1
FINANCIAL DATA
Selected Financial Data 37
Quarterly Results of Operations 66
MD&A
Management's Discussion and Analysis of Results
of Operations and Financial Condition 38
FINANCIAL STATEMENTS
Consolidated Balance Sheets 46
Consolidated Statements of Income 47
Consolidated Statements of Stockholders' Equity 48
Consolidated Statements of Cash Flows 49
NOTES
Notes to Consolidated Financial Statements 50
REPORTS
Report of Independent Auditors 64
Report of Management 65
CORPORATE INFORMATION
Directors & Officers 67
Shareholder Information 68
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FINANCIAL RESULTS AND CORPORATE INFORMATION
- --------------------------------------------------------------------------------
36. REEBOK INTERNATIONAL LTD.
2
SELECTED FINANCIAL DATA
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
Net sales $3,224,592 $3,643,599 $3,478,604 $3,481,450 $3,280,418
Income before income taxes
and minority interest 37,030 158,085 237,668 275,974 417,368
Net income 23,927 135,119 138,950 164,798 254,478
Basic earnings per share .42 2.41 2.06 2.10 3.09
Diluted earnings per share .42 2.32 2.03 2.07 3.02
Dividends per common share -- -- .225 .300 .300
---------- ---------- ---------- ---------- ----------
DECEMBER 31, 1998 1997 1996 1995 1994
Working capital $ 749,512 $ 887,367 $ 946,127 $ 900,922 $ 831,856
Total assets 1,739,624 1,756,097 1,786,184 1,651,619 1,649,461
Long-term debt 554,432 639,355 854,099 254,178 131,799
Stockholders' equity 524,377 507,157 381,234 895,289 990,505
---------- ---------- ---------- ---------- ----------
Financial data for 1998 includes special after-tax charges of $23,674, or $0.42
per share, in connection with the Company's various business re-engineering
efforts and the restructuring or adjustment of certain underperforming marketing
contracts.
The earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." For further discussion regarding the calculation of earnings per share,
see Notes 1 and 16 to the Consolidated Financial Statements.
On June 7, 1996, Reebok completed the sale of substantially all of the operating
assets and business of its subsidiary, Avia Group International, Inc. ("Avia");
accordingly, subsequent to that date, the operations of Avia are no longer
included in the Company's financial results. 1997 results include an income tax
benefit of $40,000, or $0.69 per diluted share, related to the conclusion in
1997 of outstanding tax matters associated with the sale of Avia. 1997 also
includes total special after-tax charges of $39,161, or $0.67 per diluted share,
relating to restructuring activities in the Company's global operations.
Financial data for 1995 includes total special after-tax charges of $44,934, or
$0.56 per diluted share, of which $33,699 relates to the sale of Avia and
$11,235 relates to facilities consolidation, severance and other related costs
associated with the streamlining of certain segments of the Company's
operations.
REEBOK INTERNATIONAL LTD. 37.
3
MD&A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS ABOUT THE
COMPANY'S REVENUES, EARNINGS, SPENDING, MARGINS, ORDERS, PRODUCTS, ACTIONS,
PLANS, STRATEGIES AND OBJECTIVES. ANY SUCH STATEMENTS ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
PROSPECTIVE INFORMATION IS BASED ON MANAGEMENT'S THEN CURRENT EXPECTATIONS OR
FORECASTS. SUCH INFORMATION IS SUBJECT TO THE RISK THAT SUCH EXPECTATIONS OR
FORECASTS, OR THE ASSUMPTIONS UNDERLYING SUCH EXPECTATIONS OR FORECASTS,
BECOME INACCURATE. FACTORS THAT COULD AFFECT THE COMPANY'S ACTUAL RESULTS AND
COULD CAUSE SUCH RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN
FORWARD-LOOKING STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND THOSE DESCRIBED IN THE
COMPANY'S 1998 ANNUAL REPORT ON FORM 10-K UNDER THE HEADING "ISSUES AND
UNCERTAINTIES."
- --------------------------------------------------------------------------------
OPERATING RESULTS 1998
Net sales for the year ended December 31, 1998 were $3.225 billion, an 11.5%
decrease from the year ended December 31, 1997 sales of $3.644 billion. The
Reebok Division's worldwide sales (including the sales of the Greg Norman
Collection) were $2.691 billion in 1998, a 14.1% decrease from sales of $3.131
billion in 1997. U.S. footwear sales of the Reebok Brand decreased 13.6% to
$1.062 billion in 1998 from $1.229 billion in 1997. U.S. footwear sales of the
Reebok Brand were adversely impacted by over-capacity in the market due to
significant retail expansion during a period of softening consumer demand. This
has resulted in inventory backups and heavy promotional activity to move the
excess quantities. Despite the sales decline, U.S. footwear sales of the Reebok
Brand generated a 44% sales increase in its running category and increases in
its kids and outdoor categories as compared with 1997. U.S. footwear sales in
other categories declined in 1998. U.S. apparel sales of the Reebok Brand
decreased by 16.1% to $362.2 million from $431.9 million in 1997. Increased
sales of apparel in the Company's retail outlet stores and its Greg Norman
Collection were more than offset by declines in Reebok branded and licensed
apparel. The Company is in the process of repositioning the Reebok U.S. apparel
business by upgrading its product offerings and exiting many of its unprofitable
licensed apparel contracts. International sales of the Reebok Brand (including
footwear and apparel) were $1.267 billion in 1998, a decrease of 13.8% from
International sales of $1.471 billion in 1997. The European region reported a
sales increase during 1998, whereas all other International regions reported
sales declines. The Company's sales performance is being adversely affected by
economic conditions in Asia Pacific, Latin America and Russia. As compared to
1997,
38. REEBOK INTERNATIONAL LTD.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
sales in Asia Pacific declined 47% or approximately $150 million for the year
and footwear sales to unconsolidated Latin American distributors declined by 50%
or approximately $60 million. During 1998, operations in Latin America, Asia
Pacific and Russia negatively impacted the Company's earnings by approximately
$50.0 million on a pre-tax basis, as compared to 1997. Another factor affecting
International sales comparisons is currency, particularly in Russia and Asia
Pacific. Fluctuations in foreign currency exchange rates accounted for
approximately a 3% decline in sales in 1998. Most of the Reebok Brand's
International footwear categories declined during the year, however, the classic
and kids categories had sales increases.
Rockport's sales for 1998 (including sales of the Ralph Lauren Footwear Brand)
increased by 4.2% to $533.9 million from $512.5 million in 1997. International
revenues, which grew by 8.2%, accounted for approximately 20.0% of Rockport's
sales (excluding sales of Ralph Lauren Footwear) in both 1998 and 1997.
Increased sales in the walking, outdoor and men's categories were partially
offset by decreased sales in the women's category. The Company has been
strategically repositioning its Rockport women's products in an effort to expand
that segment of the business. For 1998, women's products represented only 20% of
Rockport's sales. During 1998, Rockport expanded its branded retail presence by
opening a number of shop-in-shop and retail concept areas. The Ralph Lauren
Footwear Brand had a sales increase of approximately 15.0% in 1998 as compared
to 1997, with all of the increase coming from the Polo Sport segment. During
1999, the Company intends to expand the Polo Sport segment of the Ralph
Lauren/Polo Sport footwear business and to debut a separate Lauren product
segment.
The Company's overall gross margin was 36.8% of sales which is comparable to
last year's rate of 37.0%. During the second half of 1998, U.S. footwear pricing
margins for the Reebok Brand were restored to levels that the Company was
achieving prior to the introduction of its technology products, which is an
improvement over last year. This is the result of manufacturing efficiencies the
Company has achieved with technology products and from sourcing changes
initiated to take advantage of currency opportunities in the Far East. This
improvement was offset by a greater percentage of the Company's business being
off-price due to the promotional activity in the market. International margins
continue to be adversely affected by the strong U.S. dollar.
Selling, general and administrative expenses for the year ended December 31,
1998 were $1.043 billion, or 32.4% of sales, as compared to $1.069 billion, or
29.4% of sales for 1997. While overall spending declined, the increased spending
as a percentage of sales is attributable to additional expansion of retail
presence for all of the Company's brands and investments in research, design,
development and production. Also included in 1998 results were severance
expenses relating to the reorganization of certain business units and start-up
expenses for the Company's new European logistics and shared service companies
and global information system re-engineering efforts. These start-up expenses,
many of which are redundant in nature, amounted to approximately $43.5 million
for 1998. Of this amount, $34.1 million is included in selling, general and
administrative expenses and $9.4 million is included in cost of sales. The
Company expects to incur additional start-up expenses during most of 1999 or
until such time as these business re-engineering efforts are fully implemented.
The Company has benefited from the various cost reduction programs initiated
last year, as all other selling, general and administrative expenses declined
from last year's levels.
As described in Note 2 to the Consolidated Financial Statements, in the first
quarter of 1998, the Company recorded a special pre-tax charge of $35.0 million,
amounting to approximately $23.7 million after taxes or $0.42 per share,
relating to restructuring activities in the Company's global operations. The
charge included personnel related expenses and other charges associated with
certain underperforming marketing contracts. The business re-engineering should
enable the Company to achieve greater operating efficiencies. The
underperforming marketing contracts have been terminated or restructured to
focus the Company's spending on those key athletes and teams who are more
closely aligned with its core brand positioning.
Interest expense decreased in 1998 as compared to 1997 as a result of debt
repayments. Other expense was $19.2 million for the twelve months, an increase
of $13.0 million from last year. This increase is primarily due to the currency
devaluation in Russia and the Company's write-down of its investment in its
Brazilian joint venture.
The effective income tax rate was 32.2% for 1998 as compared to 33.2% for 1997
(exclusive of certain one-time tax benefits received in 1997). Looking forward,
dependent on the geographic mix of earnings in 1999, the Company expects that
the full year 1999 rate will be approximately 36.0%. However, the rate could
fluctuate from quarter to quarter depending on where the Company earns income
geographically, and, if the Company incurs non-benefitable losses in certain
economically troubled regions, the rate could increase further.
