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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 Commission File Number 1-9340
REEBOK INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2678061
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
100 TECHNOLOGY CENTER DRIVE, STOUGHTON, MASSACHUSETTS 02072
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (617) 341-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of each exchange
each class on which registered
---------- ------------------------
Common Stock, par value, $.01 per share New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of February 10, 1994, the aggregate market value of the registrant's voting
stock held by non-affiliates of the registrant was approximately
$2,192,743,659.
As of February 10, 1994, 83,578,516 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement to be filed with the Securities and
Exchange Commission on or before March 30, 1994 for the Annual Meeting of
Shareholders to be held on May 3, 1994 (certain parts as indicated herein in
Part III).
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PART I
Item 1. Business.
Reebok International Ltd., a Massachusetts corporation organized on
July 26, 1979, engages primarily in the design and marketing of sports and
fitness performance products, including footwear and apparel, as well as the
design and marketing of footwear and apparel for non-athletic "casual" use. The
Company recently realigned its management responsibilities to establish two
major business groups: the Reebok Division, which is primarily responsible for
the Company's REEBOK (R) brand, and the Specialty Business Group, which
consists of REEBOK brand outdoor products, golf products and retail operations,
along with the Company's other major brands and non-athletic products,
including BOKS (TM) casual footwear and the Company's subsidiaries, AVIA Group
International, Inc. ("Avia") and The Rockport Company, Inc. ("Rockport").
(Reebok International Ltd. is referred to herein, together with its
subsidiaries, as "Reebok" or the "Company" unless the context requires
otherwise.)
During calendar year 1993, net income for the Company increased to
$223.4 million, or $2.53 per share, from $114.8 million, or $1.24 per share,
for the year ended December 31, 1992, while net sales decreased by 4.3%, from
$3.023 billion to $2.894 billion. Net income in 1992 was affected by a
restructuring plan adopted by the Company in such year which resulted in
after-tax charges totaling $135.4 million in the fourth quarter of 1992 and by
after-tax gains of $18.0 million from the sale of CML Group, Inc. ("CML")
common stock. The restructuring plan contemplated, among other things, the
sale by the Company of two of its subsidiaries, Boston Whaler, Inc. ("Boston
Whaler") and Ellesse U.S.A., Inc. ("Ellesse"). The Boston Whaler sale was
completed on July 30, 1993 and the Ellesse sale was completed on September 28,
1993. The aggregate proceeds from these sales were $42.5 million (subject to
certain post-closing adjustments), which included a note receivable of $6
million, due in installments through December 31, 1999. In connection with
such sales, additional after-tax charges totaling $7.0 million were taken in
the third quarter of 1993, thus affecting net income in 1993.
On February 15, 1994, the Company filed a Registration Statement with
the Securities and Exchange Commission to register 3,450,000 shares of its
Common Stock to be sold in an underwritten public offering by the Company's
Chairman and Chief Executive Officer, Paul Fireman, and his wife, Phyllis
Fireman (the "Selling Stockholders"). The Company intends to purchase, subject
to approval by a Special Committee of the Board of Directors of the Company and
the consummation of the public offering of shares by the Selling Stockholders,
1,000,000 shares of Common Stock from the Selling Stockholders at the same
price per share as the public offering per share price, less the amount of all
underwriting discounts. It is anticipated that the Company's repurchase of
these shares of Common Stock (the "Company Stock Repurchase") will occur
simultaneously with the consummation of the public offering of the shares of
Common Stock by the Selling Stockholders. The Company intends to fund the
Company Stock Repurchase with available cash and short-term borrowings. If the
Company Stock Repurchase is consummated, the repurchased shares will be
returned to the status of authorized and unissued capital stock of the Company.
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On July 13, 1993, the Company's Board of Directors authorized the
repurchase of up to $200 million in Common Stock in open market or
privately reported transactions. This was in addition to the $200 million
share repurchase program adopted by the Company in July 1992. Under these
programs, the Company has purchased 8,725,100 shares at an aggregate price of
approximately $269.1 million through February 14, 1994, which leaves the
Company with authority to repurchase up to $130.9 million in additional shares
of Common Stock. If consummated, the Company Stock Repurchase will be treated
as a repurchase under the Company's share repurchase program.
The following is a discussion of the business of each of the Company's
operating units.
REEBOK DIVISION
The Reebok Division is responsible for designing, producing and
marketing sports and fitness footwear, apparel and accessories that combine the
attributes of athletic performance along with style, including footwear for
basketball, running, soccer, tennis, track and field, volleyball, football,
baseball, aerobics, cross training and walking activities, as well as athletic
apparel and accessories (including apparel and accessories sold under the
REEBOK (R) brand, a line of basketball clothing and accessories sold under the
ABOVE THE RIM (R) brand, and a line of performance apparel, with emphasis on
running and cycling, sold under the TINLEY (R) brand). The Division also
produces children's footwear sold under the REEBOK (R) brand and a collection
of footwear, apparel and accessories for infants and toddlers sold under the
WEEBOK (R) brand, which is designed to meet the special requirements of infants
and toddlers and to provide functional and contemporary head-to-toe dressing.
The Division has recently expanded its product scope through the development
and marketing of related sports and fitness products, such as sports and
fitness videos, programming and equipment. In addition, to enhance brand
awareness and gain credibility for its technologies, the Company has adopted a
strategic licensing program pursuant to which the Company's technologies and/or
trademarks are licensed to third parties for sporting goods and related
products.
The Reebok Division has targeted as its primary customer base athletes
and others who believe that technical and other performance features are the
critical attributes of athletic footwear and apparel. As part of its
commitment to offer leading athletic footwear technologies, the Division
engages in product research, development and design ("RD&D") activities in the
Company's Stoughton, Massachusetts headquarters and in its various Far East
offices.
TECHNOLOGY
Reebok continued to place a strong emphasis on technology in 1993,
highlighted by further development of THE PUMP (TM) inflatable technology, an
integrated system of one or more inflatable chambers that are adjustable to
help provide custom fit and support in footwear and other products, and its
evolution to INSTAPUMP (TM) technology. INSTAPUMP technology is a new
inflatable technology from Reebok which brings the features and benefits of THE
PUMP technology to lightweight performance shoes through use of an INSTAPUMP
inflator containing a carbon dioxide cartridge which is used to inflate
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the chambers instantly. The INSTAPUMP technology was tested in both running
and tennis shoes, first at the 1992 Olympic Summer Games in Barcelona where
running shoes with the INSTAPUMP technology were worn by several medal winners,
then at the 1992 and 1993 U.S. Open where tennis shoes incorporating the
INSTAPUMP technology were worn by both Michael Chang and Arantxa
Sanchez-Vicario, and finally in 1993 where running shoes incorporating the
INSTAPUMP technology were worn by Reebok athletes competing in the IAAF World
Track & Field Championships in Stuttgart, Germany. Cleated shoes incorporating
the INSTAPUMP technology were also worn by Reebok athletes in the 1994 Super
Bowl. Running and tennis shoes incorporating the INSTAPUMP technology were
available in test markets in Fall 1993 and running, basketball and tennis shoes
incorporating the INSTAPUMP technology are expected to be available at retail
in Spring 1994.
In 1993, Reebok continued its emphasis on HEXALITE (R) technology and
the exclusively licensed DYNAMIC CUSHIONING (R) technology. The HEXALITE
technology, introduced by Reebok in 1989, is a lightweight, flexible,
compressible and resilient honeycomb structure designed to provide lightweight
cushioning as a midsole component. The DYNAMIC CUSHIONING technology utilizes
compressible rearfoot and forefoot chambers formed in the outsole connected by
an air transmission duct to provide cushioning. The Company also continued its
emphasis on GRAPHLITE (R) technology, a lightweight, high strength composite
material in the midsole and outsole used to create a lightweight shoe that does
not sacrifice stability or strength.
MARKETING AND PROMOTIONAL ACTIVITIES
The Reebok Division devotes substantial resources to advertising its
products to a variety of audiences through television, radio and print media.
A substantial advertising program was pursued in 1993 with advertisements
directed toward both the trade and the ultimate consumer of REEBOK products.
The major advertising campaigns in 1993 included the SHAQ campaign featuring
NBA Rookie of the Year, Shaquille O'Neal of the Orlando Magic, which was aimed
at enhancing the Company's performance image in basketball and introducing its
signature line of SHAQ (TM) basketball shoes and apparel, the PRESEASON (TM)
campaign featuring Emmitt Smith of the Super Bowl Champion Dallas Cowboys and
Frank Thomas of the Chicago White Sox, and the Planet Reebok campaign, the
Company's first global marketing campaign, which provided a unifying theme for
the Company's worldwide advertising.
In a further effort to present a unified global image, in 1993 Reebok
adopted a new Performance Logo which provides a single, easily recognizable
symbol for REEBOK products around the world. The new Performance Logo appears
on REEBOK athletic footwear and apparel and is now featured in all of the
Company's advertising, promotional and marketing materials.
Substantial and increased resources were devoted to promotional
activities in 1993, including endorsement agreements with athletes, teams,
leagues and sports federations, event sponsorships, in-store promotions and
point-of-sale materials. Recently, the Division has made a strong strategic
push in the sports market, gaining increased visibility on playing fields and
sports arenas worldwide through endorsement arrangements with such athletes as
Shaquille O'Neal, with whom Reebok introduced a major signature line of
footwear, apparel
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and accessories featuring his distinctive logo. Other endorsements in
basketball come from professional players such as Dominique Wilkins, Shawn
Kemp, Dee Brown, Steve Smith and Muggsy Bogues.
Tennis promotions included teaching programs for inner-city youth and
endorsement contracts with well-known professionals including Michael Stich,
Michael Chang, Arantxa Sanchez-Vicario and Malivai Washington. Reebok also
signed an endorsement contract with Jimmy Connors to serve as the
coach/spokesperson for Reebok's HARDCOURT tennis line beginning in 1994.
Promotional efforts in running included endorsement contracts with such
well-known runners as Arturo Barrios, Sandra Farmer-Patrick and Suzy Hamilton.
To promote the sale of its cross training footwear, Reebok used endorsements by
prominent athletes such as Emmitt Smith and Frank Thomas. To promote its new
line of cleated baseball and football shoes, the Company signed endorsement
contracts with several hundred Major League Baseball and National Football
League players, including numerous players in the recent Super Bowl. In
addition, in 1993 Reebok entered into an agreement with the National Football
League to become one of only three official athletic footwear licensees of the
NFL; under this agreement, up to ten players on each team during each game are
permitted to wear REEBOK footwear displaying the Company's logos and Reebok has
the right to use NFL uniforms and logos in its advertising and promotions.
