either through
statutory action or intervention by the Executive Branch, due to concern over
China's trade policies, human rights, foreign weapons sales practices and its
foreign policy. Further debate on these issues is expected to continue in 1999.
However, the Company does not currently anticipate that restrictions on imports
from China will be imposed by the U.S. during 1999. 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 ("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 and thus could result in an adverse effect on Rockport's
international sales. As a result, Rockport is pursuing alternative sources for
its products to reduce such effect. However, there can be no guarantee that
Rockport will be successful in implementing such alternative sourcing
arrangements.
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
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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 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 review the athletic footwear exemption which
applies to both the quota scheme and antidumping duties discussed above. The
Company, through relevant trade associations, is working to prevent imposition
of a more limited athletic footwear exception. Should revisions be adopted
narrowing such exemption, certain of the Company's product lines could be
affected adversely, although the Company does not believe that its products
would be more severely affected than those of its major competitors.
Various other countries have taken or are considering steps to restrict
footwear imports or impose additional customs duties or other impediments, which
actions affect the Company as well as other footwear importers. The Company, in
conjunction with other footwear importers, is aggressively challenging such
restrictions 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: 1998,
footwear (approximately 72%) and apparel (approximately 28%); 1997, footwear
(approximately 72%) and apparel (approximately 27%); 1996, footwear
(approximately 75%) and apparel (approximately 24%).
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company believes that its trademarks, especially the REEBOK and
ROCKPORT trademarks, and its rights to use the GREG NORMAN name and logo, are of
great value, and the Company is vigilant in protecting these marks from
counterfeiting or infringement. Loss of the REEBOK, ROCKPORT or GREG NORMAN
trademark rights could have a serious impact on the Company's business.
The Company also believes that its technologies and designs are of
great value and the Company is vigilant in procuring patents and enforcing its
patents and other proprietary rights in the United States and in other
countries.
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
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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, 1998 was
approximately $427 million.
The Company also has various arrangements with numerous banks which
provide an aggregate of approximately $974 million of uncommitted facilities,
substantially all of which are available to the Company's foreign subsidiaries.
Of this amount, approximately $340 million is available for short-term
borrowings and bank overdrafts, with the remainder available for letters of
credit for inventory purchases. At December 31, 1998, approximately $167 million
was outstanding for open letters of credit for inventory purchases, in addition
to approximately $48 million in notes payable to banks.
The Company also has authority to issue up to $200 million of
commercial paper which is supported to the extent available by its revolving
credit and loan agreements, referred to above. As of December 31, 1998, the
Company had no commercial paper obligations outstanding.
In December 1998, Moody's Investor Service, Inc. ("Moody's") lowered
the Company's credit rating and in January 1999, Standard & Poor's Rating Group
("S&P") lowered the Company's credit rating, based in each case on the negative
conditions in the athletic footwear industry and the Company's recent financial
performance. The Company's overall debt ratings remain investment grade. As a
result of the Company's lower credit rating, it may be more difficult for the
Company to borrow and the costs of borrowing will increase, including the costs
the Company incurs under some of its existing credit arrangements.
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.
SINGLE CUSTOMER
There was no single customer of the Company that accounted for 10% or
more of the Company's net sales in 1998.
BACKLOG
The Company's backlog of orders at December 31, 1998 (many of which are
cancelable by the purchaser), totalled approximately $1.097 billion, compared to
$1.224 billion as of December 31, 1997. The Company expects that substantially
all of these orders will be shipped in 1999, although, as noted above, many of
these orders are cancelable. The backlog position is not necessarily indicative
of future sales because the ratio of future orders to "at once" shipments and
sales by Company owned retail stores may vary from year to year. In addition,
many markets in South America and Asia Pacific are not included in the backlog
since sales are made by independent distributors.
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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, 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(R) product lines
fall is also highly competitive. Competitors include a number of companies such
as Timberland, Bass, Clark and Dexter. Some competitors are highly specialized,
while others have varied product lines and some maintain their own retail
outlets. The Company believes that Rockport has a strong position in the walking
shoe market. Competition in this area, however, has intensified as the activity
of walking has grown in popularity and as athletic shoe companies have entered
the market. In addition, certain ROCKPORT products compete with leading makers
of dress shoes.
The Company's other product lines also continue to confront strong
competition. The REEBOK(R) apparel line competes with well-known brands such as
Nike, Adidas and Fila. The GREG NORMAN(R) line competes with Tommy Hilfiger,
Ralph Lauren, Nautica and other makers of men's casual sportswear. The RALPH
LAUREN footwear brand competes with such brands as Cole Haan, 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 report includes, and other documents, information or statements
released or made from time to time by the Company may include, forward-looking
statements. These statements involve risks and uncertainties. The Company's
actual results may differ materially from those discussed in such
forward-looking statements. Prospective information is based on management's
then current expectations or forecasts. Such information is subject to the risk
that such expectations or forecasts, or the assumptions underlying such
expectations or forecasts, become inaccurate. The following discussion
identifies certain important issues and uncertainties that are among the factors
that could affect the Company's actual results and could cause such results to
differ materially from those contained in forward looking statements made by or
on behalf of the Company.
COMPETITION AND CONSUMER PREFERENCES
The footwear and apparel industry is intensely competitive and subject
to rapid changes in consumer preferences, as well as technological innovations.
A major technological breakthrough or marketing or promotional success by one of
the Company's competitors could adversely affect the Company's competitive
position. A shift in consumer preferences could also negatively impact the
Company's sales and financial results.