REEBOK INTERNATIONAL LTD. 39.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
At December 31, 1998, the Company had recorded net deferred tax assets of $177.6
million, of which $69.7 million is attributable to the expected utilization of
tax net operating loss carryforwards. The remainder, $107.9 million, is
attributable to tax credit carryforwards and the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Although
realization is not assured, management believes that the net deferred tax assets
will be realized. The estimate of future taxable income relates to operations of
the Company which have, in the past, generated a level of taxable income in
excess of amounts of future taxable income necessary to realize the deferred tax
assets. In addition, the Company has tax planning strategies which can utilize a
portion of the tax net operating loss carryforwards and thereby reduce the
likelihood that they will expire unused. However, if the Company's estimates of
future taxable income are not realized in the near-term, the net carrying value
of the deferred tax assets could be reduced thereby impacting future net income.
OPERATING RESULTS 1997
Net sales for the year ended December 31, 1997 were $3.644 billion, a 4.7%
increase from the year ended December 31, 1996 sales of $3.479 billion, which
included $49.4 million of sales from the Company's Avia subsidiary that was sold
in June 1996. The Reebok Division's worldwide sales (including sales of the Greg
Norman Collection) were $3.131 billion in 1997, a 5.0% increase from comparable
sales of $2.982 billion in 1996. The stronger U.S. dollar has adversely impacted
Reebok Brand worldwide sales comparisons with the prior year. On a constant
dollar basis, sales for the Reebok Brand worldwide increased 8.3% in 1997 as
compared to 1996. The Reebok Division's U.S. footwear sales increased 3.0% to
$1.229 billion in 1997 from $1.193 billion in 1996. The increase in the Reebok
Division's U.S. footwear sales is attributed primarily to increases in the
running, walking, and men's cross-training categories. The increase in sales in
these categories was partially offset by decreases in Reebok's basketball,
outdoor and women's fitness categories. The underlying quality of Reebok
footwear sales in the U.S. improved from last year. Sales to athletic specialty
accounts increased approximately 31%, and the amount of off-price sales declined
from 7.6% of total Reebok footwear sales in 1996, to 3.2% of total Reebok
footwear sales in 1997. The Reebok Division's U.S. apparel sales increased by
37.2% to $431.9 million from $314.9 million in 1996. The increase resulted
primarily from increases in branded core basics, licensed and graphic
categories. The Reebok Division's International sales (including footwear and
apparel) were $1.471 billion in 1997, approximately equal to the Division's
International sales in 1996 of $1.474 billion. The International sales
comparison was negatively impacted by changes in foreign currency exchange
rates. On a constant dollar basis, for the year ended December 31, 1997, the
International sales gain was 6.4%. All International regions generated sales
increases over the prior year on a constant dollar basis. For International
sales, increases in the running, classic and walking categories were offset by
decreases in the basketball and tennis categories. Generally in the industry
there is a slowdown in branded athletic footwear and apparel at retail and there
is a significant amount of promotional product offered across all distribution
channels. As a result of this situation and the expected ongoing negative impact
from currency fluctuations, the Company expects it will be difficult to increase
sales in 1998.
Rockport's sales for 1997 increased by 14.5% to $512.5 million from $447.6
million in 1996. Exclusive of the Ralph Lauren footwear business, which was
acquired in May 1996, Rockport's sales increased 7.3% in 1997. International
revenues, which grew by 46.0%, accounted for approximately 21.0% of Rockport's
sales (excluding Ralph Lauren Footwear) in 1997, as compared to 16.0% in 1996.
Increased sales in the walking and men's categories were partially offset by
decreased sales in the women's lifestyle category. The decrease in the women's
lifestyle category was the result of a strategic initiative to re-focus the
women's business around an outdoor, adventure and travel positioning and reduce
the product offerings in the refined women's dress shoe segment. Rockport
continues to attract younger customers to the brand with the introduction of a
wider selection of dress and casual products. The Ralph Lauren footwear business
performed well in 1997 and is beginning to generate sales growth in its
traditional segments, reflecting the benefits of improved product design and
development and increased distribution. Rockport plans to expand the current
product line of Ralph Lauren/Polo Sport athletic footwear during 1998 with
additional products which will be available at retail during 1999.
The Company's gross margin declined from 38.4% in 1996 to 37.0% in 1997. Margins
are being negatively impacted by both start-up costs and initially higher
manufacturing costs on the Company's new technology products (DMX 2000 and 3D
Ultralite). In addition, the decline reflects a significant impact from currency
fluctuations as a result of the stronger U.S. dollar and a decrease in
full-margin at-once business as a result of an over-inventoried promotional
retail
40. REEBOK INTERNATIONAL LTD.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
environment. The Company estimates that 100 basis points of the margin decline
is due to currency. Looking forward, the Company expects margins to continue to
be under pressure through at least the first half of 1998. However, the Company
believes that if the technology product line expands and gains greater critical
mass and with improving production capabilities, the new technology products are
capable of generating margin improvement.
Selling, general and administrative expenses decreased as a percentage of sales
from 30.6% in 1996 to 29.4% in 1997. The reduction is primarily due to the
absence of certain advertising and marketing expenses associated with the 1996
Summer Olympics. In addition, non-brand building general and administrative
infrastructure expenses declined. Research, design and development expenses
increased 27.0% for the year and retail operating expenses increased in support
of new store openings. At December 31, 1997, the Company operated 157 Reebok,
Rockport and Greg Norman retail stores in the U.S. as compared to 141 at the end
of 1996.
As described in Note 2 to the Consolidated Financial Statements, the Company
recorded special pre-tax charges of $58.2 million relating to restructuring
activities in the Company's global operations. The restructuring should enable
the Company to achieve operating efficiencies, including improved inventory
management, credit management, purchasing power and customer service and should
provide the organization with access to a single global data base of company,
supplier and customer information. The restructuring initiatives should also
improve logistics, allow the Company to focus its spending on those key athletes
and teams who are more closely aligned with its brand positioning and produce
cost savings once completed during 1999.
Interest expense increased as a result of the additional debt the Company
incurred to finance the shares acquired during the 1996 Dutch Auction share
repurchase.
As described in Note 15 to the Consolidated Financial Statements, the Internal
Revenue Service notified the Company in August 1997 that it had approved the
Company's tax treatment of certain losses related to the sale of its Avia
subsidiary. Accordingly, the Company recorded a tax benefit in the quarter ended
September 30, 1997 totaling $40.0 million. Excluding the favorable impact of
this special income tax credit, the Company's effective tax rate was 33.2% in
1997, as compared with 35.4% in 1996. The decrease in the rate is attributable
to a change in the mix of the earnings between domestic and international
subsidiaries. The Company expects its effective tax rate in 1998 to be further
reduced to 31.0%-32.0% as a result of the change in geographic mix of earnings
and ongoing efforts to improve cash ow through various tax planning initiatives.
The $10.5 million increase in other expense in 1997 relates primarily to
currency losses due to the stronger U.S. dollar.
Year-to-year earnings per share comparisons benefited from the Company's share
repurchase programs including the Dutch Auction share repurchase which was
completed in August 1996. Weighted average common shares outstanding (dilutive)
for the year ended December 31, 1997 declined by 15.0% to 58.3 million shares,
as compared to 68.6 million shares for the year ended December 31, 1996.
REEBOK BRAND BACKLOG
The Reebok Brand backlog (including Greg Norman Collection apparel) of open
customer orders scheduled for delivery during the period from January 1, 1999
through June 30, 1999 declined 10.8% as compared to the same period last year.
North American backlog for the Reebok Brand, which includes the U.S. and Canada,
decreased 19.8% and the International backlog increased 5.1%. Reebok U.S.
footwear backlog decreased 18.0% and Reebok U.S. apparel backlog (including Greg
Norman Collection apparel) decreased 24.7% as compared to the same period last
year. U.S. backlog comparisons are against a period last year that had not yet
been significantly impacted by the industry slowdown which began in late 1997.
That retail slowdown, which continued during 1998, resulted in higher retail
cancellations and returns during the year. In addition, the Company believes
retailers are leaving more open-to-buy dollars available for at-once business.
These changes in business conditions suggest that the percentage changes in open
backlog are not necessarily indicative of future sales trends. In addition, many
orders are cancelable, sales by Company-owned retail stores can vary from
year-to-year, many markets in Latin America and Asia Pacific are not included in
the open orders since sales are made by independent distributors and the ratio
of orders booked early to at-once shipments can vary from period to period.
REEBOK INTERNATIONAL LTD. 41.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
LIQUIDITY AND SOURCES OF CAPITAL
The Company's financial position remains strong. Working capital was $749.5
million at December 31, 1998 and $887.4 million at December 31, 1997. The
current ratio at December 31, 1998 was 2.2 to 1 compared to 2.5 to 1 at December
31, 1997. The decline in the current ratio is primarily the result of lower
earnings and the payment of long-term debt and increased capital expenditures.
Accounts receivable decreased by $43.9 million from December 31, 1997, a
decrease of 7.8%. This is the result of the Reebok Division reducing the average
days sales outstanding in U.S. receivables by 2 days as compared to last year
end, as well as the decrease in sales. Inventory decreased by $28.5 million, or
5.1% from December 31, 1997. U.S. footwear inventories of the Reebok Brand
decreased 14.7% at year end as compared to 1997. Reebok U.S. apparel inventories
were down 34.8% and Reebok retail outlet inventories were down 8.8% despite
adding twenty-eight additional outlet stores over the course of the year and
absorbing additional excess inventories generated by the Company.
During the year ended December 31, 1998, cash and cash equivalents decreased
$29.7 million and outstanding borrowings decreased by $111.9 million. In
September 1998, in cooperation with its bank group, the Company amended certain
of its credit arrangements to relax its debt to operating cash flow ratio
covenant through June, 2000. All other material terms and conditions of the
credit arrangements remain unchanged. Cash provided by operations during 1998
was $151.8 million, as compared to cash provided by operations of $126.9 million
during 1997, a $24.9 million improvement despite lower earnings. The change in
operating cash flow year-to-year is attributable to improved inventory
management practices and improved cash collections in the U.S. Cash generated
from operations, together with the Company's existing credit lines and other
financial resources, is expected to adequately finance the Company's current and
planned 1999 cash requirements. However, the Company's actual experience may
differ from the expectations set forth in the preceding sentence. Factors that
might lead to a difference include, but are not limited to, the matters
discussed in the Company's 1998 Annual Report on Form 10-K under the heading
"Issues and Uncertainties," as well as future events that might have the effect
of reducing the Company's available cash balances (such as unexpected operating
losses or increased capital or other expenditures, as well as increases in the
Company's inventory or accounts receivable), or future events that might reduce
or eliminate the availability of external financial resources.