Reebok has also entered into an agreement with National Football League
Properties which permitted it to place INSTAPUMP inflation stations on the
sidelines during the 1994 Super Bowl and will allow it to do so for the 1995
Super Bowl. This agreement also provides for Reebok to be one of three
league-wide sponsors of the World Football League, which will include six
European football teams that will begin play in Spring 1995. In soccer, Reebok
entered into endorsement contracts with Ryan Giggs of Manchester United and
Dennis Bergkamp of Inter-Milan and the Dutch national team that will compete in
the 1994 World Cup.
The Division also continued its promotional efforts in the fitness
area. Aerobic promotional activities in 1993 focused on the STEP REEBOK (R)
Program, a step training workout that is performed on an adjustable platform,
and endorsements by aerobics experts, such as Denise Austin and Gin Miller. In
1993 the Division introduced its CITY JAM(SM) program, a mix of aerobics, funk
and dance, and sponsored CITY JAM events nationwide during the summer of 1993.
In addition, in 1993 Reebok introduced the SLIDE REEBOK (TM) lateral motion
training device which provides a lateral motion training workout and used
decathlete Dave Johnson and figure skater Nancy Kerrigan to promote this
product. The Company promoted fitness walking with an endorsement arrangement
with Kathy Smith and promoted its BODYWALK(SM) program with an endorsement
arrangement with Ellen Abbott.
To gain further visibility for the REEBOK (R) brand, Reebok has
entered into a number of sponsorships. In January 1993, Reebok entered into an
agreement to become the official footwear and apparel sponsor of the Russian
Olympic Committee and the approximately 25 individual associated Russian sport
federations for 1993 through 1996. The Company also entered into agreements to
become the official athletic footwear and activewear sponsor of the
International Amateur Athletic Federation through 1995, the official sponsor,
through 1995, of the International Ice Hockey Federation and the International
Triathlon Union, and the official athletic footwear and apparel sponsor of the
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U.S. Gymnastics Federation. In addition, Reebok will be a worldwide sponsor of
the 1994 Goodwill Games.
U.S. OPERATIONS
The Reebok Division's U.S. operations unit is responsible for all
footwear and apparel products sold in the United States by the Division. Sales
of footwear in the United States (including sales of REEBOK outdoor products,
golf footwear products and BOKS (TM) footwear) totalled approximately $1.271
billion in 1993, compared to $1.455 billion in 1992. REEBOK brand apparel
sales in the U.S. in 1993 totalled approximately $125.4 million, compared to
approximately $77.1 million in 1992. (1992's amounts reflect a
reclassification of $17.2 million from footwear to apparel for WEEBOK and golf
apparel.)
In the U.S., the Reebok Division uses an employee sales force for all
of its product lines, with the exception of the WEEBOK product line and TINLEY
apparel, which are serviced primarily by independent sales representatives.
The U.S. national sales staff and locally based sales employees are supported
by field service representatives employed by Reebok who travel to assist in
retail merchandising efforts and provide information to consumers and retailers
regarding the features of the Company's products. There are also a number of
promotional personnel who coordinate events and promotions at a "grass roots"
level to help enhance the image of the REEBOK (R) brand.
The Division's U.S. distribution strategy emphasizes high-quality
retailers and seeks to avoid lower-margin mass merchandisers and discount
outlets. In 1993, the Company took affirmative steps to enhance its brand
image and to maintain the quality of its distribution channels, including the
adoption of a resale pricing policy for certain of its products sold in the
U.S., effective as of January 1993. REEBOK (R) footwear is distributed
primarily through specialty athletic retailers, sporting goods stores and
department stores. Distribution of the Company's apparel line is predominantly
through pro shops, health clubs and department, sporting goods and specialty
stores.
INTERNATIONAL OPERATIONS
The Reebok Division's international sales are coordinated from
headquarters located in London, England which opened in August, 1993 and which
is where the Reebok Division's regional operations responsible for Western and
Eastern Europe, the Middle East, Africa and India are also located. There are
additional regional offices in Hong Kong, which is responsible for Far East
operations, and in Santiago, Chile, which is responsible for Latin American
operations. The Canadian operations of the Division are managed through a
wholly owned subsidiary headquartered outside of Toronto, Canada. The Division
markets REEBOK products internationally through wholly owned subsidiaries in
Austria, Belgium, Canada, Chile, France, Germany, The Netherlands, Italy,
Russia and the United Kingdom and majority owned subsidiaries in Japan and
Spain. Acquisition of the Belgian distributor took place as of January 1994.
REEBOK products are also marketed internationally through 32 independent
distributors and joint ventures. The Company or its wholly owned U.K.
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subsidiary holds partial ownership interests in 11 of these international
distributors, with its percentage of ownership ranging from 20 to 35 percent.
Through this international distribution network products bearing the REEBOK
brand are actively marketed internationally in approximately 140 countries and
territories. The Division's International operations unit also has small
design staffs which assist in the design of REEBOK footwear and apparel.
During 1993, the contribution of the Division's International
operations unit to overall sales of REEBOK products (including REEBOK outdoor
products, golf products and the BOKS casual line) increased to $1.083 billion
from $1.008 billion in 1992 due to Reebok's increased market share in a growing
world market for athletic and casual footwear and apparel. These sales figures
do not, however, reflect the full wholesale value of all REEBOK products sold
outside the United States in 1993 because some of the Division's distributors
are not subsidiaries and thus their sales to retailers are not included in the
calculation of the Division's international sales. If the full wholesale value
of all international sales of REEBOK products are included, total sales of
REEBOK products outside the United States represented approximately
$1.358 billion in wholesale value, consisting of approximately 33 million
pairs of shoes totalling approximately $1.08 billion in wholesale value of
footwear sold outside the United States in 1993 (compared with approximately
30 million pairs totalling approximately $1.058 billion in 1992) and
approximately $278 million in wholesale value of REEBOK apparel sold outside
the United States in 1993 (compared with approximately $250 million in 1992).
SPECIALTY BUSINESS GROUP
The Company established the Specialty Business Group to provide a
focus for the Company's non-Reebok brands and non-athletic and outdoor
products and to pursue more aggressively markets outside Reebok's primary
focus. The Specialty Business Group includes the ROCKPORT (R) brand, the BOKS
(TM) casual footwear line and the Company's REEBOK brand outdoor products,
through which the Company is pursuing the growing casual and outdoor markets,
as well as the Company's Avia subsidiary. The Group is also responsible for
the Company's golf products and its retail operations.
BOKS, OUTDOOR AND GOLF PRODUCTS
The BOKS (TM) line of casual footwear combines the Company's athletic
heritage with fashionable styling and a comfortable fit. It is designed to
appeal to the younger generation and to compete in the non-athletic footwear
market. The BOKS line is sold predominantly through department stores, shoe
stores and specialty stores. BOKS footwear products are sold through an
employee sales force, except for BOKS field accounts, which are serviced by
independent sales representatives.
To pursue the growing outdoor market, the Company has developed
authentic outdoor performance footwear under the REEBOK brand to appeal to
outdoor enthusiasts as well as to young people. The REEBOK outdoor line is
distributed primarily through specialty athletic retailers and sporting goods
stores and is sold through an employee sales force.
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The Company also produces golf footwear and apparel, which includes a
REEBOK line of golf products and a collection of footwear and apparel marketed
under the GREG NORMAN (TM) name and logo. Golf products are distributed
principally at on-course pro-shops, golf specialty stores and certain
department and sporting goods stores and are sold by independent sales
representatives.
ROCKPORT
The Company's Rockport subsidiary, headquartered in Marlboro,
Massachusetts, designs, develops and markets lightweight and comfortable
casual, dress, outdoor performance and fitness walking shoes for men and women.
Rockport has been a leader in the development of biomechanically designed shoes
that are structured specifically for the walking motion of the foot. The
ROCKPORT (R) line also includes outdoor and casual apparel.
Net sales of ROCKPORT products increased by approximately $15.3
million in 1993, to $282.7 million from $267.4 million in 1992. In 1993,
Rockport focused on consolidating its product lines as part of a focus on its
brand marketing strategies.
Rockport markets its products to authorized retailers throughout the
United States through a combination of locally based employees and independent
sales representatives, supervised by a national sales staff. In 1993, Rockport
continued to expand its international market for footwear to include 23 locally
based distributors marketing ROCKPORT (R) footwear in approximately 28 foreign
countries and territories. A majority of the international distributors are
either subsidiaries of the Company or joint venture partners or independent
distributors which also sell REEBOK (R) brand products.
Rockport distributes its products predominantly through selected
higher-quality national and local shoe store chains, department stores,
independent shoe stores, specialty clothing stores and outdoor outfitters,
emphasizing retailers that provide substantial point-of-sale assistance and
carry a full product line. Rockport also has a concept store at Quincy Market
in Boston. Rockport has not pursued mass merchandisers or discount outlets for
the distribution of its products. At the end of 1993, Rockport discontinued
its resale pricing policy that had been in effect since October 1992 for
certain of its products sold in the U.S.
Traditionally, Rockport's marketing has emphasized the comfort and
design of its footwear. Its marketing activities include advertising and
public relations, sales training clinics, technical brochures and a variety of
promotional activities at the retail level, as well as sponsorship of walking
events and educational and medical programs on walking. Rockport's marketing
efforts in 1993 focused on increasing consumer awareness of the ROCKPORT
product line.
AVIA
Avia designs, develops and markets athletic footwear and apparel under
the AVIA (R) brand. Net sales for Avia decreased from $136.2 million in 1992
to $131.0 million in 1993. In 1993, Avia continued eliminating marginal
business lines in order to return to its roots as a pure performance brand.
Avia also made major design changes to its footwear line to be
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more responsive to market demands. Avia has focused its marketing efforts and
resources on consumers who seek performance products in the categories of
aerobics, cross training and tennis in its fitness marketing group and
basketball, outdoor, running and walking in its sports marketing group. In the
United States, Avia's primary target market is the women's fitness segment of
the market. In 1993, a leading consumer magazine ranked one of Avia's women's
walking shoes as the best overall walking shoe on the market. In addition,
Avia began distributing products designed for the outdoor market.