Currently, the 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 the
Company's business, as well as that of some of its competitors. The Company is
taking steps to respond to this shift by focusing on its products and
technologies and pursuing growth opportunities with its ROCKPORT, RALPH LAUREN
Footwear and GREG NORMAN brands. There is, however, substantial uncertainty as
to whether the Company's actions will be effective and how significant the
adverse impact of the shift in consumer preference will be on the Company's
business. The outcome will be dependent on a number of factors, including the
extent of the change in consumer preference, consumer and retailer acceptance of
the Company's products, technologies and marketing,
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and the ability of the Company to effectively respond to the shift in the
marketplace, as well as the other factors described herein.
Whether the Company's DMX(R) technology will be successful on a
long-term basis is dependent on numerous factors including consumer preference,
consumer and retailer acceptance of such technology, competitive product
offerings, the Company's ability to utilize such technology and to extend it to
other products, as well as other factors described herein.
In addition, in countries where the athletic footwear market is mature
(including the U.S.), sales growth may be dependent in part on the Company
increasing its market share at the expense of its competitors, which may be
difficult to accomplish. The Company also faces strong competition with respect
to its other product lines, such as the ROCKPORT product line, the GREG NORMAN
Collection and the RALPH LAUREN and POLO SPORT footwear lines.
Competition in the markets for the Company's products occurs in a
variety of ways, including price, quality, product design, brand image,
marketing and promotion and ability to meet delivery commitments to retailers.
The intensity of the competition faced by the various operating units of the
Company and the rapid changes in the consumer preference and technology that can
occur in the footwear and apparel markets constitute significant risk factors in
the Company's operations.
INVENTORY RISK
The footwear industry has relatively long lead times for design and
production of product and thus, the Company must commit to production tooling
and in some cases to production in advance of orders. If the Company fails to
accurately forecast consumer demand or if there are changes in consumer
preference or market demand after the Company has made such production
commitments, the Company may encounter difficulty in filling customer orders or
in liquidating excess inventory, or may find that retailers are canceling orders
or returning product, all of which may have an adverse effect on the Company's
sales, its margins and brand image. In addition, the Company may be required to
pay for certain tooling if it does not satisfy minimum production quantities.
SALES FORECASTS
The Company's investment in advertising and marketing and in certain
other expenses is based on sales forecasts and is necessarily made in advance of
actual sales. The markets in which the Company does business are highly
competitive, and the Company's business is affected by a variety of factors,
including brand awareness, changing consumer preferences, fashion trends, retail
market conditions, currency changes and economic and other factors. There can be
no assurance that sales forecasts will be achieved, and to the extent sales
forecasts are not achieved, these investments will represent a higher percentage
of revenues, and the Company will experience higher inventory levels and
associated carrying costs, all of which would adversely impact the Company's
financial condition and results. See also discussion below under "Advertising
and Marketing Investment."
PRICING AND MARGINS
The prices that the Company is able to charge for its products are
dependent on the type of product offered and the consumer and retailer response
to such product, as well as the prices charged by the Company's competitors. If,
for example, the Company's products provide enhanced performance capabilities,
the Company should be able to achieve relatively higher prices for such
products. The gross margins which the Company earns are dependent on the prices
which the Company can charge for these goods and the costs incurred in acquiring
the products for sale. To the extent that the Company has higher costs, such as
the higher startup costs associated with technological products, its margins
will be
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lower unless it can increase its prices or reduce its costs. Recently, the
Company has experienced an improving trend in its pricing margins as a result of
manufacturing efficiencies and changes in sourcing initiated to take advantage
of currency opportunities in the Far East. There can be no assurance that this
trend will continue. In addition, because of the shift in the marketplace and
the resulting over-inventoried promotional retail environment, the Company has
encountered increased returns and cancellations from retailers, which have
adversely affected its margins. The ability of the Company to increase its full
margin business is dependent on a number of factors including the success of the
Company's products and marketing, the retail environment and general industry
conditions. In addition, because of the over-inventoried environment, retailers
have been more reluctant to place future orders for products, thus the Company
has fewer future orders and may be required to take on more inventory risk to
fulfill "at once" business.
BACKLOG
The Company reports its backlog of open orders for the Reebok brand.
However, its backlog position is not necessarily indicative of future sales
because the ratio of future orders to "at once" shipments, as well as sales by
Company-owned retail stores, may vary from year to year. In addition, many
customer orders are cancelable. The recent slowdown at retail has resulted in
higher cancellations and returns. Additionally, many markets in South America
and Asia Pacific are not included in the backlog since sales are made by
independent distributors.
ADVERTISING AND MARKETING INVESTMENT
Because consumer demand for athletic footwear and apparel is heavily
influenced by brand image, the Company's business requires substantial
investments in marketing and advertising, including television and other
advertising, athlete endorsements and athletic sponsorships, as well as
investments in retail presence. In the event that such investments do not
achieve the desired effect in terms of increased retailer acceptance and/or
consumer purchase of the Company's products, there could be an adverse impact on
the Company's financial results. There has been some shift in the marketplace
away from certain "icon" athletes and the products they endorse. As a result,
the Company has re-evaluated its investment in certain sports marketing deals
and has eliminated or restructured certain of its marketing contracts that no
longer reflect Reebok's brand positioning.