CONTINGENCIES
The Company's footwear and apparel production operations are subject to the
usual risks of doing business abroad, such as import duties, quotas and other
threats to free trade, foreign currency fluctuations, labor unrest and political
instability. The Company believes that it has the ability to develop, over time,
adequate substitute sources of supply for the products obtained from present
foreign suppliers. If, however, events should prevent the Company from acquiring
products from its suppliers in Indonesia, China, Thailand or the Philippines, or
significantly increase the cost to the Company of such products, the Company's
operations could be seriously disrupted until alternative suppliers are found.
For several years, imports from China to the U.S., including footwear, have been
threatened with higher or prohibitive tariff rates, either through statutory
action or intervention by the Executive Branch, due to concern over China's
trade policies, human rights, foreign weapons sales practices and its foreign
policy. Further debate on these issues is expected to continue in 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 occurs. 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.
42. REEBOK INTERNATIONAL LTD.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
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 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.
Lawsuits arise during the normal course of business. The Company does not expect
the outcome of any existing litigation to have a significant impact on its
financial position or future results of operations.
The Company enters into forward currency exchange contracts and options to hedge
its exposure for merchandise purchased in U.S. dollars that will be sold to
customers in other currencies. Realized and unrealized gains and losses on these
contracts are included in net income except that gains and losses on contracts
which hedge specific foreign currency commitments are deferred and accounted for
as a part of the transaction.
The Company also uses forward currency exchange contracts and options to hedge
significant intercompany assets and liabilities denominated in other than the
functional currency. Contracts used to hedge intercompany balances are marked to
market and the resulting transaction gain or loss is included in the
determination of net income.
Foreign currency losses realized from settlements of transactions included in
net income for the years ended December 31, 1998 and 1997 were $12.0 million and
$8.1 million, respectively. The Company has used forward exchange contracts and
options as an element of its risk management strategy for several years.
At December 31, 1998, the Company had forward currency exchange contracts and
options, all having maturities of less than one year, with a notional amount
aggregating $323.1 million. The contracts involved twelve different foreign
currencies. One currency represented 23% of the aggregate notional amount. The
notional amount of the contracts intended to hedge merchandise purchases was
$160.6 million. Deferred gains (losses) on these contracts were not material at
December 31, 1998 or 1997.
The Company uses interest rate swap agreements to manage its exposure to
interest rate movements by effectively converting a portion of its variable rate
long-term debt from floating to fixed rates. These agreements involve the
exchange of variable rate payments for fixed rate payments without the effect of
leverage and without the exchange of the underlying principal amount. Interest
rate differentials paid or received under these swap agreements are recognized
over the life of the contracts as adjustments to interest expense. At December
31, 1998, the notional amount of interest rate swaps outstanding was $295.0
million.
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents, accounts receivable
and hedging instruments. The Company places cash equivalents with high credit
major
REEBOK INTERNATIONAL LTD. 43.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
financial institutions and, by policy, limits the amount of credit exposure to
any one financial institution. Credit risk on trade receivables is somewhat
minimized as a result of the Company's worldwide customer base and the fact that
no one customer represents 10% or more of the Company's net sales.
The Company is exposed to credit-related losses in the event of non-performance
by counterparties to hedging instruments. The counterparties to these contracts
are major financial institutions. The Company continually monitors its positions
and the credit ratings of its counterparties and places dollar and term limits
on the amount of contracts it enters into with any one party.
YEAR 2000 READINESS DISCLOSURE
The year 2000 issue, which is common to most corporations, concerns the
inability of information technology (IT) systems, including computer software
programs, as well as non-IT systems, to properly recognize and process date
sensitive information related to the year 2000 and beyond. This could
potentially cause a system failure or miscalculation that could disrupt
operations.
In order to determine the Company's readiness for the year 2000, the Company has
conducted a global review of both its IT and non-IT systems to identify the
systems that could be affected by the technical problems associated with the
year 2000. As part of this review, a management team was selected to inventory
all IT (mainframe, network and desktop hardware and software), and non-IT
embedded systems (security, fire prevention, elevators, climate control systems,
etc.) to address the year 2000 issue, including an assessment of the costs
required to effect such a plan. The team is currently in the process of
evaluating these inventoried items to determine a remediation method and
implementation plan. The IT evaluation is substantially complete and the non-IT
evaluation for all major subsidiaries was substantially completed at the end of
December 1998. While the Company believes that most of its critical non-IT
systems will function without substantial year 2000 compliance problems, the
Company will continue to review, test and remediate (if necessary) such systems.
In 1993 the Company developed a strategic information systems plan which
provided for the adoption of a new global information systems infrastructure
which would substantially improve the Company's systems capability. This new
global system will replace most legacy systems with year 2000 compliant software
and will thus also address the year 2000 issue. The Company began investments in
this new global strategic system in 1994, with investments continuing each year
thereafter and expected to continue through the year 2000. The global SAP system
being adopted by the Company did not previously have an appropriate application
for the footwear and apparel industry. Thus the Company, together with its
software vendor and another company in the apparel industry, developed a new
software application for the footwear and apparel industry which is now being
implemented by the Company.
The Company believes that, with modifications to existing software and
converting to SAP software and other packaged software, the year 2000 will not
pose significant operational problems for the Company's computer systems.
However, if the modifications and conversions are not implemented or completed
in a timely or effective manner, the year 2000 problem could have a material
adverse impact on the operations and financial condition of the Company. In
addition, in converting to SAP software, the Company is relying on its software
partner to develop and support new software applications and there could be
problems in successfully developing and implementing such new applications. The
Company is the first in the apparel and footwear industry to implement this new
software application and, because of the year 2000 time restraints, the schedule
for implementation is accelerated. Thus, there are substantial risks that
problems could arise in implementation or that the system may not be fully
effective by the end of 1999. The SAP system has been installed and
implementation has been substantially completed in two of the Company's business
units, as well as, in certain other functional areas. The system is now being
configured for rollout to other operating units. The Company also plans to do
testing of its year 2000 readiness during 1999 for operations not included in
the expected SAP implementation. The Company's Rockport subsidiary will not be
converted to the new SAP system by the end of 1999. Accordingly, modifications
to its existing software are being made to make it year 2000 compliant.
44. REEBOK INTERNATIONAL LTD.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Because the Company's conversion to SAP software will replace much of the
Company's software with year 2000 compliant systems, it is difficult to
segregate the incremental costs associated with the year 2000 issue. The Company
expects that the total costs of converting to the global SAP system will be
approximately $75 million, of which approximately $50 million has been spent to
date. Capitalized costs which are included in this estimate are expected to be
approximately $30 million. These costs do not include internal staffing costs.
These estimates assume that the Company will not incur significant year 2000
related costs on behalf of its suppliers, customers or other third parties.
The Company is also focusing on major suppliers and customers to assess their
compliance with the year 2000. This effort is being handled internally and is
currently in process. The Company will be assessing its largest customers and
vendors to determine that their operations are year 2000 compliant. The Company
is also developing plans to test year 2000 compliance with significant suppliers
during 1999 and will use the results of such tests to determine if contingency
plans are necessary and to prepare such plans. The Company is dependent on its
suppliers, joint venture partners, independent distributors and customers to
implement appropriate changes to their computer systems to address the year 2000
issue. The failure of such third parties to effectively address such an issue
could have a material adverse effect on the Company's business.
Contingency plans for year 2000-related interruptions are being developed and
will include, but not be limited to, the development of emergency backup and
recovery procedures, remediation of existing systems parallel with
implementation of the new systems, and replacing electronic applications with
manual processes. These contingency plans are, however, subject to variables and
uncertainties. There can be no assurance that the Company will correctly
anticipate the level, impact or duration of potential non-compliance or that its
contingency plans will be sufficient to mitigate the impact of any potential
failures.
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 conversions; the ability to remediate all relevant
computer code for those limited applications targeted to be remediated;
co-operation and remediation success of the Company's suppliers and customers;
and the ability to implement suitable contingency plans in the event of year
2000 system failures at the Company or its suppliers or customers.
REEBOK INTERNATIONAL LTD. 45.