Avia continues to use its FOM (TM) technology, introduced in 1992,
which is designed to provide cushioning and increase comfort. Avia also
continues to utilize its ARC (R) technology which was developed to enhance
Avia's patented CANTILEVER (R) sole by improving cushioning and stability and,
hence, the functionality of the footwear. Avia conducts ongoing research
activities at its research, design and development facility in Beaverton,
Oregon, the site of Avia's corporate headquarters. The Company believes that
Avia's technical capabilities have been, and will continue to be, important to
its success.
Avia continued to focus on improving its business operations during
1993 by consolidating its staff, reducing costs and strengthening its financial
management and marketing capabilities. Internationally, Avia distributes its
products through wholly owned subsidiaries in Germany and the United Kingdom
and a network of independent distributors. In 1993, Avia formed a joint
venture with its Spanish distributor in this important and successful Avia
market. In 1993, Avia also changed its distribution arrangement in Canada.
Previously, Avia distributed its products in Canada through a wholly owed
subsidiary of Reebok; Avia is now using an independent distributor in Canada.
Avia's distribution arrangements with independent distributors cover
approximately 30 other foreign countries and territories.
Avia's principal retail accounts are specialty athletic footwear
stores, general sporting goods stores, shoe stores and department stores. Avia
seeks to ensure that its products are distributed only to those retailers that
reflect the high quality and performance image of its footwear. Avia operates
factory direct retail stores in Centralia, Washington, in Bend, Oregon and in
Gonzales, Louisiana. Additional stores are planned for 1994.
Avia believes that purchasers of its products are primarily active
sports and fitness participants who value functionality and performance as key
product features. Avia's marketing efforts include advertising on television,
on radio and in print and other media, national and local retail and event
promotions, point-of-purchase displays and product endorsements by leading
athletes. Avia also widely distributes sample products and product literature
to key sports and fitness participants, including coaches, instructors and
prominent athletes.
RETAIL STORES AND OTHER PROPERTIES
The Company has REEBOK "concept" stores located in Boston,
Massachusetts, in Santa Monica, California, and in New York City. In addition,
the Company intends to open a REEBOK "concept" store in Atlanta, Georgia in
Spring 1994. The Company envisions its concept stores as a model for
innovative retailing of its products and as a potential proving ground for
testing new products and marketing/merchandising techniques. The stores sell a
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wide selection of current, in-line REEBOK (R), WEEBOK (R), ABOVE THE RIM (R),
TINLEY (R) and BOKS (TM) footwear and apparel. The Company opened a retail
store in Moscow, Russia in Spring 1993 and expects to open a retail store in
St. Petersburg, Russia in February 1994. In addition, the Company has a retail
store in Del Mar, California which sells TINLEY apparel.
The Company also operates approximately 30 factory direct stores which
sell footwear, apparel and accessories bearing the REEBOK, WEEBOK, BOKS,
ROCKPORT, AVIA, TINLEY and ABOVE THE RIM trademarks. The Company's policy is
to locate and operate its retail outlets in such a way as to minimize
disruption to its normal channels of distribution.
Avia and Rockport also operate retail stores. See discussion of those
companies above.
In 1992, Reebok entered into a partnership to develop and build a
Reebok sports and fitness complex in New York City. The sports and fitness
club will feature a wide array of fitness equipment, facilities and services in
a luxurious atmosphere. The club will utilize approximately 125,000 square
feet and will occupy 5 floors of the new Lincoln Square project. A REEBOK (R)
concept store will also be located in the building. The club is scheduled for
completion in early 1995.
LICENSING
The Company has continued to expand its strategic trademark and
technology licensing programs begun in 1991. These programs are designed to
pursue opportunities for licensing the Company's trademarks, patents and other
intellectual property to third parties for sporting goods and related products.
The licensing programs are focused on enhancing the reputation of the Company's
brand and technologies, advancing their growth and introducing them into
selective new markets. The Company has pursued strategic alliances with
licensees who Reebok believes are leaders and innovators in their product
categories and who share Reebok's commitment to offering superior, innovative
products. The Company believes that its licensing programs reinforce Reebok's
reputation as a market leader.
In 1993, CCM hockey skates using THE PUMP (TM) technology were
introduced by Sport Maska, Inc., the Company's licensee, who also introduced
two new models of CCM in-line skates with THE PUMP (TM) technology. Also in
1993, the Company's licensee, Bell Sports, expanded its line of bicycle helmets
using THE PUMP (TM) technology to include a children's bicycle helmet. In
March of 1993, ski gloves using THE PUMP (TM) technology were introduced by the
Company's licensee, Grandoe International Corporation, and leather weight
lifting belts using THE PUMP (TM) technology are being sold by the Company's
licensee, Champion Glove Manufacturing Co., Inc. Rawlings Sporting Goods
continued to offer their Defense Series baseball fielding gloves featuring THE
PUMP (TM) technology.
Pursuant to the Company's trademark licensing program, Champion Glove
Manufacturing Co., Inc. established a separate division called Reebok Athletic
Glove, which designs, manufactures and markets a full line of athletic gloves,
including baseball batting
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gloves, football gloves, running gloves, racquetball gloves and weightlifting
gloves, all featuring the REEBOK trademark and Reebok's Performance Logo. In
1993, the Company's licensees, Sun Sport Optics, Inc. and the Renaissance
Group, completed the design of a collection of REEBOK sports performance
sunglasses and protective eyewear that will be shipped to retail in early 1994.
In 1993, the Company also licensed its REEBOK and BLACKTOP (R) trademarks to
Sports by Design for basketballs and licensed the REEBOK trademark to Tighe
Industries for a line of gymnastic apparel.
MANUFACTURING
Virtually all of the Company's products are produced by independent
manufacturers, almost all of which are outside the United States, except that
some of the Company's apparel and some of the component parts used in the
Company's footwear are sourced in the United States. Each of the Company's
operating units generally contracts with its manufacturers on a purchase order
basis. All contract manufacturing is performed in accordance with detailed
specifications furnished by the operating unit, subject to strict quality
control standards, with a right to reject products that do not meet
specifications. To date, the Company has not encountered any significant
problem with product rejection or customer returns. The Company generally
considers its relationships with its contract manufacturers to be good.
FOOTWEAR AND APPAREL
In 1993, the Company continued efforts to diversify its production
sources for footwear, placing increased levels of production in Thailand, China
and Indonesia. Indonesia, China, Thailand and South Korea were the Company's
primary sources for such footwear, accounting for approximately 28%, 27%, 18%,
and 10%, respectively, of the Company's total footwear production during 1993.
The Company's largest manufacturer, which has several factory locations,
accounted for approximately 13% of the Company's total footwear production in
1993.
A wholly owned Hong Kong subsidiary of Reebok serves as buying agent
for footwear produced for the Reebok Division's U.S. and International
operations through a network of related parties in China, Indonesia, Thailand,
Taiwan, Korea and the Philippines. The agent's functions include quality
assurance, quality control and the inspection of finished goods prior to
shipment by the manufacturer, facilitating the shipment of goods from foreign
ports and arranging for the issuance of letters of credit, which are the
primary means used to pay manufacturers for finished products. The Company's
apparel group utilizes the services of independent buying agents to assist in
the placement, inspection and shipment of apparel and accessories orders
internationally. Production of apparel in the United States is through
independent contractors which are retained and managed by the Company's apparel
group. Avia utilizes the services of an independent buying agent to assist in
the placement, inspection and shipment of footwear orders in South Korea.
ROCKPORT products are produced by independent contractors which are retained
and managed through country managers employed by Rockport. The remainder of
the Company's order placement, quality control and inspection work abroad is
handled by a combination of employees and independent contractors in the
various countries in which its products are made.
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The principal materials used in the Company's footwear products are
leather, nylon, rubber, ethylvinyl acetate and polyurethane. Most of these
materials can be obtained from a number of sources, although a loss of supply
could temporarily disrupt production. Some of the component parts for the
Company's THE PUMP (TM) and INSTAPUMP (TM) technologies are obtained from a
single source, at the Company's election, in order to protect the
confidentiality of such technologies. The Company believes that such component
parts could be obtained from other sources, if necessary. If, however, the
source of supply for such component parts were changed, a temporary disruption
to production could result. The principal materials used in the Company's
apparel products are nylon, cotton, fleece and spandex. These materials can be
obtained from a number of sources.
The footwear products of the Company that are manufactured overseas
and shipped to the United States for sale are subject to U.S. Customs duties.
Duties on the footwear products imported by the Company range from 6% to 37.5%
(plus a unit charge in some cases of approximately 90 cents), depending on
whether the principal component is leather or some other material and on the
construction. The Company and its subsidiaries are in discussions with the
U.S. Customs Service and certain foreign customs services about customs duty
for certain past importations. However, the Company does not expect to incur
any material additional liability as a consequence of any such discussions.
As with its international sales operations, the Company's footwear and
apparel production operations are subject to the usual risks of doing business
abroad, such as import duties, quotas and other threats to free trade, foreign
currency fluctuations, labor unrest and political instability. See "TRADE
POLICY" below. The Company believes that it has the ability to develop, over
time, adequate substitute sources of supply for the products obtained from
present foreign suppliers. If, however, events should prevent the Company from
acquiring products from its suppliers in Indonesia, China or Thailand, or
significantly increase the cost to the Company of such products, the Company's
operations could be seriously disrupted until alternative suppliers were found,
with a significant negative financial impact.
TRADE POLICY
For several years, imports from China to the U.S., including footwear,
have been threatened with higher tariff rates, either through statutory action
or intervention by the Executive Branch, due to concern over China's trade
policies, human rights, and foreign weapons sales practices. Further debate on
this subject is expected during 1994, specifically relating to China's most
favored nation trade status. However, the Company expects that China's most
favored nation status will be renewed as it has in each of the preceding years
that this debate has occurred.
Legislation designed to restrict imports of footwear and apparel has
been introduced in the last several sessions of Congress, although it has not
been enacted. No such legislation has yet been introduced in 1994.
The European Union ("EU") recently announced import quotas on footwear
from China. The effective date is expected to be sometime in the Spring of
1994. The effect of such quota scheme on Reebok is not expected to be
significant because only a small portion
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of REEBOK footwear sold in the EU is produced in China and because Reebok has
taken steps to prepare for imposition of such quotas. Moreover, the quota
scheme provides an exemption for certain higher-priced special technology
athletic footwear, which will be available for some REEBOK products. Although
the quota scheme is not anticipated to have a significant effect on the Company
as a whole, it is likely to have a temporary disruptive effect on certain
product lines. The EU may also be asked to take other action to restrict
imports of products from China or other countries. If any such restrictive
action is taken, the Company could be affected adversely, but it does not
believe that its products will be more severely restricted than those of
its major competitors.