RETAIL OPERATIONS
The Company currently operates approximately 175 retail stores in the
U.S. (including REEBOK, ROCKPORT and GREG NORMAN stores and combination stores,
in which stores for all three brands are located at a single site) and a
significant number of retail stores internationally which are operated either
directly or through the Company's distributors or other third parties. The
Company has made a significant capital investment in opening these stores and
incurs significant expenditures in operating these stores. To the extent the
Company continues to expand its retail organization, the Company's performance
could be adversely affected by lower than anticipated sales at its retail
stores. The performance of the Company's retail organization is also subject to
general retail market conditions. The recent over-inventoried promotional
environment in the U.S. has resulted in a decline in retail margins, thus
adversely affecting the Company's own retail business. In 1998 comparative store
sales declined in the Company's own retail business, following two years of
comparative store sales increases.
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
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have an adverse impact on its sales and/or profitability.
INTERNATIONAL SALES AND PRODUCTION
A substantial portion of the Company's products are manufactured abroad
and approximately 40% of the Company's sales are made outside the U.S. The
Company's footwear and apparel production and sales operations are thus subject
to the usual risks of doing business abroad, such as currency fluctuations,
longer payment terms, potentially adverse tax consequences, repatriation of
earnings, import duties, tariffs, quotas and other threats to free trade, labor
unrest, political instability and other problems linked to local production
conditions and the difficulty of managing multinational operations. If such
factors limited or prevented the Company from selling products in any
significant international market or prevented the Company from acquiring
products from its suppliers in China, Indonesia, Thailand or the Philippines, or
significantly increased the cost to the Company of such products, the Company's
operations could be seriously disrupted until alternative suppliers were found
or alternative markets were developed, with a significant negative impact. See
also discussion below under "Economic Factors".
SOURCES OF SUPPLY
The Company depends upon independent manufacturers to manufacture
high-quality product in a timely and cost-efficient manner and relies upon the
availability of sufficient production capacity at its existing manufacturers or
the ability to utilize alternative sources of supply. A failure by one or more
of the Company's significant manufacturers to meet established criteria for
pricing, product quality or timeliness could negatively impact the Company's
sales and profitability. In addition, if the Company were to experience
significant shortages in raw materials or components used in its products, it
could have a negative effect on the Company's business, including increased
costs or difficulty in delivering product. Some of the components used in the
Company's technologies are obtained from only one or two sources and thus a loss
of supply could disrupt production. See also discussion below under "Economic
Factors".
RISK ASSOCIATED WITH INDEBTEDNESS
The Company has a substantial credit facility which consists of a $640
million term loan (as of December 31, 1998, the outstanding balance of such debt
was approximately $427 million) and has a $400 million revolving credit line (as
of December 31, 1998, there were no borrowings outstanding under the revolving
credit line). As a result of this indebtedness, the Company currently faces
significant interest expense and debt amortization. The credit arrangement
contains certain covenants (including restrictions on liens and the requirements
to maintain a minimum interest coverage ratio and a minimum debt to cash flow
ratio) which are intended to limit the Company's future actions and which may
also limit the Company's financial, operating and strategic flexibility. In
addition, the Company's failure to make timely payments of interest and
principal on its debt, or to comply with the material covenants applicable
thereto, could result in significant negative consequences.
The Company believes that its cash, short-term investments and access
to credit facilities, together with its anticipated cash flow from operations,
are adequate for the Company's current and planned needs in 1999. However, the
Company's actual experience may differ from the expectations set forth in the
preceding sentence. Factors that might lead to a difference include, but are not
limited to, the matters discussed herein, as well as future events that might
have the effect of reducing the Company's available cash balances (such as
unexpected operating losses or increased capital or other expenditures, as well
as increases in the Company's inventory or accounts receivable) or future events
that might reduce or eliminate the availability of external financial resources.
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As indicated above, in December 1998, Moody's lowered the Company's
credit rating and in January 1999, S&P lowered the Company's credit rating. As a
result of these actions, it may be 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 1998, the Company's international sales, gross margins and profits were
negatively impacted by changes in foreign currency exchange rates.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted a single currency called the Euro. On this date, fixed
conversion rates between the existing currencies of these countries ("legacy
currencies") and the Euro were established and the Euro is now traded in the
currency markets and may be used in business transactions. The legacy currencies
will remain as legal tender together with the Euro until at least January 1,
2002 (but not later than July 1, 2002). During the transition period, parties
may settle transactions using either the Euro or a participating country's
legacy currency.
The use of a single currency in the eleven participating countries may
result in increased price transparency which may affect Reebok's ability to
price its products differently in various European markets. Although it is not
clear what the result of this price harmonization might be, one possible result
is lower average prices for products sold in certain of these markets.
Conversion to the Euro is not expected to have a significant impact on the
amount of Reebok's exposures to changes in foreign exchange rates since most of
Reebok's exposures are incurred against the U.S. dollar, as opposed to other
legacy currencies. Reebok's foreign exchange hedging costs should also not
change significantly. Nevertheless, because there will be less diversity in
Reebok's currency exposures, changes in the Euro's value against the U.S. dollar
could have a more pronounced effect, whether positive or negative, on the
Company.
The Company has made the necessary changes in its internal and banking
systems in Europe to accommodate introduction of the Euro and can make and
receive payments in Europe using the Euro. As part of its global restructuring,
the Company is in the process of implementing SAP software on a global basis;
the SAP system will be Euro-compatible. Other business functions will be
converted for the Euro by the end of the transition period or earlier to meet
business needs. The Company does not expect such conversion costs to be
material.