11
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31 1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 180,070 $ 209,766
Accounts receivable, net of allowance for
doubtful accounts (1998, $47,383; 1997, $44,003) 517,830 561,729
Inventory 535,168 563,735
Deferred income taxes 78,419 75,186
Prepaid expenses and other current assets 50,309 54,404
---------- ----------
Total current assets 1,361,796 1,464,820
---------- ----------
Property and equipment, net 172,585 156,959
Other non-current assets:
Intangibles, net of amortization 68,648 65,784
Deferred income taxes 99,212 19,371
Other 37,383 49,163
---------- ----------
205,243 134,318
---------- ----------
Total Assets $1,739,624 $1,756,097
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 48,070 $ 40,665
Current portion of long-term debt 86,640 121,000
Accounts payable 203,144 192,142
Accrued expenses 191,833 219,386
Income taxes payable 82,597 4,260
---------- ----------
Total current liabilities 612,284 577,453
---------- ----------
Long-term debt, net of current portion 554,432 639,355
Minority interest 31,972 32,132
Commitments and contingencies
Outstanding redemption value of equity put options 16,559
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; authorized 250,000,000 shares;
issued 93,306,642 shares in 1998, 93,115,835 shares in 1997 933 931
Retained earnings 1,156,739 1,145,271
Less 36,716,227 shares in treasury at cost (617,620) (617,620)
Unearned compensation (26) (140)
Accumulated other comprehensive income (expense) (15,649) (21,285)
---------- ----------
524,377 507,157
---------- ----------
Total Liabilities and Stockholders' Equity $1,739,624 $1,756,097
========== ==========
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
46. REEBOK INTERNATIONAL LTD.
12
CONSOLIDATED STATEMENTS OF INCOME
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31 1998 1997 1996
Net sales $3,224,592 $3,643,599 $3,478,604
Other income (expense) (19,167) (6,158) 4,325
---------- ---------- ----------
3,205,425 3,637,441 3,482,929
---------- ---------- ----------
Costs and expenses:
Cost of sales 2,037,465 2,294,049 2,144,422
Selling, general and administrative expenses 1,043,199 1,069,433 1,065,792
Special charges 35,000 58,161
Amortization of intangibles 3,432 4,157 3,410
Interest expense 60,671 64,366 42,246
Interest income (11,372) (10,810) (10,609)
---------- ---------- ----------
3,168,395 3,479,356 3,245,261
---------- ---------- ----------
Income before income taxes and minority interest 37,030 158,085 237,668
Income taxes 11,925 12,490 84,083
---------- ---------- ----------
Income before minority interest 25,105 145,595 153,585
Minority interest 1,178 10,476 14,635
---------- ---------- ----------
Net income $ 23,927 $ 135,119 $ 138,950
========== ========== ==========
Basic earnings per share $ .42 $ 2.41 $ 2.06
========== ========== ==========
Diluted earnings per share $ .42 $ 2.32 $ 2.03
========== ========== ==========
Dividends per common share $ -- $ -- $ 0.225
========== ========== ==========
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
REEBOK INTERNATIONAL LTD. 47.
13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DOLLAR AMOUNTS IN THOUSANDS
ACCUMULATED
COMMON UNEARNED OTHER
STOCK RETAINED TREASURY COMPEN- COMPREHENSIVE
SHARES TOTAL (PAR VALUE $.01) EARNINGS STOCK SATION INCOME (EXPENSE)
BALANCE, DECEMBER 31, 1995 111,015,133 $ 895,289 $1,096 $1,487,006 $(603,241) $(1,208) $ 11,636
=========== ========= ====== ========== ========= ======= ========
Comprehensive income:
Net income 138,950 138,950
Adjustment for foreign
currency translation (5,988) (5,988)
---------
Comprehensive income 132,962
Treasury shares repurchased (14,379) (14,379)
Issuance of shares to
certain employees 43,278 1,450 1,505 (55)
Amortization of unearned
compensation 292 292
Shares repurchased and retired (18,931,403) (672,402) (190) (672,900) 688
Shares issued under employee
stock purchase plans 157,134 4,044 2 4,042
Shares issued upon exercise
of stock options 272,153 6,933 3 6,930
Put option contracts expired 39,840 15 39,825
Income tax reductions relating to
exercise of stock options 2,385 2,385
Dividends declared (15,180) (15,180)
----------- --------- ------ ---------- --------- ------- --------
BALANCE, DECEMBER 31, 1996 92,556,295 381,234 926 992,563 (617,620) (283) 5,648
=========== ========= ====== ========== ========= ======= ========
Comprehensive income:
Net income 135,119 135,119
Adjustment for foreign
currency translation (26,933) (26,933)
---------
Comprehensive income 108,186
Issuance of shares to
certain employees 9,532 431 (431)
Amortization of unearned
compensation 566 566
Shares repurchased and retired (313) 8 8
Shares issued under employee
stock purchase plans 151,210 4,363 1 4,362
Shares issued upon exercise
of stock options 399,111 10,044 4 10,040
Income tax reductions relating to
exercise of stock options 2,756 2,756
----------- --------- ------ ---------- --------- ------- --------
BALANCE, DECEMBER 31, 1997 93,115,835 507,157 931 1,145,271 (617,620) (140) (21,285)
=========== ========= ====== ========== ========= ======= ========
Comprehensive income:
Net income 23,927 23,927
Adjustment for foreign
currency translation 5,636 5,636
---------
Comprehensive income 29,563
Issuance of shares to
certain employees 14,704 458 (458)
Amortization of unearned
compensation 387 387
Shares repurchased and retired (114,920) (3,181) (1) (3,365) 185
Shares issued under employee
stock purchase plans 223,583 3,821 2 3,819
Shares issued upon exercise
of stock options 67,440 1,187 1 1,186
Put option contracts outstanding (16,559) (16,559)
Premium received from unexercised
equity put options 2,002 2,002
----------- --------- ------ ---------- --------- ------- --------
BALANCE, DECEMBER 31, 1998 93,306,642 $ 524,377 $ 933 $1,156,739 $(617,620) $ (26) $(15,649)
=========== ========= ====== ========== ========= ======= ========
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
48. REEBOK INTERNATIONAL LTD.
14
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMOUNTS IN THOUSANDS
YEAR ENDED DECEMBER 31 1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,927 $ 135,119 $ 138,950
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 48,017 47,423 42,927
Minority interest 1,178 10,476 14,635
Deferred income taxes (83,074) (17,285) (6,333)
Special charges 35,000 58,161
Changes in operating assets and liabilities,
exclusive of those arising from
business acquisitions:
Accounts receivable 63,951 (13,915) (107,082)
Inventory 39,134 (47,937) 77,286
Prepaid expenses 4,734 (28,613) 22,650
Other 3,892 24,458 11,042
Accounts payable and accrued expenses (65,616) 18,295 67,769
Income taxes payable 80,634 (59,257) 18,419
--------- --------- ---------
Total adjustments 127,850 (8,194) 141,313
--------- --------- ---------
Net Cash Provided by Operating Activities 151,777 126,925 280,263
========= ========= =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to acquire property and equipment (53,616) (23,910) (29,999)
Proceeds from business divestitures 6,887
--------- --------- ---------
Net cash used for investing activities (53,616) (23,910) (23,112)
========= ========= =========
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) of notes payable to banks 2,048 27,296 (36,947)
Proceeds from issuance of common stock
to employees 5,008 17,163 13,362
Dividends paid (20,922)
Repayments of long-term debt (121,016) (156,966) (1,290)
Net proceeds from long-term debt 632,108
Proceeds from premium on equity put options 2,002 717
Dividends to minority shareholders (6,649) (3,900) (7,426)
Repurchases of common stock (3,366) (686,266)
--------- --------- ---------
Net cash used for financing activities (121,973) (116,407) (106,664)
========= ========= =========
Effect of exchange rate changes on cash (5,884) (9,207) 1,485
========= ========= =========
Net increase (decrease) in cash and cash equivalents (29,696) (22,599) 151,972
Cash and cash equivalents at beginning of year 209,766 232,365 80,393
--------- --------- ---------
Cash and cash equivalents at end of year $ 180,070 $ 209,766 $ 232,365
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 58,224 $ 59,683 $ 38,738
Income taxes paid 26,068 115,985 77,213
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
REEBOK INTERNATIONAL LTD. 49.
15
NOTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
The Company and its subsidiaries design and market sports and fitness products,
including footwear and apparel, as well as footwear and apparel for non-athletic
"casual" use, under various trademarks, including REEBOK, the GREG NORMAN Logo,
ROCKPORT and footwear under RALPH LAUREN and POLO SPORT.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and accounts are
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECOGNITION OF REVENUES
Sales are recognized upon shipment of products.
50. REEBOK INTERNATIONAL LTD.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
ADVERTISING
Advertising production costs are expensed the first time the advertisement is
run. Media (TV and print) placement costs are expensed in the month the
advertising appears. Advertising expense (including cooperative advertising)
amounted to $143,471, $164,870, and $201,584 for the years ended December 31,
1998, 1997 and 1996, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and provides pro
forma disclosures of the compensation expense determined under the fair value
provisions of Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation."
CASH EQUIVALENTS
Cash equivalents are defined as highly liquid investments with maturities of
three months or less at date of purchase.
INVENTORY VALUATION
Inventory, substantially all finished goods, is recorded at the lower of cost
(first-in, first-out method) or market.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed principally
on the straight line method over the assets' estimated lives. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful lives of the assets.
INTANGIBLES
Excess purchase price over the fair value of assets acquired is amortized using
the straight line method over periods ranging from 5 to 40 years. Other
intangibles are amortized using the straight line method over periods ranging
from 3 to 40 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of most of the Company's foreign subsidiaries are
translated at current exchange rates. Revenues, costs and expenses are
translated at the average exchange rates for the period. Translation adjustments
resulting from changes in exchange rates are reported as a component of
comprehensive income. The cumulative translation adjustment at December 31,
1998, 1997 and 1996 was ($15,649), ($21,285) and $5,648, respectively. Other
foreign currency transaction gains and losses are included in the determination
of net income.
For those foreign subsidiaries operating in a highly inflationary economy or
having the U.S. dollar as their functional currency, net nonmonetary assets are
translated at historical rates and net monetary assets are translated at current
rates. Translation adjustments are included in the determination of net income.
INCOME TAXES
The Company accounts for income taxes in accordance with Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" ("Statement
109"). Tax provisions and credits are recorded at statutory rates for taxable
items included in the consolidated statements of income regardless of the period
for which such items are reported for tax purposes. Deferred income taxes are
recognized for temporary differences between financial statement and income tax
bases of assets and liabilities.
NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("Statement 128"). Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and have been restated, to conform to Statement 128 requirements.
REEBOK INTERNATIONAL LTD. 51.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
COMPREHENSIVE INCOME
The Company adopted Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income" ("Statement 130") in 1998 which established
standards for the reporting and display of comprehensive income and its
components in a full set of comparative general-purpose financial statements.
The statement became effective for the Company as of December 31, 1998.
Statement 130 requires foreign currency translation adjustments, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income (expense). The adoption of Statement 130 resulted in
revised and additional disclosures but had no effect on the financial position,
results of operations, or liquidity of the Company. Comprehensive income is
reported by the Company in the Consolidated Statements of Stockholders' Equity.
The information for 1997 and 1996 has been restated from the prior year's
presentation to conform to Statement 130 requirements.