PRINCIPAL PRODUCTS
Sales of the following categories of products contributed more than
10% to the Company's total consolidated revenue in the years indicated: 1993,
footwear (approximately 88%) and apparel (approximately 11%); 1992, footwear
(approximately 89%); 1991, footwear (approximately 91%).
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company believes that its trademarks, especially the REEBOK,
WEEBOK, THE PUMP, INSTAPUMP, BOKS, AVIA, ROCKPORT, TINLEY and ABOVE THE RIM
trademarks, are of great value, and the Company is vigilant in protecting them
from counterfeiting or infringement. Loss of the REEBOK, AVIA or ROCKPORT
trademark rights could have a serious impact on the Company's business.
The Company also believes that its technologies and designs are of
great value and the Company is vigilant in procuring patents and enforcing its
patents and other proprietary rights in the United States and in other
countries. See Item 3. Legal Proceedings.
WORKING CAPITAL ARRANGEMENTS
The Company has various arrangements with numerous banks which provide
an aggregate of approximately $700 million of uncommitted facilities,
substantially all of which are available to the Company's foreign subsidiaries.
Of this amount, $187 million is available for short-term borrowings and bank
overdrafts, with the remainder available for letters of credit for inventory
purchases. At December 31, 1993, approximately $304 million was outstanding
for open letters of credit for inventory purchases, in addition to $23.9
million in notes payable to banks.
The Company can also issue up to $125 million of commercial paper
which is supported to the extent available by a portion of the $175 million
revolving credit agreement,
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which expires in December 1994. As of December 31, 1993, the Company had no
commercial paper obligations outstanding.
Under a medium-term note program, the Company may also issue medium
term notes or other senior debt securities in an aggregate principal amount up
to $150 million under an Indenture dated September 15, 1988, as amended and
restated by a First Supplemental Indenture dated January 22, 1993. In February
1993, the Company issued $20 million of medium term notes pursuant to the First
Supplemental Indenture.
SEASONALITY
Sales by the Company of athletic and casual footwear tend to be
seasonal in nature, with the strongest sales occurring in the third quarter.
Apparel sales also generally vary during the course of the year, with the
greatest demand occurring during the spring and fall seasons.
SINGLE CUSTOMER
Foot Locker, a specialty athletic chain of retail stores with various
affiliates, is the largest customer of the Company, although it accounted for
less than 10% of the Company's net sales in 1993.
BACKLOG
The Company's backlog of orders at December 31, 1993 (many of which
are cancelable by the purchaser), totalled approximately $1.022 billion,
compared to $904 million as of December 31, 1992. The Company expects that all
of these orders will be shipped in 1994. The backlog position is not
necessarily indicative of future sales because the ratio of future orders to
"at once" shipments may vary from year to year.
COMPETITION
Competition in sports and fitness footwear and apparel sales is
intense. Competitors include a number of sports and fitness footwear and
apparel companies, such as Nike, Adidas and others. Competition is very strong
in each of the sports and fitness footwear market segments, with new entrants
and established companies providing challenges in every category.
The casual footwear market into which the ROCKPORT (R) and BOKS (TM)
product lines fall is also highly competitive. Some competitors are highly
specialized, while others have varied product lines, and some maintain their
own retail outlets. The Company believes that Rockport has a strong position
in the walking shoe market. Competition in this area, however, has intensified
as the activity of walking has grown in popularity and as athletic shoe
companies have entered the market.
The Company's other product lines also continue to confront strong
competition. The Company's WEEBOK (R) line, for example, competes with such
companies as Stride-Rite, Buster Brown, Toddler University and Osh Kosh. The
REEBOK (R), TINLEY (TM) and
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ABOVE THE RIM (R) apparel lines compete with well-known brands such as Nike and
Adidas. Rockport's DRESSPORTS (R) line and Signature Collection compete with
leading makers of dress shoes.
Competition in each of the markets for the Company's products is
manifested in a variety of ways, including price, quality, brand image and
ability to meet delivery commitments to retailers. The intensity of the
competition faced by the various operating units of the Company and the rapid
changes in technology and consumer preference that can occur in the footwear
and apparel markets constitute significant risk factors in the Company's
operations.
EMPLOYEES
As of December 31, 1993, the Company had approximately 4,700 employees
in all operating units. None of these employees is represented by a labor
union. The Company has never suffered a material interruption of business
caused by labor disputes with employees. Management considers employee
relations to be good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial information pertaining to the Company's foreign and domestic
operations is set forth in note 14 to the Financial Statements included in Item
8 and presented as a separate section of this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is submitted as to the executive officers of
the Company:
NAME AGE OFFICE HELD
---- --- -----------
Paul B. Fireman 50 President, Chief Executive Officer and Chairman of the Board
of Directors
Paul R. Duncan 53 Executive Vice President, Chief Financial Officer
and Director
John H. Duerden 53 Executive Vice President and Director
Robert Meers 50 Executive Vice President and Director
Angel R. Martinez 38 Executive Vice President
Roberto F. Muller 50 Executive Vice President
Kenneth I. Watchmaker 51 Executive Vice President
John B. Douglas III 40 Senior Vice President and General Counsel
Officers hold office until the first meeting of the Board of Directors
following the annual meeting of stockholders, or special meeting in lieu
thereof, and thereafter until their respective successors are chosen and
qualified.
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Paul B. Fireman is the founder of the Company and has served as its
Chief Executive Officer since the Company's founding in 1979 and its Chairman
of the Board since 1986. Mr. Fireman served as President of the Company from
1979 to 1987 and was appointed again to that position in 1989. Mr. Fireman has
been a director since 1979.
Paul R. Duncan was appointed Executive Vice President and Chief
Financial Officer of the Company in February 1990. Mr. Duncan, who joined the
Company in May 1985 as Senior Vice President and Chief Financial Officer, has
been a director of the Company since March 1989.
John H. Duerden was appointed Executive Vice President of the Company
in February 1994, with responsibility for global distribution of the Reebok
Division's products. He was elected a director of the Company in June 1991.
Mr. Duerden was previously President of the Reebok International Operations
group of the Reebok Division from September 1992 until January 1994. Prior to
that, Mr. Duerden was President of the Reebok Division from February 1990 to
September 1992 and President of the Reebok International Division from October
1988 to February 1990.
Robert Meers became an Executive Vice President of the Company in
February, 1994, with responsibility for the Company's newly formed Specialty
Business Group which includes the Company's subsidiaries Rockport and Avia,
BOKS casual footwear, REEBOK (R) brand outdoor products, golf products and
retail operations. Mr. Meers has been a director of the Company since
February, 1993. Previously, Mr. Meers was President, U.S. Operations of the
Reebok Division from November 1990 to January 1993 and President, U.S. and
Canadian Operations of the Reebok Division from January 1993 until January
1994. Mr. Meers was Senior Vice President, Sales and Marketing of the Company
from July 1990 to November 1990. Mr. Meers served as Senior Vice President,
Sales of The Rockport Company, Inc. from December 1988 to July 1990, after
holding positions as Vice President and Senior Vice President of Sales and
Marketing of the Company and Reebok U.S. Operations from 1984 to December 1988.
Angel R. Martinez became an Executive Vice President of the Company in
February 1994, with responsibility for the Company's global marketing. Prior
to that, Mr. Martinez was President of the Fitness Division of the Company from
September 1992 to January 1994 and prior to that he was Vice President for
Business Development of the Company for several years.
Roberto F. Muller was appointed Executive Vice President of the
Company in February 1994, with responsibility for the Reebok athletic footwear
and apparel product groups. He joined the Company in February 1992 as
President of the Company's Sports Division. Prior to joining Reebok, Mr.
Muller was President, Chief Executive Officer and founder of Phoenix
Integrated, Inc., a footwear company.
Kenneth I. Watchmaker was appointed Executive Vice President of the
Company in February 1994, with responsibility for the Company's footwear
manufacturing, research, design and development, information systems and
financial controls and accounting. Prior to that, he was Executive Vice
President, Operations and Finance, Reebok Division from July
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1992, when he joined the Company. Prior to joining Reebok, Mr. Watchmaker was
the partner in charge of audit services in the Boston office of Ernst & Young.
John B. Douglas III became Senior Vice President and General Counsel
of the Company, in February 1994. Prior to that, he had been Vice President
and General Counsel of the Company since 1986.
Item 2. Properties.
The Company leases most of the properties that are used in its
business. Its corporate headquarters and the offices of the Reebok Division
and its U.S. Operations are located in office facilities in Stoughton,
Massachusetts. At its corporate headquarters the Company occupies under lease
approximately 255,000 square feet of space. The Company signed a six-year
lease in July 1989, with two three-year renewal options, for its principal
facility at its corporate headquarters. This facility and two other leased
premises at the Company's corporate headquarters are located approximately one
mile from the Reebok Division's U.S. Operations group's principal warehouse and
distribution center in Stoughton, which is owned by the Company and which
contains approximately 450,000 total square feet of usable space. The Company
also has a lease for approximately 400,000 square feet of space for use as a
warehouse in Avon, Massachusetts with an initial term expiring on December 31,
1994, with three one-year renewal options.
In 1993, Rockport purchased its corporate headquarters facility in
Marlboro, Massachusetts, containing approximately 80,000 square feet of floor
space at a purchase price of four million dollars ($4,000,000). In 1992,
Rockport purchased approximately 140 acres of land in Lancaster, Massachusetts
with the intention of constructing a distribution center on the land by 1995.
Rockport has a lease for approximately 241,000 square feet of space for use as
a warehouse in Leominster, Massachusetts which expires on December 31, 1995.
Avia extended its lease of a 194,000 square foot distribution facility
in Wilsonville, Oregon, which now expires in 1999. Avia also has a lease
ending in 2003 for a 56,146 square foot facility in Beaverton, Oregon, where
its corporate headquarters and research, design and development facility are
located.
In June 1993, the Company's wholly owned U.K. subsidiary, Reebok
International Limited, entered into a fifteen-year lease for the corporate
headquarters of the Company's International operations in Stockley Park,
London. The lease is for approximately 37,000 square feet of usable space,
with a renewal option for a term of up to fourteen years mandated by law. This
lease is guaranteed by the Company.
The Company's wholly owned Canadian distribution subsidiary, Avrecan
International Inc., leases an approximately 145,000 square foot
office/warehouse facility in Aurora, Ontario pursuant to a lease which expires
in 1998.
The Company and its subsidiaries own and lease other warehouses,
offices, showrooms and retail and other facilities in the United States and in
various foreign countries
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to meet their space requirements. The Company believes that these arrangements
are satisfactory to meet its needs.