CUSTOMERS
Although the Company has no single customer that represents 10% or more
of its sales, the Company has certain significant customers, the loss of which
could have an adverse effect on its business. There could also be a negative
effect on the Company's business if any such significant customer became
insolvent or otherwise failed to pay its debts. See also discussion below under
"Economic Factors".
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INTELLECTUAL PROPERTY
The Company believes that its trademarks, technologies and designs are
of great value. From time to time the Company has been, and may in the future
be, the subject of litigation challenging its ownership of certain intellectual
property. Loss of the REEBOK, ROCKPORT or GREG NORMAN trademark rights could
have a serious impact on the Company's business. Because of the importance of
such intellectual property rights, the Company's business is subject to the risk
of counterfeiting, parallel trade or intellectual property infringement. The
Company is, however, vigilant in protecting its intellectual property rights.
LITIGATION
The Company is subject to the normal risks of litigation with respect
to its business operations.
ECONOMIC FACTORS
The Company's business is subject to economic conditions in the
Company's major markets, including, without limitation, recession, inflation,
general weakness in retail markets and changes in consumer purchasing power and
preferences. Adverse changes in such economic factors could have a negative
effect on the Company's business. For example, the recent slowdown in the
athletic footwear and branded apparel markets has had negative effects on the
Company's business. As a result of current market conditions, a number of the
Company's competitors have generated excess inventories which they are
attempting to sell off. The U.S. market has also suffered from over capacity due
to significant retail expansion during a period of softening consumer demand.
This has resulted in inventory backups and heavy promotional activity. This
over-inventoried, promotional environment has made it more difficult for the
Company to sell its products and has negatively impacted the Company's gross
margins.
The current financial crisis in the Far East has also had a negative
impact on the Company's business. The economic problems in Asia have had an
adverse effect on the Company's sales to that region. Such financial
difficulties have also increased the risk that certain of the Company's
customers in the region will be unable to pay for product orders. In addition,
most of the Company's products are manufactured in the Far East by third party
manufacturers. The current economic conditions have made it more difficult for
such manufacturers to gain access to working capital and there is a risk that
such manufacturers could encounter financial problems which could affect their
ability to produce products for the Company. Similar problems have also resulted
from the financial difficulties in Latin America (especially Brazil) and in
Russia.
TAX RATE CHANGES AND DEFERRED TAX ASSETS
If the Company was to encounter significant tax rate changes in the
major markets in which it operates, it could have an adverse effect on its
business or profitability. In addition, the tax rate can be affected by the
Company's geographic mix of earnings. If more revenue is earned in markets where
the tax rate is relatively higher, the Company's effective tax rate will
increase. The Company expects that the full year 1999 tax rate will be higher
than the rate for 1998.
The Company has approximately $177 million of net deferred tax assets,
of which approximately $70 million is attributable to the expected utilization
of tax net operating loss carry- forwards. There can be no assurance that the
Company will realize the full value of such deferred tax assets, although the
Company has tax planning strategies which are designed to utilize at least a
portion of the tax net operating loss carryforwards and thereby reduce the
likelihood that they expire unused. Realization of the deferred tax assets will
be dependent on a number of factors including the level of taxable income
generated by the Company, the countries in which such income is generated, as
well as
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the effectiveness of the Company's tax planning strategies. If the Company
estimates of future taxable income are not realized in the near-term, the net
carrying value of the deferred tax assets could be reduced, thereby reducing
future net income.
GLOBAL RESTRUCTURING ACTIVITIES
The Company is currently undertaking various global restructuring
activities designed to enable the Company to achieve operating efficiencies,
improve logistics and reduce expenses. There can be no assurance that the
Company will be able to effectively execute on its restructuring plans or that
such benefits will be achieved. Moreover, in the short-term the Company could
experience difficulties in product delivery or other logistical operations as a
result of its restructuring activities, which could have an adverse effect on
the Company's business. In the short-term, the Company could also be subject to
increased expenditures and charges because of inefficiencies resulting from such
restructuring activities. For example, the Company is currently consolidating
its warehouses in Europe. Such consolidation should enable it to achieve
efficiencies and improve logistics. However, in the short-term, such benefits
may not be achieved and if difficulties arise in effecting such consolidation,
the Company could experience operational difficulties, excess inventory or a
decline in sales. Delays in product shipment could result in additional order
cancellations, added distribution costs and increased markdowns on products.
During 1998 the Company incurred approximately $43 million in start-up costs
(consisting of increased costs of sales, as well as selling, general and
administrative expenses) as a result of its global restructuring efforts. These
incremental start-up expenses are expected to continue in 1999.
YEAR 2000 READINESS DISCLOSURE
The Company has conducted a global review of its information technology
(IT) systems, as well as its non-IT computer systems, to identify the systems
that could be affected by the technical problems associated with the year 2000
and has developed an implementation plan to address the "year 2000" issue. The
Company made a strategic decision in 1993 to adopt a new global information
system, the SAP system, which will replace most legacy systems. The Company's
Rockport subsidiary will not be converted to the new SAP system by the end of
1999 and thus modifications to its existing software are being made to make it
year 2000 compliant. The Company presently believes that, with modifications to
existing software and converting to SAP software and other packaged software,
the year 2000 will not pose significant operational problems for the Company's
computer systems. However, if the modifications and conversions are not
implemented or completed in a timely or effective manner, the year 2000 problem
could have a material adverse impact on the operations and financial condition
of the Company. In addition, in converting to SAP software, the Company is
relying on its software partner to develop and support new software applications
and there could be problems in successfully developing and implementing such new
applications.