SEGMENT AND RELATED INFORMATION
The Company adopted Financial Accounting Standards Board Statement No. 131
"Disclosures About Segments of an Enterprise and Related Information"
("Statement 131") in 1998. Statement 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements. The information for 1997 and 1996 has been revised
from the prior year's presentation to conform to Statement 131 requirements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, AcSEC issued Statement of Position 98-1 "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which
requires capitalization of certain costs to develop or obtain internal-use
software. SOP 98-1 is required to be adopted for years beginning after December
15, 1998.
In April 1998, the AcSEC issued Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"), which requires the costs of start-up
activities to be expensed as incurred. SOP 98-5 is required to be adopted for
years beginning after December 15, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"), which is required to be adopted for years beginning after June 15, 1999.
Management of the Company does not expect the adoption of any of these standards
to have a material impact on the Company's financial position and results from
operations.
RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform to the 1998
presentation.
2. SPECIAL CHARGES
In the first quarter of 1998, the Company recorded a special charge of $35,000
($23,674 after tax, or $0.42 per share) in connection with the Company's ongoing
business re-engineering efforts. The charge was for personnel related expenses
and certain other charges associated with the restructuring or adjustment of
underperforming marketing contracts. The business re-engineering, which will
result in the termination of approximately 485 full-time positions, should
enable the Company to achieve greater operating efficiencies. The underper-
forming marketing contracts have been terminated or restructured to focus the
Company's spending on those key athletes and teams who are more closely aligned
with its brand positioning. The charge consists of certain one-time expenses,
substantially all of which will affect cash.
The financial results for 1997 include special pre-tax charges of $58,161
($39,161 after tax or $0.67 per diluted share) relating to restructuring
activities in the Company's global operations. The restructuring charge relates
to facilities consolidation and elimination, asset write-downs, personnel
related expenses and the termination or restructuring of certain underperforming
marketing contracts that no longer reflect the Company's brand positioning. The
restructuring activities include reducing the number of European warehouses;
establishing a shared services company that will centralize European
administrative operations; and implementing a global management information
system. The charge will cover certain one-time costs, of which approximately 70%
will affect cash. Actual costs incurred in 1998 and 1997 did not differ
materially from the Company's estimates.
52. REEBOK INTERNATIONAL LTD.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
Details of the special charge activity are as follows:
1997 1997 BALANCE 1998 1998 BALANCE
CHARGES UTILIZATION 12/31/97 CHARGES UTILIZATION 12/31/98
Marketing contracts $25,000 $ $25,000 $18,476 $(28,734) $14,742
Fixed asset write-downs 16,500 (9,600) 6,900 (1,134) 5,766
Employee retention and severance 9,200 (800) 8,400 14,798 (15,983) 7,215
Termination of leases and other 7,461 (700) 6,761 1,726 (5,912) 2,575
------- -------- ------- ------- -------- -------
$58,161 $(11,100) $47,061 $35,000 $(51,763) $30,298
======= ======== ======= ======= ======== =======
The fixed asset write-downs relate to assets that will be abandoned or sold.
The restructuring should enable the Company to achieve operating efficiencies,
including improved inventory management, credit management, purchasing power and
customer service and should provide the organization with access to a single
global data base of company, supplier and customer information. The
restructuring initiatives should also improve logistics, allow the Company to
focus its spending on those key athletes and teams who are more closely aligned
with its brand positioning and produce cost savings once completed during 1999.
3. DUTCH AUCTION SELF-TENDER STOCK REPURCHASE
On July 28, 1996, the Board of Directors authorized the purchase by the Company
of up to 24.0 million shares of the Company's common stock pursuant to a Dutch
Auction self-tender offer. The tender offer price range was from $30.00 to
$36.00 net per share in cash. The self-tender offer commenced on July 30, 1996
and expired on August 27, 1996. As a result of the self-tender offer, the
Company repurchased approximately 17.0 million common shares at a price of
$36.00 per share. Concurrent with the Dutch Auction share repurchase, the
Company's Board of Directors elected to suspend subsequent declarations of
quarterly cash dividends on the Company's stock. Accordingly, the last dividend
declared was for shareholders of record as of September 11, 1996. Suspension of
the dividend will conserve substantial cash which the Company plans to utilize
to reduce debt incurred as a result of the share repurchase.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31 1998 1997
Land $ 8,699 $ 9,037
Buildings 68,776 75,380
Machinery and equipment 264,642 221,114
Leasehold improvements 56,701 48,663
-------- --------
398,818 354,194
Less accumulated depreciation and amortization 226,233 197,235
-------- --------
$172,585 $156,959
======== ========
REEBOK INTERNATIONAL LTD. 53.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
5. INTANGIBLES
Intangibles consist of the following:
DECEMBER 31 1998 1997
Excess of purchase price over fair value of assets acquired $ 38,900 $ 33,579
Other intangible assets:
Purchased technology 52,827 52,827
Company trade name and trademarks 47,678 47,254
Other 12,969 13,699
-------- --------
152,374 147,359
Less accumulated amortization 83,726 81,575
-------- --------
$ 68,648 $ 65,784
======== ========
6. SHORT-TERM BORROWINGS
The Company has various arrangements with numerous banks which provide an
aggregate of approximately $974,000 of uncommitted facilities, substantially all
of which are available to the Company's foreign subsidiaries. Of this amount,
$340,000 is available for short-term borrowings and bank overdrafts, with the
remainder available for letters of credit for inventory purchases. In addition
to amounts reported as notes payable to banks, approximately $167,000 was
outstanding for open letters of credit for inventory purchases at December 31,
1998.
On August 23, 1996, in conjunction with the repurchase of its shares pursuant to
the Dutch Auction self-tender offer, the Company entered into a new Credit
Agreement underwritten by a syndicate of major banks ("Credit Agreement"). The
Credit Agreement included a $750,000 revolving credit facility, expiring on
August 31, 2002 which replaced the Company's previous $300 million credit line.
The balance of the facility was a $640,000 six-year term loan (see Note 8).
On July 1, 1997, the Company amended and restated the Credit Agreement. The
amendment reduced the revolving credit portion of the facility from $750,000 to
$400,000. The revolving credit facility is available to finance the short-term
working capital needs of the Company as well as support the issuance of letters
of credit for inventory purchases, if required. At December 31, 1998 and
December 31, 1997, there were no borrowings outstanding under the revolving
credit portion of this agreement. As part of the agreement, the Company is
required to pay certain commitment fees on the unused portion of the revolving
credit facility as well as comply with various financial and other covenants. As
part of the amendment, the commitment fees the Company is required to pay on the
unused portion of the revolving credit facility as well as the borrowing margins
over the London Interbank Offer Rate on the used portion of the revolving credit
facility were reduced. The amendment further removed or relaxed various
covenants. All other material terms and conditions of the Credit Agreement
remained unchanged.
On September 30, 1998 the Company further amended the Credit Agreement. The
amendment relaxed certain financial covenants through June 2000, at which time
they will return to their original levels.
The Company utilizes a commercial paper program under which it can borrow up to
$200,000 for periods not to exceed 270 days. This program is supported, to the
extent available, by the unused portion of the $400,000 revolving credit
facility. At December 31, 1998, the Company had no commercial paper obligations
outstanding.
The weighted-average interest rate on notes payable to banks was 8.5% and 7.1%
at December 31, 1998 and 1997, respectively.
7. LEASING ARRANGEMENTS
The Company leases various offices, warehouses, retail store facilities and
certain of its data processing and warehouse equipment under lease arrangements
expiring between 1999 and 2006.
54. REEBOK INTERNATIONAL LTD.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
In March 1998, the Company entered into an operating lease agreement for a
Worldwide Headquarters and North American Operations facility scheduled to open
in 2000. Under the agreement, the lessor purchases the property, pays for the
construction costs and subsequently leases the facility to the Company. The
initial lease term is six years with five two-year renewal options. Lease
payments will commence the earlier of occupancy or March 27, 2001 and the
expected annual payments are approximately $10,000. In June 1998, the Company
entered into an operating lease agreement for the purpose of financing
construction costs for a new distribution facility in the Netherlands. Under the
agreement, the lessor leased the land pursuant to a ninety nine-year ground
lease, paid for the construction costs and subsequently leased the entire
facility to the Company. The initial lease term is six years with one five-year
renewal option. These leases provide for substantial residual value guarantees
by the Company and include purchase options at the original cost of the
properties. The maximum amount of the residual value guarantees relative to the
assets under these two leases is projected to be $162,000. As part of these
agreements, the Company is required to comply with various financial and other
covenants.
Minimum annual rentals under operating leases (excluding the Worldwide
Headquarters and North American Operations facility lease discussed above) for
the five years subsequent to December 31, 1998 and in the aggregate are as
follows:
1999 $ 41,622
2000 31,711
2001 23,415
2002 18,943
2003 14,756
2004 and thereafter 23,734
--------
154,181
Less: amounts representing sublease income 18,103
--------
$136,078
========
Total rent expense for all operating leases amounted to $45,771, $45,827, and
$46,751 for the years ended December 31, 1998, 1997 and 1996, respectively.
8. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31 1998 1997
Variable Rate Term Loan due August 31, 2002 with interest payable quarterly $427,398 $497,398
Medium-term notes, bearing interest at rates approximating 6.75%,
due May 15, 2000, with interest payable semiannually on May 15
and November 15 100,000 100,000
6.75% debentures due September 15, 2005, with interest payable
semiannually on March 15 and September 15 99,103 98,953
Medium-term notes, bearing interest at rates approximating 6%, due
July 15, 1998, with interest payable semiannually on February 15
and August 15 30,000
Medium-term notes, bearing interest at rates approximating 6%,
due February 11, 1998, with interest payable semiannually on February 15
and August 15 20,000
Bank and other notes payable 14,571 14,004
-------- --------
641,072 760,355
Less current portion 86,640 121,000
-------- --------
$554,432 $639,355
======== ========
REEBOK INTERNATIONAL LTD. 55.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
On August 23, 1996, the Company entered into a $1,700,000 Credit Agreement
underwritten by a syndicate of major banks of which $950,000 was available in
the form of a six-year term loan facility for the purpose of financing the
Company's acquisition of common stock pursuant to the Dutch Auction self-tender
offer (see Note 3). Based on the number of shares tendered, the Company borrowed
$640,000 from this facility. The undrawn portion of $310,000 was immediately
canceled upon funding of the share repurchase. The Credit Agreement included
various covenants including restrictions on asset acquisitions, capital
expenditures and future indebtedness, and the requirement to maintain a minimum
interest coverage ratio. Under the terms of the agreement there are various
options under which the interest is calculated. On July 1, 1997, the Company
amended and restated the Credit Agreement. This amendment left the remaining
portion of the six-year term loan of $522,398 (as of July 1, 1997) on
substantially the same payment schedule, after adjusting for the $100,000 in
optional prepayments made in 1997. The amendment also removed or relaxed
covenants pertaining to restrictions on asset acquisitions and sales, capital
expenditures, future indebtedness and investments and reduced the borrowing
margins charged by the banks on the variable rate term loan. All other material
terms and conditions of the Credit Agreement remain unchanged.