Item 3. Legal Proceedings.
On February 5, 1993, a lawsuit was filed by Byron A. Donzis ("Donzis")
against the Company and its then wholly owned subsidiary Ellesse U.S.A., Inc.,
entitled Byron A. Donzis v. Reebok International Ltd. et al., Civil Action No.
93-10260H in the United States District Court for the District of
Massachusetts. A second related lawsuit, entitled Donzis Laboratories, Inc.,
et al. v. Reebok International Ltd. et al., Civil Action No. 93-11761H, was
filed on August 10, 1993 in the United States District Court for the District
of Massachusetts. These two cases have been consolidated. Both complaints
allege, among other things, that the Company breached an agreement with Donzis
and misappropriated trade secrets in connection with the development of the
Company's THE PUMP (TM) technology and its procurement of U.S. Patent No.
5,158,767 for the basic THE PUMP (TM) technology. The Complaint requests a
declaratory judgment stating that Donzis is the owner/inventor of U.S. Patent
No. 5,158,767, an assignment of such patent rights to Donzis, injunctive
relief, recovery of profits received by the Company, punitive damages, treble
damages, costs and attorneys' fees. The Company intends to vigorously defend
this lawsuit. The Company believes that the lawsuit is without merit, and
further believes that it is unlikely that any subsequent outcome would have a
material adverse effect on the financial condition of the Company.
On July 1, 1993, a lawsuit was filed by Stutz Motor Car of America,
Inc. ("Stutz") against the company, entitled Stutz Motor Car of America, Inc.
v. Reebok International Ltd., Case Number BC074579 in the Central District of
Los Angeles County Superior Court. The case was removed to the United States
District Court for the Central District of California and was assigned Civil
Action No. 93-4433LGB. The present complaint alleges, among other things,
fraud, misappropriation and conversion, unfair competition, tortious
interference with prospective economic advantage in connection with the
development of the Company's THE PUMP (TM) technology. The complaint requests
compensatory damages, punitive damages, costs and attorneys' fees. The Company
intends to vigorously defend this lawsuit. The Company believes that the
lawsuit is without merit, and further believes that it is unlikely that any
subsequent outcome would have a material adverse effect on the financial
condition of the Company.
A lawsuit was filed against the Company on February 7, 1994 in
California Superior Court (a class action entitled Marshall Verano v. Reebok
International Ltd., Case No. 67348) challenging the Company's resale pricing
practices in California under California state law and seeking unspecified
damages, including treble damages, injunctive relief and costs. Reebok intends
to vigorously defend this lawsuit and believes that it is unlikely that the
outcome of the lawsuit would have a material adverse effect on the financial
condition of the Company.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
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 sale prices during 1992 and 1993.
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1993 1992
High Low High Low
First Quarter 38 32 7/8 35 5/8 28
Second Quarter 38 5/8 26 7/8 33 5/8 21 3/8
Third Quarter 28 3/8 23 31 23 7/8
Fourth Quarter 32 1/8 23 3/4 35 5/8 25 1/2
====== ====== ====== ======
The number of record holders of the Company's common stock at December 31, 1993
was 8,898. Information regarding dividends is set forth under the heading
"Quarterly Results of Operations" in the Financial Statements included in Item
8 and presented as a separate section of this report.
Item 6. Selected Financial Data.
Amounts in thousands, except per share data
Year ended December 31 1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Net sales $2,893,900 $3,022,627 $2,734,474 $2,159,243 $1,822,092
Income before income taxes 363,247 257,964 389,886 294,835 290,779
Net income 223,415 114,818 234,711 176,606 174,998
Net income per common share 2.53 1.24 2.37 1.54 1.53
Cash dividends per common share .30 .30 .30 .30 .30
Weighted average common
and common equivalent shares
outstanding 88,348 92,697 98,958 114,654 114,176
========== ========== ========== ========== ==========
Amounts in thousands
December 31 1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Working capital $ 730,757 $ 682,342 $ 564,072 $ 705,303 $ 566,337
Total assets 1,391,711 1,345,346 1,422,283 1,392,076 1,157,793
Long-term debt 134,207 116,037 169,613 104,647 108,832
Stockholders' equity 846,617 838,656 823,537 996,729 844,296
========== ========== ========== ========== ==========
Financial data for 1993 include a restructuring
charge ($7,037 after-tax) related to the sale of
Ellesse U.S.A., Inc. and Boston Whaler, Inc.
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Financial data for 1992 includes restructuring
charges ($135,439 after-tax) principally related
to the write-down of the Company's subsidiary,
Avia Group International, Inc., to estimated fair
value and estimated losses from the planned sales
of Ellesse U.S.A., Inc. and Boston Whaler, Inc.,
and after-tax gains of $17,967 from the sale of
investments.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OPERATING RESULTS
1993
Net sales for the year decreased by 4.3%, or $128.7 million, to $2.894
billion in 1993 from $3.023 billion in 1992. On a pro forma basis, excluding
the 1992 results of operations of Boston Whaler and Ellesse (both of which were
sold and are excluded from 1993 results), net sales for the year decreased by
$49.6 million, or 1.7%.
The Reebok Division's worldwide sales were $2.48 billion in 1993, a
decrease of 2.3% from $2.54 billion in 1992. This decrease is due entirely to
the Reebok Division's U.S. footwear sales which decreased 12.6% to $1.271
billion in 1993 from $1.455 billion in 1992, partially offset by an increase in
U.S. apparel sales and international sales. The decline in the Reebok Division's
U.S. footwear sales can be attributed mainly to volume decreases in the
walking, basketball, aerobics and BOKS footwear categories, as well as the
negative impact of the Company's Centennial resale pricing program, effective
as of January 1, 1993, on sales volume of certain Reebok footwear products.
1992's sales levels for footwear and apparel reflect a reclassification of
$17.2 million from footwear to apparel for Weebok and golf apparel. The Reebok
Division's U.S. apparel sales increased by 62.6% to $125.4 million in 1993 from
$77.1 million in 1992. The Reebok Division's International sales (including
both footwear and apparel) were $1.083 billion in 1993, an increase of 7.5%
from $1.008 billion in 1992, primarily due to improved sales in the United
Kingdom, Germany, several smaller European countries, Canada and South America,
and acquisition of a majority interest in the Company's Spanish distributor
effective January 1, 1993. Changes in foreign exchange rates had a negative
effect on the Reebok Division's International net sales of $65.1 million, or
6.5%.
Rockport sales reached a record level of $282.7 million in 1993, a 5.7%
increase from $267.4 million in 1992. This increase is due to an increase in
the number of pairs of footwear shipped both in the U.S. and internationally.
Avia sales decreased in 1993 by 3.8% to $131.0 million from $136.2 million in
1992. The decrease in net sales at Avia is due to declines in both domestic
and international net sales. The decline in domestic net sales is mainly due
to lower volume in the tennis and basketball categories, partially offset by
volume increases in the walking and cross training categories. The decline in
international net sales volume can be partly attributed to a change in the
Canadian distribution from a
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wholly owned subsidiary to an independent distributor which changed the
recording of Canadian sales from a wholesale basis to a royalty basis.
International sales were also affected by a volume decrease in Avia's Germany
subsidiary, offset by volume increases in sales to independent distributors.
The decrease in other income is mainly due to the inclusion in 1992 of
a non-recurring pre-tax gain of $29.6 million on the sale of CML common stock.
The common stock was acquired from the exercise of warrants which were obtained
as part of the Company's 1989 purchase of Boston Whaler. In addition,
recognized losses on foreign exchange transactions in 1993 compared to
recognized gains in 1992 reduced other income by $6.2 million.
Gross margin increased as a percentage of sales from 40.1% in 1992 to
40.6% in 1993. This improvement is due entirely to the exclusion in 1993 of
the operating results of businesses held for sale, which generally carried
lower gross margins. This improvement was offset in part by lower margins in
the Reebok Division's U.S. footwear operations, mainly because of higher
markdowns.
Selling expenses decreased as a percentage of sales from 18.3% in 1992
to 17.8% in 1993 due to lower advertising expenditures. This decrease was
partially offset by increased endorsements and sports promotions in the Reebok
Division. Selling expenses decreased in absolute dollar amounts in part due to
the exclusion of businesses held for sale from 1993's financial results and
lower advertising expenses.
General and administrative expenses also decreased in absolute dollar
amounts due to the exclusion of businesses held for sale from 1993's financial
results. Included in 1992's financial results were selling and general and
administrative expenses of $19.4 million and $8.8 million, respectively, from
businesses held for sale. General and administrative expenses increased as a
percentage of sales from 8.4% in 1992 to 8.8% in 1993 partly due to Reebok
Division's International operations, which generally carry higher general and
administrative costs, representing a larger proportion of sales volume and the
fixed nature of many of the expenses classified as general and administrative
costs.
During 1993, the Company recorded an additional pre-tax restructuring
charge of $8.5 million related to the sales of Boston Whaler and Ellesse, which
were completed during the third quarter. This restructuring charge was in
addition to the restructuring charges previously recorded in December 1992,
when the Company announced its intention to sell these businesses.
Amortization of intangibles decreased due to the write-down of the
carrying value of Avia in the fourth quarter of 1992.
Minority interest represents the minority shareholders' proportionate
share of the net income of the Company's Japanese and Spanish subsidiaries.
Minority interest increased in
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1993 due in part to the acquisition of a 51% interest in Reebok's Spanish
distributor as of January 1, 1993.
Interest expense increased in 1993 due to the higher average borrowing
levels throughout the year. Interest income increased due to interest received
from the successful settlement of certain prior years' state tax matters.
The effective tax rate for the twelve months ended December 31
decreased from 55.5% in 1992 to 38.5% in 1993. 1992's effective tax rate was
abnormally high because of certain restructuring charges which are not
deductible for tax purposes. The Company's 1993 tax rate is more in line with
the Company's future expectations. The decrease in the tax rate in 1993 was
also caused in part by a change in the geographic mix of worldwide income
partially offset by an increase in the U.S. federal tax rate.
The higher level of net income in 1993 as compared with 1992 was a
result primarily of a restructuring plan adopted by the Company during December
1992 which resulted in after-tax charges totaling $135.4 million ($1.46 per
share). Under the restructuring plan, the Company announced its intention to
dispose of two subsidiaries, Boston Whaler and Ellesse, a write-down of the
carrying value of its Avia subsidiary, and certain office relocation charges.