The Company is the first in the apparel and footwear industry to
implement this new software application and, because of the year 2000 time
restraints, the schedule for implementation is accelerated. Thus, there are
substantial risks that problems could arise in implementation or that the system
may not be fully effective by the end of 1999. Finally, the Company is dependent
on its suppliers, joint venture partners, independent distributors and customers
to implement appropriate changes to their IT and non-IT systems to address the
"year 2000" issue. The failure of such third parties to effectively address such
issue could have a material adverse effect on the Company's business.
Estimates of time and cost and risk assessments are based on currently
available information. Developments that could affect such estimates and
assessments include, but are not limited to, the ability to hold to the schedule
defined for SAP and other package conversion; the ability to remediate all
relevant computer code for those limited applications targeted to be remediated;
co-operation and remediation success of the Company's suppliers and customers;
and the ability to implement suitable contingency
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22
plans in the event of year 2000 system failures at the Company or its suppliers
or customers.
EMPLOYEES
As of December 31, 1998, the Company had approximately 6,600 employees
in all operating units. None of these employees is represented by a labor union.
The Company has never suffered a material interruption of business caused by
labor disputes with employees. Management considers employee relations to be
good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
The Company is filing herewith selected portions of its Annual Report
to Shareholders for the year ended December 31, 1998 (the "1998 Annual Report")
filed with the Securities and Exchange Commission. Financial information
pertaining to the Company's foreign and domestic operations is incorporated
herein by reference from Note 17 on page 63 of the 1998 Annual Report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is submitted as to the executive officers of
the Company:
NAME AGE OFFICE HELD
- ---- --- -----------
Paul B. Fireman 55 President, Chief Executive Officer and Chairman of the Board of Directors
Carl J. Yankowski 50 Executive Vice President, President and Chief Executive Officer of the Reebok Division and Director
Angel R. Martinez 43 Executive Vice President, Chief Marketing Officer of the Reebok Division
Kenneth I. Watchmaker 56 Executive Vice President and Chief Financial Officer
Anthony J. Tiberii 58 Senior Vice President, President and Chief Executive Officer of The Rockport Company
James R. Jones, III 54 Senior Vice President and Chief Human Resources Officer
Barry Nagler 42 Senior Vice President and General Counsel
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.
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Carl J. Yankowski was appointed Executive Vice President of the Company
and President and Chief Executive Officer of the Reebok Division in September
1998. Prior to that he was President and Chief Operating Officer of Sony
Electronics Inc., a subsidiary of the Sony Corporation, from November 1993 to
January 1998.
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. 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.
Anthony J. Tiberii was appointed President and Chief Executive Officer
of The Rockport Company, Inc. and a Senior Vice President of the Company in
December 1998. He was acting President and Chief Executive Officer of The
Rockport Company, Inc. from October 1998 to December 1998. Prior to that, he was
Executive Vice President of Operations and Chief Financial Officer of The
Rockport Company, Inc. since January 1995. Prior to that, since 1990 he was
Senior Vice President and Chief Financial Officer of The Rockport Company, Inc.
Mr. Tiberii joined Rockport in 1982 as Vice President of Finance.
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.
Barry Nagler has been Senior Vice President of the Company since
February 1998 and General Counsel since September 1995. Mr. Nagler was
previously a Vice President of the Company since May 1995. Prior to that, Mr.
Nagler was divisional Vice President and Assistant General Counsel for the
Company since September 1994. He joined the Company in June 1987 as Counsel.
Item 2. Properties.
The Company leases most of the properties that are used in its
business. Its corporate headquarters and the offices of the Reebok Division and
its U.S. Operations are located in office facilities in Stoughton,
Massachusetts. At its corporate headquarters, the Company occupies under lease
approximately 200,000 square feet of space. The Company signed a six-year lease
in July 1989, with two three-year renewal options, for its principal facility at
its corporate headquarters. This lease was later amended to extend the term of
the lease until June 30, 2000, with a three-year renewal option thereafter. This
facility and three other smaller facilities, one of which is leased and the
other two of which are owned by the Company, at the Company's corporate
headquarters are located approximately one mile from the Reebok Division's U.S.
Operations group's principal warehouse and distribution center in Stoughton,
which is owned by the Company and which contains approximately 450,000 total
square feet
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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 take approximately two years and to be complete in 2000. The
facility 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.
In 1994, the Company purchased a building in Avon, Massachusetts
containing approximately 400,000 square feet of space which it uses as an office
and warehouse. The Company also leases approximately 330,000 square feet of
space in Memphis, Tennessee which it uses as a warehouse and distribution
center.
In 1993, Rockport purchased its corporate headquarters facility in
Marlboro, Massachusetts, containing approximately 80,000 square feet of floor
space. In 1995, Rockport completed construction of a distribution center of
approximately 285,000 usable square feet on approximately 140 acres of land in
Lancaster, Massachusetts which it purchased in 1992.
The Company's 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 which 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.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company is filing herewith selected portions of its 1998 Annual
Report filed with the Securities and Exchange Commission. The information
required by this Item is incorporated herein by reference from page 68 of the
1998 Annual Report.
Item 6. Selected Financial Data.