On September 30, 1998 the Company further amended the Credit Agreement. The
amendment relaxed certain financial covenants through June 2000, at which time
they will return to their original levels.
At December 31, 1998 and 1997, the effective rate of interest on the variable
term loan was approximately 5.89% and 6.19%, respectively. In addition, the
Company is amortizing fees and expenses associated with the Credit Agreement
over the life of the agreement.
Maturities of long-term debt during the five-year period ending December 31,
2003 are $86,640 in 1999, $195,833 in 2000, $110,212 in 2001, $147,527 in 2002
and $140 in 2003.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors defined contribution retirement plans covering
substantially all of its domestic employees and certain employees of its foreign
subsidiaries. Contributions are determined at the discretion of the Board of
Directors. Aggregate contributions made by the Company to the plans and charged
to operations in 1998, 1997, and 1996 were $14,394, $13,696 and $11,755,
respectively.
10. STOCK PLANS
The Company has stock plans which provide for the grant of options to purchase
shares of the Company's common stock to key employees, other persons or entities
who make significant contributions to the success of the Company, and eligible
members of the Company's Board of Directors. The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations in accounting for its employee
stock options. Under APB 25, as long as the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Under the 1994 Equity Incentive Plan, options may be incentive stock options or
"non-qualified options" under applicable provisions of the Internal Revenue
Code. The exercise price of any stock option granted may not be less than fair
market value at the date of grant except in the case of grants to participants
who are not executive officers of the Company and in certain other limited
circumstances. The exercise period cannot exceed ten years from the date of
grant. The vesting schedule for options granted under the 1994 Equity Incentive
Plan is determined by the Compensation Committee of the Board of Directors. The
1994 Equity Incentive Plan also permits the Company to grant restricted stock to
key employees and other persons or entities who make significant contributions
to the success of the Company. The restrictions and vesting schedule for
restricted stock granted under this Plan are determined by the Compensation
Committee of the Board of Directors. The Company also has an option plan for its
Directors. Under this plan, a fixed amount of options are granted annually to
all non-employee Directors. Grants of options under the Directors plan vest in
equal annual installments over three years.
56. REEBOK INTERNATIONAL LTD.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
The Company has two employee stock purchase plans. Under the 1987 Employee Stock
Purchase Plan, eligible employees are granted options to purchase shares of the
Company's common stock through voluntary payroll deductions during two option
periods, running from January 1 to June 30 and from July 1 to December 31, at a
price equal to the lower of 85% of market value at the beginning or end of each
period. Under the 1992 Employee Stock Purchase Plan, for certain foreign-based
employees, eligible employees are granted options to purchase shares of the
Company's common stock during two option periods, running from January 1 to June
30 and from July 1 to December 31, at the market price at the beginning of the
period. The option becomes exercisable 90 days following the date of grant and
expires on the last day of the option period. Accordingly, no options are
outstanding at December 31, 1998 and 1997. During 1998, 1997 and 1996,
respectively, 223,583, 151,210, and 157,134 shares were issued pursuant to these
plans.
In June 1990, the Company adopted a shareholders' rights plan and declared a
dividend distribution of one common stock purchase right ("Right") for each
share of common stock outstanding. Each Right entitles the holder to purchase
one share of the Company's common stock at a price of $60 per share, subject to
adjustment. The Rights will be exercisable only if a person or group of
affiliated or associated persons acquires beneficial ownership of 10% or more of
the outstanding shares of the Company's common stock or commences a tender or
exchange offer that would result in a person or group owning 10% or more of the
outstanding common stock, or in the event that the Company is subsequently
acquired in a merger or other business combination. When the Rights become
exercisable, each holder would have the right to purchase, at the then-current
exercise price, common stock of the surviving company having a market value of
two times the exercise price of the Right. The Company can redeem the Rights at
$.01 per Right at any time prior to expiration on June 14, 2000.
At December 31, 1998, 13,157,869 shares of common stock were reserved for
issuance under the Company's various stock plans and 69,748,284 shares were
reserved for issuance under the shareholders' rights plan.
The following schedule summarizes the changes in stock options during the three
years ended December 31, 1998:
WEIGHTED
AVERAGE
NON-QUALIFIED OPTION EXERCISE
STOCK OPTIONS PRICE PER SHARE PRICE
Outstanding at December 31, 1995 6,156,917 $ 8.75 - $38.88 $24.96
Granted 4,436,947 26.75 - 41.63 31.32
Exercised (272,153) 8.75 - 37.02 25.41
Canceled (406,005) 11.38 - 37.02 31.10
---------- --------------- ------
Outstanding at December 31, 1996 9,915,706 8.75 - 41.63 27.54
Granted 1,205,704 33.75 - 49.25 35.51
Exercised (399,111) 8.75 - 36.75 25.72
Canceled (534,680) 24.00 - 41.63 33.14
---------- --------------- ------
Outstanding at December 31, 1997 10,187,619 10.63 - 49.25 28.26
Granted 4,187,889 12.63 - 31.88 13.69
Exercised (67,440) 10.63 - 28.87 17.60
Canceled (5,066,327) 12.63 - 49.25 32.21
---------- --------------- ------
Outstanding at December 31, 1998 9,241,741 $11.37 - $48.37 $19.54
========== =============== ======
At December 31, 1998, the exercise prices for outstanding options ranged from
$11.37 to $48.37. Within that range, 6,709,022 options were outstanding between
$11.37 and $18.37. Included in this range are 3,069,795 options exercisable at a
weighted-average exercise price of $17.23. The weighted-average exercise price
and average remaining contractual life of these options is $15.11 and 5.26
years, respectively. Additionally, 2,532,719 options were outstanding between
$20.46 and $48.37. Included in this range are 1,150,927 options exercisable at a
weighted-average exercise price of $29.81. The weighted-average exercise price
and average remaining contractual life of these outstanding options were $31.26
and 6.44 years, respectively.
On October 6, 1998, the Board of Directors approved a stock option exchange and
restructuring program pursuant to which certain current employees of the Company
that held stock options with exercise prices above market could elect
REEBOK INTERNATIONAL LTD. 57.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
to exchange all or none of their then outstanding above market employee stock
options for a smaller number of new options, with a new four-year vesting
schedule. The number of existing outstanding option shares exchanged for the new
option shares was at a ratio of 1.25:1. The new options have an exercise price
of $12.625 per share which was the current market price as of October 6, 1998.
Executive officers of the Company who were also directors and certain other
option holders were not eligible to participate in this program. Of the
9,932,000 option shares outstanding under the Company's stock option programs as
of October 6, 1998, approximately 3,900,000 option shares (or approximately 40%)
were eligible for this exchange and restructuring program. Substantially all of
these options were exchanged by employees under the program.
Shares granted in 1996 include a July grant to certain senior executives made in
conjunction with the Dutch Auction. The options did not begin to vest until the
end of 1998, and vesting extends for a period of up to five years ending in
December 2002. Certain of these options were exchanged in 1998 pursuant to the
Company's stock option exchange and restructuring program. In addition, during
1996 the Company reinstituted December as the month in which it grants its
annual stock options to employees. The 1995 annual employee option grants were
issued in February 1996.
At December 31, 1998, 1997 and 1996, options to purchase 4,220,722, 4,324,208,
and 3,983,278 shares of common stock were exercisable, and 3,648,581, 3,032,790,
and 1,225,051 shares, respectively, were available for future grants under the
Company's stock equity plans.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates ranging from 4.2% to 7.7%;
dividend yields of .00%, .00% and .68%; volatility factors of the expected
market price of the Company's common stock of .52 in 1998, .35 in 1997 and .27
in 1996; and a weighted-average expected life of the option of 3.5 years in 1998
and 4.2 years in 1997 and 1996.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except for earnings per share
information):
1998 1997 1996
Pro forma net income $27,008 $127,506 $134,017
Pro forma basic earnings per share $ .49 $ 2.31 $ 2.03
Pro forma diluted earnings per share $ .49 $ 2.23 $ 2.00
The weighted-average fair value of options granted in 1998, 1997 and 1996 is
$6.70, $13.09 and $10.76, respectively.
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 2001.
11. ACQUISITION OF COMMON STOCK
Under various share repurchase programs from 1992 to 1995, the Board of
Directors authorized the repurchase of up to $800,000 in Reebok common stock in
the open market or privately-negotiated transactions. As of December 31, 1998,
the Company had approximately $126,600 available for future repurchases of
common stock under these programs (See note 12).
12. EQUITY PUT OPTIONS
During 1998, the Company issued equity put options as part of its ongoing share
repurchase program. These options provide the Company with an additional source
to supplement open market purchases of its common stock. The options were priced
based on the market value of the Company's common stock at the date of issuance.
The redemption value of the options, which represents the option price
multiplied by the number of shares under option, is presented in the
58. REEBOK INTERNATIONAL LTD.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
accompanying consolidated balance sheet at December 31, 1998 as "Outstanding
redemption value of equity put options." At December 31, 1998, 625,000 shares of
outstanding common stock were subject to repurchase under the terms and
conditions of these options. In January 1999, the Company purchased the 625,000
shares under the terms of the equity put agreements for a net aggregate purchase
price of $16,559. At December 31, 1997, no shares of outstanding common stock
were subject to repurchase under the terms and conditions of equity put options.