The effect of the restructuring charge was reduced by the after-tax gain of
$18.0 million ($.19 per share) on the sale of common stock of CML obtained as
part of the Company's 1989 purchase of Boston Whaler.
The Boston Whaler sale was completed on July 30, 1993 and the Ellesse
sale was completed on September 28, 1993. In connection with the sales, the
Company recorded an additional after-tax restructuring charge of $7.0 million
in addition to the restructuring charge recorded in 1992. Income from
operations (without the effect of the restructuring charge) for 1993 was $2.61
per share compared to $2.51 per share in 1992 (after excluding the effect of
the restructuring charge and the gain on the sale of CML common stock). If the
restructuring had taken place as of the beginning of 1992, income from
operations in 1992 would have been about $.18 per share higher.
Year-to-year earnings per share comparisons benefited from the share
repurchase programs announced in July 1992 and July 1993. Weighted average
common shares outstanding for the year ended December 31, 1993 were 88.3
million, compared to 92.7 million for the year ended December 31, 1992.
1992
Net sales for the year reached a record level of $3.023 billion, 10.5%
above the level reported for 1991. Reebok U.S. footwear sales increased 10.2%
to $1.472 billion. Reebok International sales reached $1.008 billion, an
increase of 21.0%. These increases in sales are mainly due to an increase in
the number of pairs shipped. The effect of changes in foreign exchange rates
did not have a material impact on the change in net sales. Reebok U.S. apparel
sales increased by 13.5% to $59.9 million. Rockport sales increased by 6.4%
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to $267.4 million. Avia sales decreased by 15.4% to $136.2 million. Ellesse
sales declined by 45.7% to $34.2 million. Boston Whaler sales were $45.0
million, an 18.7% increase.
Other income in 1992 includes a gain of $29.6 million ($18.0 million
after-tax) on the sale of CML common stock. The common stock was acquired from
the exercise of warrants which were obtained as part of the Company's 1989
purchase of Boston Whaler.
The small improvement in gross margin percentage is the net result of
several trends in 1992. Higher gross margins arose as a result of favorable
overall foreign currency exchange rates and as a result of Avia and Ellesse
sales, which carry lower gross margins, representing a smaller portion of the
total business in 1992. These higher margins were largely offset by lower
gross margins in Reebok U.S. footwear sales caused by a change in mix of
products sold to items with lower margins.
Selling expenses increased as a percentage of sales from 16.1% in 1991
to 18.3% in 1992 primarily due to increased advertising and marketing costs in
the Reebok Division.
General and administrative expenses increased slightly as a percentage
of sales from 8.2% in 1991 to 8.4% in 1992 due mainly to increased distribution
costs in the Reebok International Division.
Interest income decreased in 1992 due to the lower interest rates on
investments as well as lower average cash balances in 1992 resulting from the
repayment of borrowings incurred in connection with the share repurchase from
Pentland in 1991 and the use of cash for the Company's share repurchase program
announced in July 1992. Interest expense decreased due to the lower debt
levels, as well as the impact of lower borrowing rates in 1992.
The effective tax rate for the twelve months ended December 31
increased from 39.8% in 1991 to 55.5% in 1992. This increase is caused by
certain restructuring charges which are not deductible for tax purposes.
The decrease in net income for the year resulted primarily from a
restructuring plan recorded by the Company during December 1992 which resulted
in non-recurring after-tax charges totaling $135.4 million ($1.46 per share).
The plan includes offering for sale the Company's Boston Whaler, Inc. and
Ellesse U.S.A., Inc. subsidiaries; a write-down of the carrying value of its
Avia subsidiary; the planned consolidation of the Reebok performance apparel
operation to San Diego, where it is being combined with the recently acquired
operations of the ABOVE THE RIM and TINLEY apparel brands; and the move of the
Reebok Division's International Operations group's headquarters to London from
Bolton, England. The restructuring plan will permit the Company to focus its
efforts and resources on building its core brands. The effect of the
restructuring charges was reduced by the after-tax gain of $18.0 million ($.19
per share) on the sale of common stock of CML obtained as part of the Company's
1989 purchase of Boston Whaler. Income from
22
24
operations (without the effect of the restructuring charge and the sale of CML
common stock) for 1992 was $2.51 per share compared to $2.37 per share in 1991.
Income from operations in 1992 includes about $.18 per share of losses from the
operations of Boston Whaler, Ellesse U.S.A. and Avia which will not occur in
future years because of the restructuring plan which was put in place in the
fourth quarter of 1992.
1991
Net sales for the year increased by $575 million, or 26.6% above the
level reported for 1990. Reebok U.S. footwear sales increased 14% to $1.336
billion. The increase is mainly due to an increase in the number of pairs
shipped. Reebok International sales were $833 million, an increase of 75%.
During the first quarter of 1991 the Company began performing certain
activities previously contracted out to an independent third party, and
consequently, began recording sales on footwear sold to independent Reebok
distributors. In the past the profit only was recorded as royalty income. If
this change had taken place on January 1, 1990, net sales in 1990 and 1991
would have increased by $142 million and $32 million, respectively. The
increased sales also reflect $117 million in sales from Reebok Italia and
Reebok Japan, both of which were acquired in 1991. On a pro forma basis, after
adjustment for the acquisitions and the change described above, Reebok
International sales increased 24%. The remaining increase in net sales is
mainly due to an increase in the number of pairs shipped. The effect of
changes in foreign exchange rates did not have a material impact on the change
in net sales.
Rockport sales increased by 8.5% to $251 million. Avia sales were $161
million, a 4% increase. Ellesse sales were $63 million, 34% above the 1990
level. Reebok U.S. apparel sales increased by 26% to $53 million. Boston
Whaler sales were $38 million, a 2.5% increase over 1990.
Cost of sales as a percentage of sales was 60.1% in 1991, as compared
with 59.7% in 1990. The decrease in gross margin percentage is largely due to
the change in recording net sales, as described above. On a pro forma basis,
gross margin percentage actually improved 1.6% partly due to higher
international margins resulting from favorable exchange rates on inventory
purchases.
General and administrative expenses decreased as a percentage of sales
from 9.4% in 1990 to 8.2% in 1991. The change in recording net sales as
described above accounted for .5% of the difference and .6% was caused by the
change in bonus arrangement with the Company's chief executive officer.
Interest income decreased due to the lower cash balances and interest
expense increased due to the higher debt levels resulting from the treasury
stock repurchase from Pentland Group plc ("Pentland") on April 8, 1991.
23
25
BACKLOG
The Company's backlog of customer orders at December 31, 1993 was up
approximately 13% from the prior year. Reebok U.S. footwear order levels as
of the same date were up 14.4% from the prior year. The backlog position is not
necessarily indicative of future sales because the ratio of future orders to
"at once" shipments may vary from year to year.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's financial position remains strong. Working capital
increased by $48.4 million at December 31, 1993 as compared to December 31,
1992, primarily due to increases in accounts receivable and inventory which
were offset in part by increases in borrowings and a decrease in cash. The
current ratio remained relatively constant at December 31, 1993 (2.84 to 1) as
compared to December 31, 1992 (2.81 to 1).
Accounts receivable increased from December 31,1992 by $39.3 million
reflecting in part an increase in days sales outstanding attributable
principally to the Company's International business, where sales terms tend to
be longer, representing a larger relative share of sales volume.
Inventory increased by $79.8 million from December 31, 1992 as a result
of an increase in the footwear and apparel inventory levels in the Reebok
Division. The footwear increase can mainly be attributed to three factors:(1)
an effort to more evenly load factory orders to reduce factory costs and
improve on-time delivery, (2) an increase in Spring 1994 future orders, and (3)
lower than anticipated sales during the fourth quarter of 1993. The increase
in Reebok apparel inventory is due primarily to the overall increase in the
Company's apparel business.
On July 13, 1993, the Board of Directors authorized the repurchase of
up to $200 million in Reebok common stock in open market or privately-
negotiated transactions. This authorization was in addition to the
$200 million share repurchase program announced in July 1992. Since the start
of the program in 1992, the Company has repurchased 8,572,200 shares at an
average price of $30.82 per share through December 31, 1993; approximately
$135.8 million is authorized for future purchases.
During the twelve months ended December 31, 1993, cash and cash
equivalents decreased by $26.0 million, and outstanding borrowings increased by
$36.9 million, while $194.0 million of common stock was repurchased. Net cash
provided by operating activities during 1993 was $142.5 million, compared to
$187.6 million and $335.2 million for the years ended December 31, 1992 and
1991, respectively. Net cash provided by investing activities in 1993
included cash proceeds of $36.5 million received in connection with the sale of
Boston Whaler and Ellesse. Cash generated from operations, together with the
24
26
Company's financing sources, is expected to adequately finance all of the
Company's current and planned cash requirements.
EFFECTS OF CHANGING PRICES
The Company has generally been able to adjust selling prices and
control expenses in the environment of cost escalation that has existed in the
recent past. Product purchases require relatively short lead times (4 - 6
months) and the Company sells a large part of its product for future delivery
on similar lead times, which generally permits a matching of committed costs
with committed revenues. The Company anticipates that this matching ability
will continue.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is submitted as a separate
section of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item with respect to the Registrant's
directors is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on May 3, 1994,
which will be filed with the Securities Exchange Commission on or before March
30, 1994 (the "1994 Proxy Statement"), under the headings "Information with
respect to Nominees", "Executive Compensation" and "Transactions with
Management and Affiliates". Information called for by this Item with respect
to the registrant's executive officers is set forth under "Executive Officers
of Registrant" in Item 1 of this report.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by
reference from the 1994 Proxy Statement under the headings "Compensation of
Directors", "Executive Compensation", "Employee Agreements" and "Compensation
Committee Interlocks and Insider Participation".
25
27
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this Item is incorporated herein by
reference from the 1994 Proxy Statement under the heading "Beneficial Ownership
of Shares".
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by
reference from the 1994 Proxy Statement under the heading "Transactions with
Management and Affiliates".
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.
(a)(1) and (2) List of Financial Statements and Financial Statement
Schedules.
1. Financial Statements
The following consolidated financial statements are included in Item 8
and presented as a separate section of this report:
FORM 10-K
PAGE
----
Consolidated Balance Sheets at
December 31, 1993 and 1992 F-2
For each of the three years ended
December 31, 1993, 1992 and 1991:
Consolidated Statements of
Income F-3
Consolidated Statements of
Stockholders' Equity F-4
Consolidated Statements of
Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-15
26
28
2. Financial Statement Schedules
The following consolidated financial statement schedules of Reebok
International Ltd. are included in Item 14(d) and presented as a separate
section of this report:
FORM 10-K
PAGE
---------
Schedule II - Amounts Receivable From Related
Parties and Underwriters, Promoters and
Employees Other Than Related Parties F-17
Schedule VIII - Valuation and Qualifying
Accounts F-18
Schedule IX - Short-Term Borrowings F-19
Schedule X - Supplementary Income
Statement Information F-20
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a)3. Exhibits
Listed below are all the Exhibits filed as part of this report.