The Company is filing herewith selected portions of its 1998 Annual
Report filed with the Securities and Exchange Commission. The information
required by this Item is incorporated herein by reference from page 37 of the
1998 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Company is filing herewith selected portions of its 1998 Annual
Report filed with the Securities and Exchange Commission. The information
required by this Item is incorporated herein by reference from pages 38 through
45 of the 1998 Annual Report.
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 its 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.
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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 1998 levels would reduce the fair value of the
interest rate swaps by $9.7 million and a 10% adverse change in foreign currency
rates would reduce the fair value of the forward currency exchange contracts and
options by $39 million. In addition, a 100 basis point increase in interest
rates from year-end 1998 levels would increase interest expense on floating rate
debt (net of hedges) by $1.3 million.
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 to adopt effective
January 1, 1999. SFAS 133 will require 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.
The Company is filing herewith selected portions of its 1998 Annual
Report filed with the Securities and Exchange Commission. The consolidated
financial statements required by this Item, together with the report of the
Company's independent auditors for 1998, are contained therein and are
incorporated herein by reference from pages 46 through 65 of the 1998 Annual
Report. The supplementary financial information required by this Item is
contained in the 1998 Annual Report on page 66 and such information is
incorporated by reference herein. The financial statements, supplementary data,
and Report of Independent Auditors for 1997 and 1996 are listed under Part IV,
Item 14 in this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item with respect to the Registrant's
directors is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on May 4, 1999,
which will be filed with the Securities Exchange Commission on or before March
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27
26, 1999 (the "1999 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 1999 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 1999 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 1999 Proxy Statement under the heading "Transactions with
Management and Affiliates".
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) and (2) List of Financial Statements and Financial Statement
Schedules.
a. Financial Statements
The following consolidated financial statements appearing in the
Company's 1998 Annual Report are incorporated by reference in Item 8 of this
Form 10-K:
1998 ANNUAL REPORT PAGE
Consolidated Balance Sheets at
December 31, 1998 and 1997 46
For each of the three years ended
December 31, 1998, 1997 and 1996:
Consolidated Statements of
Income 47
Consolidated Statements of
Stockholders' Equity 48
Consolidated Statements of
Cash Flows 49
Notes to Consolidated Financial Statements 50-63
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2. Financial Statement Schedule
The following consolidated financial statement schedule of Reebok
International Ltd. is included in Item 14(d) and presented as a separate section
of this report:
FORM 10-K PAGE
Schedule II - Valuation and Qualifying
Accounts F-1
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a) b. Exhibits
Listed below are all the Exhibits filed as part of this report. Certain
Exhibits are incorporated by reference from documents previously filed by the
Company with the Securities and Exchange Commission pursuant to Rule 12b-32
under the Securities Exchange Act of 1934, as amended.
Exhibit
(3) Articles of incorporation and by-laws.
3.1 Restated Articles of Organization of the Company, as
amended (1)
3.2 By-laws, as amended (5, 6, 8, 18)
(4) Instruments defining the rights of security holders, including
indentures.
4.1 Indenture, dated as of September 15, 1988, as amended and
restated by the First Supplemental Indenture, dated as of
January 22, 1993, between Reebok International Ltd. and
Citibank N.A., as Trustee (4, 12)
4.2 Common Stock Rights Agreement dated as of June 14, 1990
between the Company and The First National Bank of Boston, as
Rights Agent, as amended (7, 9, 10)
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) Material Contracts.
10.1 Distributorship Agreement between Reebok International Limited
and the Company (2)
10.2 Trademark License Agreement between Reebok International
Limited and the Company (2)
10.3 Lease Agreement, dated March 1, 1988, as amended, between
Reebok International Ltd. and North Stoughton Industrial Park
Development Trust (5, 13)
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10.4 Purchase and Sale Agreement between Reebok International Ltd.
and Pentland Group plc dated March 8, 1991 (8)
10.5 Agreements with various banks in Hong Kong reflecting
arrangements for letter of credit facilities (8)
10.6 Credit Agreement, dated August 23, 1996, among the Company,
the Lenders and Co-Agents named therein and Credit Suisse, as
Administrative Agent, as amended by the First Amendment dated
as of August 23, 1996 (15)
10.7 Amended and Restated Credit and Guarantee Agreement, dated as
of July 1, 1997, among Reebok International Ltd., Reebok
International Limited, the Lenders and Co-Agents named
therein, Citibank N.A. as Documentation Agent and Credit
Suisse, as Administrative Agent (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 Reebok International Ltd., Reebok International
Limited, the Lenders and Co-Agents named therein, Citibank
N.A. as Documentation Agent and Credit Suisse, as
Administrative Agent (22)
10.9 Participation Agreement dated as of March 27, 1998 among
Reebok International Ltd., 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
Reebok International Ltd., 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 Reebok International Ltd., as Lessee
(19)
10.12 Guaranty from Reebok International Ltd. dated as of March 27,
1998 (19)
Management Contracts and Compensatory Plans.