13. BUSINESS ACQUISITIONS AND DIVESTITURES
On May 23, 1996, the Company finalized a long-term exclusive footwear licensing
arrangement with Ralph Lauren to design, develop, manufacture, market and
distribute men's, women's and children's footwear under the Ralph Lauren label.
The agreement requires payment of certain annual minimum amounts for royalties
and other compensation. The territory for the license initially included North
America and is expected to expand worldwide as existing Ralph Lauren licenses
expire subject to reaching agreement with Ralph Lauren as to business plans for
the additional territories. In conjunction with the licensing arrangement,
Reebok's subsidiary, The Rockport Company, Inc. acquired Ralph Lauren's prior
licensee for the U.S. and Canada, Ralph Lauren Footwear, Inc.
On June 7, 1996, Reebok completed the sale of substantially all of the operating
assets and business of its subsidiary, Avia Group International, Inc.
14. FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company to estimate the
fair value of its financial instruments:
Cash and cash equivalents and notes payable to banks: the carrying amounts
reported in the balance sheet approximate fair value. Long-term debt: the fair
value of the Company's medium-term notes and debentures is estimated based on
quoted market prices. The fair value of other long-term debt is estimated using
discounted cash flow analyses, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements. Unrealized gains or losses on
foreign currency exchange contracts and options: the fair value of the Company's
foreign currency exchange contracts is estimated based on current foreign
exchange rates. Fair market value of interest rate swaps: the fair value of the
Company's interest rate swaps is estimated based on current interest rates.
The carrying amounts and fair value of the Company's financial instruments are
as follows:
CARRYING AMOUNT FAIR VALUE
------------------- -------------------
DECEMBER 31 1998 1997 1998 1997
Long-term debt $641,072 $760,355 $629,789 $759,049
Unrealized gains (losses) on foreign
currency exchange contracts and options 2,024 4,619 (2,817) 6,256
Interest rate swaps (3,622) 344
======== ======== ======== ========
FOREIGN EXCHANGE FORWARDS AND OPTIONS
The Company enters into forward currency exchange contracts and options to hedge
its exposure for merchandise purchased in U.S. dollars that will be sold to
customers in other currencies. Realized and unrealized gains and losses on these
contracts are included in net income except that gains and losses on contracts
which hedge specific foreign currency commitments are deferred and accounted for
as a part of the transaction. The Company also uses forward currency exchange
contracts and options to hedge significant intercompany assets and liabilities
denominated in other than the functional currency. Contracts used to hedge
intercompany balances are marked to market and the resulting transaction gain or
loss is included in the determination of net income.
Foreign currency losses realized from settlements of transactions included in
other income (expense) for the years ended December 31, 1998 and 1997 were
$12,000 and $8,100, respectively. The Company has used forward exchange
contracts and options as an element of its risk management strategy for several
years.
REEBOK INTERNATIONAL LTD. 59.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
At December 31, 1998, the Company had option and forward currency exchange
contracts, all having maturities of less than one year, with a notional amount
aggregating $323,148. The contracts involved 12 different foreign currencies. No
single currency represented more than 23% of the aggregate notional amount. The
notional amount of contracts intended to hedge merchandise purchases was
$160,586. Deferred gains (losses) on these contracts were not material at
December 31, 1998 and 1997.
INTEREST RATE SWAPS
The Company uses interest rate swap agreements to manage its exposure to
interest rate movements by effectively converting a portion of its variable rate
long-term debt from floating to fixed rates. These agreements involve the
exchange of variable rate payments for fixed rate payments without the effect of
leverage and without the exchange of the underlying principal amount. Interest
rate differentials paid or received under these swap agreements are recognized
over the life of the contracts as adjustments to interest expense.
During the fourth quarter of 1996, the Company entered into several amortizing
interest rate swaps with a group of financial institutions having an initial
notional value of $320,000 and expiring on December 31, 2000. The notional
amount of the swaps is reduced each year in accordance with the expected
repayment schedule of the Company's variable rate term loan. In January 1998,
the Company entered into additional interest rate swaps in the amount of
$150,000 with respect to the variable rate term loan. The terms of the swaps
require the Company to make fixed rate payments on a quarterly basis whereas the
Company will receive variable rate payments based on the three-month U.S. dollar
LIBOR. At December 31, 1998 and 1997, the notional amount of interest rate swaps
outstanding was $295,000 and $245,000 respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents, accounts receivable and
hedging instruments.
The Company places cash equivalents with high credit financial institutions and,
by policy, limits the amount of credit exposure to any one financial
institution. Credit risk on trade receivables is somewhat minimized as a result
of the Company's worldwide customer base and the fact that no one customer
represents 10% or more of the Company's net sales.
The Company is exposed to credit-related losses in the event of non-performance
by counterparties to hedging instruments. The counterparties to these contracts
are major financial institutions. The Company continually monitors its positions
and the credit ratings of its counterparties and places dollar and term limits
on the amount of contracts it enters into with any one party.
15. INCOME TAXES
The components of income before income taxes and minority interest are as
follows:
1998 1997 1996
Domestic $(54,064) $(32,783) $(12,720)
Foreign 91,094 190,868 250,388
-------- -------- --------
$ 37,030 $158,085 $237,668
======== ======== ========
60. REEBOK INTERNATIONAL LTD.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
The provision for income taxes consists of the following:
1998 1997 1996
Current:
Federal $ 44,090 $(34,314) $ 1,961
State 3,572 (324) 4,534
Foreign 47,337 64,413 83,921
-------- -------- -------
94,999 29,775 90,416
-------- -------- -------
Deferred:
Federal (37,811) (8,940) (1,705)
State (19,880) (1,900) (689)
Foreign (25,383) (6,445) (3,939)
-------- -------- -------
(83,074) (17,285) (6,333)
-------- -------- -------
$ 11,925 $ 12,490 $84,083
======== ======== =======
During 1992, the Company recorded a write-down in the carrying value of its Avia
subsidiary in the amount of $100,000 with no corresponding tax benefit
recognized in that year due to the uncertainty concerning the ultimate
deductibility of the charge. In June 1996, substantially all of the operating
assets and business of Avia were sold. After the sale, in December 1996, the
Company requested a pre-filing determination from the Internal Revenue Service
("IRS") regarding the deductibility of certain losses pertaining to the sale of
Avia. In August 1997, the IRS notified the Company that it had approved the
Company's tax treatment concerning the deductibility of the Avia losses and
accordingly, a corresponding reduction in income taxes totaling $40,000 was
recorded in the third quarter of that year.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $409,369, $405,265 and $517,309 at December 31, 1998, 1997 and
1996, respectively. Those earnings are considered to be indefinitely reinvested.
Upon distribution of those earnings in the form of dividends or otherwise, some
portion of the distribution would be subject to both U.S. income taxes and
foreign withholding taxes, less an adjustment for applicable foreign tax
credits. Determination of the amount of U.S. income tax liability that would be
incurred is not practicable because of the complexities associated with its
hypothetical calculation; however, unrecognized foreign tax credits would be
available to reduce some portion of any U.S. income tax liability.
Income taxes computed at the federal statutory rate differ from amounts provided
as follows:
1998 1997 1996
Tax at statutory rate 35.0% 35.0% 35.0%
State taxes, less federal tax effect 1.5 1.5 1.7
Effect of tax rates of foreign
subsidiaries and joint ventures (5.1) (4.3) (1.6)
Tax benefit from Avia losses (25.3)
Amortization of intangibles 0.7 0.4 0.4
Other, net 0.1 0.6 (0.1)
---- --- ----
Provision for income taxes 32.2% 7.9% 35.4%
==== === ====
Deferred income taxes reflect the expected utilization of tax net operating loss
carryforwards, tax credit carryforwards and the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
REEBOK INTERNATIONAL LTD. 61.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
Net deferred tax assets are attributable to the following:
DECEMBER 31 1998 1997
Inventory $ 37,175 $ 30,238
Accounts receivable 26,641 24,973
Liabilities 11,849 26,714
Depreciation 8,436 6,117
Accrued special charges 11,707 14,452
Tax net operating loss carryforwards 69,707 10,424
Tax credit carryforwards 16,710
Other, net (4,594) (18,361)
-------- --------
Total $177,631 $ 94,557
======== ========
At December 31, 1998, the Company had U.S. federal and state and local tax
net operating loss carryforwards and foreign tax net operating loss
carryforwards for certain foreign subsidiaries, the tax effect of which is
approximately $69,707. These carryforwards will expire as follows: $7,029 in
2002, $15,580 in 2003, and $47,098 thereafter. The Company also has available
tax credit carryforwards of approximately $16,710, which will expire as
follows: $3,145 in 2002, $1,509 in 2003, and $12,056 thereafter.
16. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
1998 1997 1996
Numerator:
Net Income $23,927 $135,119 $138,950
------- -------- --------
Denominator:
Denominator for basic earnings per share --
weighted-average shares 56,394 56,162 67,370
Dilutive employee stock options and equity put options 635 2,147 1,247
------- -------- --------
Denominator for diluted earnings per share --
adjusted weighted-average shares and assumed conversions 57,029 58,309 68,617
======= ======== ========
Basic earnings per share $ .42 $ 2.41 $ 2.06
======= ======== ========
Diluted earnings per share $ .42 $ 2.32 $ 2.03
======= ======== ========
62. REEBOK INTERNATIONAL LTD.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
17. SEGMENT AND RELATED INFORMATION
The Company designs and markets footwear and apparel products, under various
brand names. All products are generally manufactured using similar manufacturing
processes. Additionally, these products share similar distribution methods and
are marketed and sold to a similar type of customer. Operating results are
assessed on an aggregate basis to make decisions about resources to be allocated
among the brands.
Consequently, as permitted by the provisions of Statement 131, "Disclosure About
Segments of an Enterprise and Related Information," the Company has one
reportable segment for financial statement purposes.