Certain Exhibits are incorporated by reference from documents previously filed
by the Company with the Securities and Exchange Commission pursuant to Rule
12b-32 under the Securities Exchange Act of 1934, as amended.
Exhibit
(3) Articles of incorporation and by-laws.
3.1 Restated Articles of Organization of the Company, as amended 1
3.2 By-laws, as amended 5, 7, 9
(4) Instruments defining the rights of security holders, including
indentures.
4.1 Indenture, dated September 15, 1988, between Reebok
International Ltd. and Citibank N.A., as Trustee 4
27
29
4.2 First Supplemental Indenture, dated as of January 22, 1993,
between Reebok International Ltd. and Cititbank N.A., as
Trustee 13
4.3 Common Stock Rights Agreement dated as of June 14, 1990
between the Company and The First National Bank of Boston, as
Rights Agent, as amended 8, 10, 11
(10) Material Contracts.
10.1 Distributorship Agreement between Reebok International Limited
and the Company 2
10.2 Trademark License Agreement between Reebok International
Limited and the Company 2
10.3 Continuing Letter of Credit Agreement, dated August 1, 1989,
between the Company and State Street Bank and Trust Company;
and Letter Agreement between The Rockport Company, Inc. and
Norwest Bank, Master Security Agreement for Irrevocable
Documentary Letters of Credit and Guarantee of the Company,
all dated August 1, 1989 7
10.4 First Amended and Restated Master Agreement between The
Company and Security Pacific dated June 26, 1991 12
10.5 Credit Facility Agreement between Reebok International Limited
and Citibank dated November 7, 1991 12
10.6 Lease Agreement dated March 1, 1988 between Reebok
International Ltd. and North Stoughton Industrial Park
Development Trust 5
10.7 Purchase and Sale Agreement between Reebok International Ltd.
and Pentland Group plc dated March 8, 1991 9
10.8 Credit Agreement dated as of December 7, 1992, among the
Company, the Lenders named therein, Credit Suisse as Agent and
Credit Suisse First Boston Limited as Syndication Agent 13
10.9 Agreements with various banks in Hong Kong reflecting
arrangements for letter of credit facilities 9
Management Contracts and Compensatory Plans.
10.10 Reebok International Ltd. 1985 Stock Option Plan, as amended 12
28
30
10.11 Reebok International Ltd. 1987 Stock Option Plan for
Directors, as amended 13
10.12 Reebok International Ltd. 1987 Stock Bonus Plan 3
10.13 Reebok International Ltd. Excess Benefits Plan 9
10.14 Stock Option Agreement with Paul B. Fireman 9
10.15 Split-Dollar Life Insurance Agreement with Paul B. Fireman 12
10.16 Contingent Severance Agreement with Paul R. Duncan 7
10.17 Employment Agreement with John H. Duerden 12
10.18 Contingent Severance Agreement with John H. Duerden 7
10.19 Change of Control Agreement with John B. Douglas III 13
10.20 Employment Agreement with Kenneth Watchmaker 13
10.21 Change of Control Agreement with Kenneth Watchmaker 13
10.22 Supplemental Retirement Program for Kenneth Watchmaker 13
10.23 Deferred Cash Compensation Plan for Directors 13
10.24 Employment Agreement with Roberto Muller
10.25 Contingent Severance Agreement with Angel Martinez
10.26 Lease with Angel Martinez
(11) Statement Re Computation of Per Share Earnings.
(12) Statement Re Computation of Ratio of Earnings to Fixed Charges.
(22) Subsidiaries.
22.1 List of Subsidiaries of the Company
(23) Consents of experts and counsel.
23.1 The consent of Ernst & Young
29
31
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a separate
section of this report.
______________________________________________
1 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
30, 1987 and incorporated by reference herein.
2 Filed as an Exhibit to Registration Statement No. 2-98367 and
incorporated by reference herein.
3 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
28, 1988 and incorporated by reference herein.
4 Filed as an Exhibit to Reebok International Ltd. Form 8-K filed on
September 29, 1988 and incorporated by reference herein.
5 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
30, 1989 and incorporated by reference herein.
6 Filed as an Exhibit to Reebok International Ltd. Form 8-K filed on
March 8, 1990 and incorporated by reference herein.
7 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
26, 1990 and incorporated by reference herein.
8 Filed as an Exhibit to Reebok International Ltd. Form 8-A filed on
July 31, 1990 and incorporated by reference herein.
9 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
28, 1991 and incorporated by reference herein.
10 Filed as an Exhibit to Reebok International Ltd. Form 8 Amendment to
Registration Statement on Form 8-A filed on April 4, 1991 and
incorporated by reference herein.
11 Filed as an Exhibit to Reebok International Ltd. Form 8 Amendment to
Registration Statement on Form 8-A filed on December 13, 1991 and
incorporated by reference herein.
12 Filed as an Exhibit to Reebok International Ltd. Form 10-K dated March
27, 1992 and incorporated by reference herein.
30
32
13 Filed as an Exhibit to Reebok International Ltd. Form 10-k
dated March 26, 1993 and incorporated by reference herein.
31
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
REEBOK INTERNATIONAL LTD.
BY: /S/ PAUL R. DUNCAN
-----------------------
Paul R. Duncan
Executive Vice President
and Chief Financial Officer
Dated: February 15, 1994
32
34
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/S/ PAUL FIREMAN
- -------------------
Paul Fireman
Director, Chairman of the Board
and President
(Chief Executive Officer)
/S/ PAUL R. DUNCAN
- --------------------
Paul R. Duncan
Executive Vice President and Chief Financial Officer
(Chief Financial and Accounting Officer)
Director
/S/ JOHN H. DUERDEN
- ---------------------
John H. Duerden
Executive Vice President
Director
/S/ ROBERT MEERS
- ----------------------
Robert Meers
Executive Vice President
Director
/S/ JILL E. BARAD
- ---------------------
Jill E. Barad
Director
/S/ DANIEL E. GILL
- -----------------------
Daniel E. Gill
Director
/S/ BERTRAM M. LEE, SR.
- -------------------------
Bertram M. Lee, Sr.
Director
33
35
/S/ RICHARD G. LESSER
- -------------------------
Richard G. Lesser
Director
/S/ WILLIAM M. MARCUS
- -------------------------
William M. Marcus
Director
/S/ GEOFFREY NUNES
- -------------------------
Geoffrey Nunes
Director
/S/ JOHN A. QUELCH
- -------------------------
John A. Quelch
Director
Dated: February 15, 1994
34
36
ITEMS 8, 14(C) AND (D)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
35
37
Report of Ernst & Young, Independent Auditors
BOARD OF DIRECTORS AND STOCKHOLDERS
REEBOK INTERNATIONAL LTD.
STOUGHTON, MASSACHUSETTS
We have audited the accompanying consolidated balance sheets of Reebok
International Ltd. as of December 31, 1993 and 1992, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1993. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules 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
from 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. at December 31, 1993 and 1992, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1993, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/S/ ERNST & YOUNG
Boston, Massachusetts
February 1, 1994, except for
the third paragraph of Note 16,
as to which the date is
February 7, 1994.
F-1
38
REEBOK INTERNATIONAL LTD.
Consolidated Balance Sheets
Amounts in thousands, except share data
=========================================================================================================
December 31 1993 1992
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 79,347 $ 105,386
Accounts receivable, net of allowance for doubtful accounts
(1993, $46,455; 1992, $43,224) 457,399 418,072
Inventory 514,027 434,242
Deferred income taxes 54,784 78,530
Prepaid expenses 21,558 23,972
---------- ----------
Total current assets 1,127,115 1,060,202
---------- ----------
Property and equipment, net 130,607 127,562
Non-current assets:
Intangibles, net of amortization 94,262 102,953
Net assets of businesses held for sale - 38,579
Deferred income taxes 1,250 -
Other 38,477 16,050
---------- ----------
133,989 157,582
---------- ----------
$1,391,711 $1,345,346
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 23,852 $ 4,442
Current portion of long-term debt 3,009 3,724
Accounts payable 138,188 145,475
Accrued expenses 143,784 128,111
Income taxes payable 81,240 89,387
Dividends payable 6,285 6,721
---------- ----------
Total current liabilities 396,358 377,860
---------- ----------
Long-term debt, net of current portion 134,207 116,037
Deferred income taxes - 5,027
Minority interest 14,529 7,766
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01; authorized 250,000,000
shares; issued 119,902,298 shares in 1993, 125,574,291
shares in 1992 1,199 1,256
Additional paid-in capital 266,890 448,056
Retained earnings 1,198,190 1,000,615
Less 36,210,902 shares in treasury at cost (603,241) (603,241)
Unearned compensation (3,276) (611)
Foreign currency translation adjustment (13,145) (7,419)
----------- -----------
846,617 838,656
---------- ----------
$1,391,711 $1,345,346
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
39
REEBOK INTERNATIONAL LTD.
Consolidated Statements of Income
Amounts in thousands, except per share data
=============================================================================================================
Year ended December 31 1993 1992 1991
---- ---- ----
Net sales $2,893,900 $3,022,627 $2,734,474
Other income 33 39,719 2,893
---------- ---------- ----------
2,893,933 3,062,346 2,737,367
---------- ---------- ----------
Costs and expenses:
Cost of sales 1,719,869 1,809,304 1,644,635
Selling expenses 515,963 552,240 441,030
General and administrative expenses 253,781 254,838 225,245
Restructuring charges 8,449 155,000 -
Amortization of intangibles 10,052 16,587 16,354
Minority interest 8,261 1,787 1,311
Interest expense 25,021 20,080 29,295
Interest income (10,710) (5,454) (10,389)
----------- ----------- -----------
2,530,686 2,804,382 2,347,481
---------- ---------- ----------
Income before income taxes 363,247 257,964 389,886
Income taxes 139,832 143,146 155,175
---------- ---------- ----------
Net income $ 223,415 $ 114,818 $ 234,711
========== ========== ==========
Net income per common share $ 2.53 $ 1.24 $ 2.37
========== ========== ==========
Dividends per common share $ 0.30 $ 0.30 $ 0.30
========== ========== ==========
Weighted average common and common
equivalent shares outstanding 88,348 92,697 98,958
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
40
REEBOK INTERNATIONAL LTD.