10.13 Reebok International Ltd. 1994 Equity Incentive Plan, as
amended (16, 17)
10.14 Reebok International Ltd. Equity and Deferred Compensation
Plan for Directors, as amended (13, 18)
10.15 Reebok International Ltd. 1985 Stock Option Plan, as amended
(11)
10.16 Reebok International Ltd. 1987 Stock Option Plan for
Directors, as amended (12)
10.17 Reebok International Ltd. 1987 Stock Bonus Plan (3)
10.18 Reebok International Ltd. Excess Benefits Plan (8)
10.19 Reebok International Ltd. Supplemental Executive Retirement
Plan (14)
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10.20 Amendment to Supplemental Executive Retirement Plan dated as
of February 23, 1999
10.21 Reebok International Ltd. Executive Performance Incentive
Plan, as amended (14, 16)
10.22 Stock Option Agreement with Paul B. Fireman (8)
10.23 Split-Dollar Life Insurance Agreement with Paul B. Fireman
(11)
10.24 Letter Agreement with Paul R. Duncan dated December 29, 1997
(18)
10.25 Employment Agreement with Kenneth Watchmaker (12)
10.26 Change of Control Agreement with Kenneth Watchmaker (17)
10.27 Supplemental Retirement Program for Kenneth Watchmaker (12)
10.28 Change of Control Agreement with Angel Martinez (17)
10.29 Employment Agreement dated April 17, 1996 with Roger Best (16)
10.30 Employment Agreements dated September 11, 1997 with Roger Best
(18)
10.31 Change of Control Agreement with James R. Jones, III (17)
10.32 Change of Control Agreement with Barry Nagler (17)
10.33 Form of Non-Competition Agreements signed by James R. Jones,
III, Angel Martinez, Robert Meers, Barry Nagler, Kenneth
Watchmaker and Anthony Tiberii (18)
10.34 Employment Agreement dated September 8, 1998 between Carl J.
Yankowski and Reebok International Ltd. (20)
10.35 Promissory Note dated September 11, 1998 by Carl J. Yankowski
to Reebok International Ltd. (20)
10.36 Change of Control Agreement with Carl J. Yankowski
10.37 Letter Agreement dated July 14, 1998 between Robert Meers and
Reebok International Ltd. (20)
(12) Statement Re Computation of Ratio of Earnings to Fixed Charges.
(13) Annual Report to Security Holders.
13.1 Selected Portions of Registrant's 1998 Annual Report to
Shareholders
(21) Subsidiaries.
21.1 List of Subsidiaries of the Company
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(23) Consents of experts and counsel.
23.1 The consent of Ernst & Young LLP
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a
separate section of this report.
(1) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
30, 1987 and incorporated by reference herein and as an Exhibit to
Registration Statement No. 11-13370 and incorporated by reference
herein.
(2) Filed as an Exhibit to Registration Statement No. 2-98367 and
incorporated by reference herein.
(3) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
28, 1988 and incorporated by reference herein.
(4) Filed as an Exhibit to Reebok International Ltd. Form 8-K filed on
September 29, 1988 and incorporated by reference herein.
(5) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
30, 1989 and incorporated by reference herein.
(6) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
26, 1990 and incorporated by reference herein.
(7) Filed as an Exhibit to Reebok International Ltd. Form 8-A filed on July
31, 1990 and incorporated by reference herein.
(8) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
28, 1991 and incorporated by reference herein.
(9) Filed as an Exhibit to Reebok International Ltd. Form 8 Amendment to
Registration Statement on Form 8-A filed on April 4, 1991 and
incorporated by reference herein.
(10) Filed as an Exhibit to Reebok International Ltd. Form 8 Amendment to
Registration Statement on Form 8-A filed on December 13, 1991 and
incorporated by reference herein.
(11) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
27, 1992 and incorporated by reference herein.
(12) Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
26, 1993 and incorporated by reference herein.
(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.
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(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.
31
33
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
and Chief Financial Officer
Dated: March 24, 1999
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
/s/ PAUL B. FIREMAN
- -----------------------------
Paul B. Fireman
Director, Chairman of the Board
and President
(Chief Executive Officer)
/s/ KENNETH I. WATCHMAKER
- -----------------------------
Kenneth I. Watchmaker
Executive Vice President and Chief Financial Officer
(Chief Financial and Accounting Officer)
/s/ CARL J. YANKOWSKI
- -----------------------------
Carl J. Yankowski
Executive Vice President
Director
/s/ PAUL R. DUNCAN
- -----------------------------
Paul R. Duncan
Director
/s/ M. KATHERINE DWYER
- -----------------------------
M. Katherine Dwyer
Director
/s/ WILLIAM F. GLAVIN
- -----------------------------
William F. Glavin
Director
32
34
/s/ MANNIE L. JACKSON
- -----------------------------
Mannie L. Jackson
Director
/s/ RICHARD G. LESSER
- -----------------------------
Richard G. Lesser
Director
/s/ THOMAS M. RYAN
- -----------------------------
Thomas M. Ryan
Director
/s/ GEOFFREY NUNES
- -----------------------------
Geoffrey Nunes
Director
Dated: March 24, 1999
33
35
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
REEBOK INTERNATIONAL LTD.