Net sales to unaffiliated customers and long-lived assets by geographic area are
summarized below:
1998 1997 1996
NET SALES:
United States $1,790,143 $2,000,883 $1,935,724
United Kingdom 522,393 661,358 566,196
Europe 585,686 510,981 623,209
Other countries 326,370 470,377 353,475
---------- ---------- ----------
$3,224,592 $3,643,599 $3,478,604
========== ========== ==========
Long-lived assets:
United States $ 170,537 $ 175,744 $ 182,380
United Kingdom 28,697 23,565 23,422
Europe 30,138 14,388 16,950
Other countries 11,861 9,046 32,240
---------- ---------- ----------
$ 241,233 $ 222,743 $ 254,992
========== ========== ==========
18. CONTINGENCIES
The Company is involved in various legal proceedings generally incidental to its
business. While it is not feasible to predict or determine the outcome of these
proceedings, management does not believe that they should result in a materially
adverse effect on the Company's financial position, results of operations or
liquidity. Included in these proceedings is a lawsuit filed by a former
distributor in Brazil in which the plaintiff asserted a claim for damages in
excess of $50,000. In April 1998, a court of first instance in Brazil awarded
this distributor damages of approximately $15,000, plus interest and attorneys'
fees. The Company appealed the ruling to a three-judge panel of the appellate
court which upheld the trial court's decision by a vote of two to one. Because
the appellate decision was not unanimous, the case is now being referred to a
new panel of five appellate judges from the same court, who will decide the case
on a de novo basis which means that the appellate panel will not have any
obligation to defer to the factual or legal conclusions of the trial court or
the first appellate panel, but the amount awarded must be within the parameters
established by the minority and majority decisions of the prior appellate panel
(a range from approximately $72 to approximately $15,000, plus interest and
attorneys' fees). The Company continues to believe the trial court's decision is
in error and will aggressively pursue all rights of appeal available to it. The
accompanying consolidated financial statements contain no provision for loss
with respect to this Brazilian lawsuit.
REEBOK INTERNATIONAL LTD. 63.
29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Reebok International Ltd.
Stoughton, Massachusetts
We have audited the accompanying consolidated balance sheets of Reebok
International Ltd. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Reebok
International Ltd. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 2, 1999
64. REEBOK INTERNATIONAL LTD.
30
REPORT OF MANAGEMENT
FINANCIAL STATEMENTS
The management of Reebok International Ltd. and its subsidiaries has prepared
the accompanying financial statements and is responsible for their integrity and
fair presentation. The statements, which include amounts that are based on
management's best estimates and judgments, have been prepared in conformity with
generally accepted accounting principles and are free of material misstatement.
Management has also prepared other information in the annual report and is
responsible for its accuracy and consistency with the financial statements.
INTERNAL CONTROL SYSTEM
Reebok International Ltd. and its subsidiaries maintain a system of internal
control over financial reporting, which is designed to provide reasonable
assurance to the Company's management and Board of Directors as to the integrity
and fair presentation of the financial statements. Management continually
monitors the system of internal control for compliance, and actions are taken to
correct deficiencies as they are identified. Even an effective internal control
system, no matter how well designed, has inherent limitations including the
possibility of the circumvention or overriding of controls and therefore can
provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, internal control system
effectiveness may vary over time.
The Company maintains an internal auditing program that monitors and assesses
the effectiveness of the internal controls system and recommends possible
improvements thereto. The Company's accompanying financial statements have been
audited by Ernst & Young LLP, independent auditors, whose audit was made in
accordance with generally accepted auditing standards and included a review of
the system of internal accounting controls to the extent necessary to determine
the audit procedures required to support their opinion on the consolidated
financial statements. Management believes that, as of December 31, 1998, the
Company's system of internal control is adequate to accomplish the objectives
discussed herein.
Reebok International Ltd.,
/s/ Paul Fireman /s/ Kenneth Watchmaker
PAUL FIREMAN KENNETH WATCHMAKER
Chairman, President and Chief Executive Vice President and Chief
Executive Officer Financial Officer
REEBOK INTERNATIONAL LTD. 65.
31
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
YEAR ENDED DECEMBER 1998
Net sales $880,123 $760,567 $ 878,335 $705,567
Gross profit 314,051 280,328 331,994 260,754
Net income (loss) (3,358) 6,146 28,229 (7,090)
Basic earnings (loss) per share (.06) .11 .50 (.13)
Diluted earnings (loss) per share (.06) .11 .50 (.13)
-------- -------- ---------- --------
YEAR ENDED DECEMBER 1997
Net sales $930,041 $841,059 $1,009,053 $863,446
Gross profit 356,229 323,511 370,211 299,599
Net income 40,184 20,322 73,968 645
Basic earnings per share .72 .36 1.32 .01
Diluted earnings per share .69 .35 1.26 .01
-------- -------- ---------- --------
Net income for the first quarter of 1998 includes a special charge of $23,674
after taxes, or $0.42 per share, for personnel related expenses and certain
other expenses associated with the restructuring or adjustment of
underperforming marketing contracts.
Net income for the fourth quarter of 1997 includes a special charge of $18,000
after taxes, or $0.31 per diluted share, for the restructuring of a number of
marketing contracts.
Net income for the third quarter of 1997 includes a tax credit of $40,000, or
$0.68 per diluted share, as well as a special charge of $21,161 after taxes, or
$0.36 per diluted share, for facilities consolidation and elimination, asset
adjustments, and personnel related expenses associated with global restructuring
activities.
66. REEBOK INTERNATIONAL LTD.
32
DIRECTORS & OFFICERS
BOARD OF DIRECTORS CORPORATE OFFICERS
PAUL FIREMAN PAUL FIREMAN
Chairman, President & Chief Executive Officer Chairman, President & Chief Executive Officer
Reebok International Ltd.
ANGEL R. MARTINEZ
CARL J. YANKOWSKI Executive Vice President
Executive Vice President Chief Marketing Officer
President & Chief Executive Officer Reebok Division
Reebok Division
Reebok International Ltd. KENNETH WATCHMAKER
Executive Vice President
PAUL R. DUNCAN Chief Financial Officer
Executive Vice President
Reebok International Ltd. CARL J. YANKOWSKI
Executive Vice President
M. KATHERINE DWYER President & Chief Executive Officer
President Reebok Division
Revlon Consumer Products, USA
Revlon, Inc. JAMES R. JONES, III
Senior Vice President &
WILLIAM F. GLAVIN Chief Human Resources Officer
President Emeritus
Babson College BARRY NAGLER
Senior Vice President
MANNIE L. JACKSON General Counsel
Chairman & Chief Executive Officer
Harlem Globetrotters International, Inc. ANTHONY J. TIBERII
Senior Vice President
RICHARD G. LESSER President & Chief Executive Officer
Executive Vice President & Chief Operating Officer The Rockport Company, Inc.
TJX Companies, Inc.
LEO S. VANNONI
GEOFFERY NUNES Treasurer
Retired Senior Vice President & General Counsel
Millipore Corporation
THOMAS M. RYAN
President & Chief Executive Officer
CVS Corporation
REEBOK INTERNATIONAL LTD. 67.
33
SHAREHOLDER INFORMATION
INDEPENDENT AUDITORS FORM 10-K
Ernst & Young LLP For a copy of the Form 10-K Annual
200 Clarendon Street Report, filed with the Securities
Boston, MA 02116 and Exchange Commission, write to:
Office of Investor Relations
Reebok International Ltd.
100 Technology Center Drive
TRANSFER AGENT AND REGISTRAR Stoughton, MA 02072
BankBoston, N.A. is the Transfer Agent
and Registrar for the Company's common
stock and maintains the shareholder
accounting records. The Transfer Agent
should be contacted on questions of
changes in address, name or ownership, Web Site
lost certificates and consolidation of http://www.reebok.com
accounts. When corresponding with the
Transfer Agent, shareholders should
state the exact name(s) in which the
stock is registered and certificate number
as well as old and new information about
the account. CORPORATE HEADQUARTERS
Reebok International Ltd.
BankBoston, N.A. 100 Technology Center Drive
c/o EquiServe Stoughton, MA 02072
Shareholder Correspondence Phone: (781) 401-5000
Post Office Box 8040
Boston, MA 02266-8040
Phone: (781) 575-3400
Facsimile: (781) 828-8813 ANNUAL MEETING
Toll-free number outside Massachusetts
(800) 733-5001 The Annual Meeting of Shareholders
http://www.equiserve.com will be held at 10:00 a.m., local
time, on Tuesday, May 4, 1999 at
BankBoston, Long Lane Conference
Room, Second Floor, 100 Federal
Street, Boston, Massachusetts.
Shareholders of record on March 11,
1999 are entitled to vote at the
meeting.
STOCK INFORMATION
The Company's common stock is quoted on the New York Stock Exchange under the
symbol RBK. The following table, derived from data supplied by the NYSE, sets
forth the quarterly high and low sales prices during 1998 and 1997.
1998 1997
------------------ -----------------
High Low High Low
First 33 3/16 25 1/2 52 7/8 40 5/8
Second 32 1/2 27 49 7/8 37 1/8
Third 29 1/4 13 1/8 52 1/4 43 5/8
Fourth 18 1/2 12 9/16 49 1/2 27 5/8
================== =================
The number of record holders of the Company's common stock at February 19, 1999
was 6,895.
68. REEBOK INTERNATIONAL LTD.
34
(C) 1999 Reebok International Ltd. All Rights Reserved.
REEBOK, DMX and the Vector Logo [REEBOK the Vector Logo] are registered
trademarks and ATTACK LIFE is a trademark of Reebok.
ROCKPORT, PROWALKER, UNCOMPROMISE and the Lighthouse Logo are registered
trademarks and SOUL SENSATION and WALKING PLATFORM are trademarks of The
Rockport Company, Inc.
GREG NORMAN and the Greg Norman Logo are registered trademarks of Great White
Shark Enterprises, Inc.
RALPH LAUREN, LAUREN BY RALPH LAUREN and POLO SPORT are registered trademarks
and RLX and LAUREN are trademarks of Polo/Ralph Lauren.
Design: Belk Mignogna Associates, New York
Photography: (Cover) Graham MacIndoe; (pgs. 21, 29 and 30) Robert Fishman