(Amounts in thousands)
Balance at
end of Balance at Charged to Charged to Deductions Balance at
description Beginning Costs and Other From End of
period of Period Expenses Accounts Allowances(A) Period
- ----------- --------- -------- -------- ------------ ------
YEAR ENDED DECEMBER 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $44,003 $ 8,228 $ 4,848 $47,383
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $43,527 $16,471 $15,995 $44,003
YEAR ENDED DECEMBER 31, 1996
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $46,401 $10,225 $13,099 $43,527
(A) Uncollectible accounts written off, net of recoveries
F-1
36
EXHIBIT INDEX
EXHIBIT LOCATION
3.1 Restated Articles of Organization Incorporated by
of the Company, as amended reference
3.2 By-laws, as amended Incorporated by
reference
4.1 Indenture, dated September 15, 1988, Incorporated by
as amended and restated by the First reference
Supplemental Indenture, dated as of
January 22, 1993, between Reebok
International Ltd. and Citibank
N.A., as Trustee
4.2 Common Stock Rights Agreement dated Incorporated by
as of June 14, 1990 between the reference
Company and The First National Bank
of Boston, as Rights Agent, as amended
4.3 Amendment No. 3 dated as of January Incorporated by
1, 1999 to Common Stock Rights reference
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
Reebok International Limited and reference
the Company
10.2 Trademark License Agreement between Incorporated by
Reebok International Limited and the reference
Company
10.3 Lease Agreement, dated March 1, 1988, Incorporated by
as amended, between Reebok reference
International Ltd. and North Stoughton
Industrial Park Development Trust
10.4 Purchase and Sale Agreement between Incorporated by
Reebok International Ltd. and Pentland reference
Group plc dated March 8, 1991
10.5 Agreements with various banks in Hong Incorporated by
Kong reflecting arrangements for letter reference
of credit facilities
37
10.6 Credit Agreement, dated August 23, Incorporated by
1996, among the Company, the Lenders reference
and Co-Agents named therein and Credit
Suisse, as Administrative Agent, as
amended by the First Amendment dated
as of August 23, 1996
10.7 Amended and Restated Credit and Incorporated by
Guarantee Agreement, dated as of reference
July 1, 1997, among Reebok
International Ltd., Reebok Inter-
national Limited, the Lenders and
Co-Agents named therein, Citibank
N.A. as Documentation Agent and
Credit Suisse, as Administrative
Agent
10.8 Amendment No. 2 dated as of September Incorporated by
30, 1998 to the Amended and Restated reference
Credit and Guarantee Agreement dated
as of July 1, 1997, among Reebok
International Ltd., Reebok Inter-
national Limited, the Lenders and
Co-Agents named therein, Citibank N.A.
as Documentation Agent and Credit
Suisse, as Administrative Agent
10.9 Participation Agreement dated as of Incorporated by
March 27, 1998 among Reebok reference
International Ltd., 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 September Incorporated by
30, 1998 to Participation Agreement reference
dated as of March 27, 1998 among
Reebok International Ltd., 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
between Credit Suisse Leasing 92A, reference
L.P., as Lessor, and Reebok
International Ltd., as Lessee
10.12 Guaranty from Reebok International Incorporated by
Ltd. dated as of March 27, 1998 reference
38
10.13 Reebok International Ltd. 1994 Equity Incorporated by
Incentive Plan, as amended reference
10.14 Reebok International Ltd. Equity and Incorporated by
Deferred Compensation Plan for reference
Directors, as amended
10.15 Reebok International Ltd. 1985 Stock Incorporated by
Option Plan, as amended reference
10.16 Reebok International Ltd. 1987 Stock Incorporated by
Option Plan for Directors, as amended reference
10.17 Reebok International Ltd. 1987 Stock Incorporated by
Bonus Plan reference
10.18 Reebok International Ltd. Excess Incorporated by
Benefits Plan reference
10.19 Reebok International Ltd. Supplemental Incorporated by
Executive Retirement Plan reference
10.20 Amendment to Supplemental Executive Filed herewith
Retirement Plan dated as of
February 23, 1999
10.21 Reebok International Ltd. Executive Incorporated by
Performance Incentive Plan, as amended reference
10.22 Stock Option Agreement with Paul Incorporated by
B. Fireman reference
10.23 Split-Dollar Life Insurance Agreement Incorporated by
with Paul B. Fireman reference
10.24 Letter Agreement with Paul R. Incorporated by
Duncan dated December 29, 1997 reference
10.25 Employment Agreement with Kenneth Incorporated by
Watchmaker reference
10.26 Change of Control Agreement with Incorporated by
Kenneth Watchmaker reference
10.27 Supplemental Retirement Program for Incorporated by
Kenneth Watchmaker reference
10.28 Change of Control Agreement with Incorporated by
Angel Martinez reference
10.29 Employment Agreement dated April 17, Incorporated by
1996 with Roger Best reference
39
10.30 Employment Agreements dated Incorporated by
September 11, 1997 with Roger Best reference
10.31 Change of Control Agreement with Incorporated by
James R. Jones, III reference
10.32 Change of Control Agreement with Incorporated by
Barry Nagler reference
10.33 Form of Non-Competition Agreements Incorporated by
signed by James R. Jones, III, reference
Angel Martinez, Robert Meers, Barry
Nagler, Kenneth Watchmaker and
Anthony J. Tiberii
10.34 Employment Agreement dated September 8, Incorporated by
1998 between Carl J. Yankowski and reference
Reebok International Ltd.
10.35 Promissory Note dated September 11, Incorporated by
1998 by Carl J. Yankowski reference
10.36 Change of Control Agreement with Filed herewith
Carl J. Yankowski
10.37 Letter Agreement dated July 14, Incorporated by
1998 between Robert Meers and reference
Reebok International Ltd.
12. Statement Re Computation of Ratio Filed herewith
of Earnings to Fixed Charges
13.1 Selected Portions of Registrant's Filed herewith
1998 Annual Report to Shareholders
21.1 List of Subsidiaries of the Company Filed herewith
23.1 The consent of Ernst & Young LLP Filed herewith
27. Financial Data Schedule Filed herewith