Consolidated Statements of Stockholders' Equity
Dollar amounts in thousands
===================================================================================================================================
COMMON STOCK ADDITIONAL
PAR PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS
------ ----- --------- --------
Balance, December 31, 1990 114,428,286 $1,144 $281,478 $ 707,336
Net income 234,711
Adjustment for foreign currency translation
Amortization of unearned compensation
Acquisition of treasury stock 11,750,000 118 206,976
Shares issued under employee stock purchase plan 157,040 2 2,183
Shares issued upon exercise of stock options 836,284 8 8,887
Income tax reductions relating to exercise of stock options 3,861
Dividends declared (29,045)
Other 12,800 (423)
----------- ------ --------- ----------
Balance, December 31, 1991 127,184,410 1,272 502,962 913,002
Net income 114,818
Adjustment for foreign currency translation
Issuance of shares to certain employees 33,058 1 1,020
Amortization of unearned compensation
Shares repurchased and retired (2,337,100) (23) (70,179)
Shares issued under employee stock purchase plans 152,310 1 3,164
Shares issued upon exercise of stock options 541,613 5 7,724
Income tax reductions relating to exercise of stock options 3,365
Dividends declared (27,205)
----------- ------ --------- ----------
Balance, December 31, 1992 125,574,291 1,256 448,056 1,000,615
Net income 223,415
Adjustment for foreign currency translation
Issuance of shares to certain employees 102,400 1 2,956
Amortization of unearned compensation
Shares repurchased and retired (6,235,100) (62) (193,959)
Shares issued under employee stock purchase plans 149,977 1 3,493
Shares issued upon exercise of stock options 310,730 3 4,648
Income tax reductions relating to exercise of stock options 1,696
Dividends declared (25,840)
----------- ------ --------- ----------
Balance, December 31, 1993 119,902,298 $1,199 $266,890 $1,198,190
=========== ====== ======== ==========
FOREIGN
CURRENCY
TREASURY UNEARNED TRANSLATION
STOCK COMPENSATION ADJUSTMENT
----------- ------------ -----------
Balance, December 31, 1990 $ (191) $ 6,962
Net income
Adjustment for foreign currency translation 2,654
Amortization of unearned compensation 117
Acquisition of treasury stock $(603,241)
Shares issued under employee stock purchase plan
Shares issued upon exercise of stock options
Income tax reductions relating to exercise of stock options
Dividends declared
Other
---------- -------- --------
Balance, December 31, 1991 (603,241) (74) 9,616
Net income
Adjustment for foreign currency translation (17,035)
Issuance of shares to certain employees (1,021)
Amortization of unearned compensation 484
Shares repurchased and retired
Shares issued under employee stock purchase plans
Shares issued upon exercise of stock options
Income tax reductions relating to exercise of stock options
Dividends declared
---------- -------- --------
Balance, December 31, 1992 (603,241) (611) (7,419)
Net income
Adjustment for foreign currency translation (5,726)
Issuance of shares to certain employees (2,957)
Amortization of unearned compensation 292
Shares repurchased and retired
Shares issued under employee stock purchase plans
Shares issued upon exercise of stock options
Income tax reductions relating to exercise of stock options
Dividends declared
---------- -------- --------
Balance, December 31, 1993 $(603,241) $(3,276) $(13,145)
========== ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
41
REEBOK INTERNATIONAL LTD.
Consolidated Statements of Cash Flows
Amounts in thousands
====================================================================================================================
Year ended December 31 1993 1992 1991
---- ---- ----
Cash flows from operating activities:
Net income $223,415 $114,818 $234,711
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 25,209 27,214 21,984
Amortization of intangibles 10,052 16,587 16,354
Minority interest 8,261 1,787 1,311
Amortization of unearned compensation 292 484 117
Deferred income taxes 17,470 (38,190) (8,544)
Restructuring charges 8,449 155,000 -
Gain on sale of CML common stock - (29,648) -
Changes in operating assets and liabilities,
exclusive of those arising from business acquisitions:
Accounts receivable (44,682) (27,598) 1,079
Inventory (84,020) (39,135) (43,414)
Prepaid expenses 2,023 7,945 (16,378)
Other (23,012) 10,402 1,383
Accounts payable and accrued expenses 6,035 (33,068) 111,569
Income taxes payable (6,959) 21,006 15,013
-------- -------- --------
Total adjustments (80,882) 72,786 100,474
-------- -------- --------
Net cash provided by operating activities 142,533 187,604 335,185
-------- -------- --------
Cash flows from investing activities:
Payments to acquire property and equipment (26,628) (36,513) (37,730)
Proceeds from sale of CML common stock - 31,648 -
Payments for business acquisitions, net of cash acquired (10,321) (3,958) (5,657)
Proceeds from sale of businesses held for sale 36,500 - -
-------- --------- ---------
Net cash used for investing activities (449) (8,823) (43,387)
-------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) of notes payable to banks 19,961 (5,930) 9,444
(Payments) proceeds from issuance of commercial paper - - (59,805)
Net borrowings (repayments) of interest-bearing accounts payable - - (13,742)
Proceeds from issuance of common stock to employees 9,841 14,259 14,941
Dividends paid (26,276) (27,300) (30,805)
Repayments of long-term debt (4,351) (78,748) (158,723)
Proceeds from long-term debt 20,000 - 215,000
Repurchases of common stock (194,021) (70,202) (396,147)
Other - - (4,222)
-------- -------- --------
Net cash used for financing activities (174,846) (167,921) (424,059)
-------- -------- --------
Effect of exchange rate changes on cash 6,723 9,809 (10,162)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (26,039) 20,669 (142,423)
Cash and cash equivalents at beginning of year 105,386 84,717 227,140
-------- -------- --------
Cash and cash equivalents at end of year $ 79,347 $105,386 $ 84,717
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 24,348 $ 20,900 $ 28,058
Income taxes paid 132,456 148,783 137,294
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
42
REEBOK INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands, except per share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
The Company and its subsidiaries develop and market active lifestyle and
performance products, including footwear and apparel, under various trademarks,
including REEBOK, WEEBOK, THE PUMP, INSTAPUMP, BOKS, AVIA, ROCKPORT, TINLEY and
ABOVE THE RIM.
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.
CASH EQUIVALENTS
Cash equivalents are defined as highly liquid investments with maturities of
three months or less at date of purchase.
INVENTORY VALUATION
Inventory, substantially all finished goods, is recorded at the lower of cost
(first-in, first-out method) or market.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed
principally on the straight line method over the assets' estimated useful
lives. Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful lives of the assets.
INTANGIBLES
Excess purchase price over the fair value of assets acquired is amortized using
the straight line method over periods ranging from 5 to 40 years. Other
intangibles are amortized using the straight line method over periods ranging
from 7 to 40 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of most of the Company's foreign subsidiaries are
translated at current exchange rates. Revenues, costs and expenses are
translated at the average exchange rates for the period. Translation
adjustments resulting from changes in exchange rates are reported as a separate
component of stockholders' equity. Other foreign currency transaction gains
and losses are included in the determination of net income.
For those foreign subsidiaries operating in a highly inflationary economy or
having the U.S. dollar as their functional currency, net nonmonetary assets are
translated at historical rates and net monetary assets are translated at
current rates. Translation adjustments are included in the determination of
net income.
FORWARD CURRENCY EXCHANGE CONTRACTS
Certain of the Company's foreign subsidiaries purchase merchandise in U.S.
dollars. To reduce the impact of changes in the rate of exchange of the U.S.
dollar against the various local currencies, the Company enters into forward
currency exchange contracts. Realized and unrealized gains and losses
F-6
43
on these contracts are included in net income except that gains and losses on
contracts to hedge specific foreign currency commitments are deferred and
accounted for as a part of the transaction.
INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement No. 109
"Accounting for Income Taxes" ("Statement 109"). Tax provisions and credits
are recorded at statutory rates for taxable items included in the consolidated
statements of income regardless of the period for which such items are reported
for tax purposes. Deferred income taxes are recognized for temporary
differences between financial statement and income tax bases of assets and
liabilities for which income tax benefits will be realized in future years.
NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted average number of
common and common equivalent shares outstanding for the period.
RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform to the 1993
presentation.
2. RESTRUCTURING CHARGES
In December 1992, the Company's Board of Directors approved a restructuring
plan which included offering for sale the Company's Boston Whaler, Inc.
("Boston Whaler") and Ellesse U.S.A., Inc. ("Ellesse") subsidiaries, a
write-down of the carrying value of its Avia subsidiary, the planned
consolidation and relocation of its performance apparel operation and certain
other office relocations. In connection therewith, the Company recorded a
$155,000 pre-tax restructuring charge in 1992 for estimated costs and losses to
be incurred. The sale of Boston Whaler was completed on July 30, 1993 and the
sale of Ellesse was completed on September 28, 1993. In connection with the
sales, the Company recorded an additional pre-tax restructuring charge in 1993
of $8,500.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
- -------------------------------------------------------------------------------
December 31 1993 1992
---- ----
Land $ 27,994 $ 26,279
Buildings 41,709 39,084
Machinery and equipment 124,568 106,691
Leasehold improvements 25,355 24,122
-------- --------
219,626 196,176
Less accumulated depreciation and amortization 89,019 68,614
-------- --------
$130,607 $127,562
======== ========
F-7
44
4. INTANGIBLES
Intangibles consist of the following:
- ------------------------------------------------------------------------------
December 31 1993 1992
---- ----
Excess of purchase price over fair value of assets
acquired (net of accumulated amortization of
$126,316 in 1993 and $124,224 in 1992) $ 45,808 $ 46,744
Other intangible assets:
Purchased technology 52,827 52,827
Company tradename and trademarks 50,019 49,815
Other 13,731 13,676
-------- --------
116,577 116,318
Less accumulated amortization 68,123 60,109
-------- --------
48,454 56,209
-------- --------
$ 94,262 $102,953
======== ========
In connection with the Company's restructuring charge, as more fully described
in Note 2, the carrying value of certain intangibles was reduced in 1992.
5. SHORT-TERM BORROWINGS
The Company has various arrangements with numerous banks which provide an
aggregate of approximately $700,000 of uncommitted facilities, substantially
all of which are available to the Company's foreign subsidiaries. Of this
amount, $187,000 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 $304,000
was outstanding for open letters of credit for inventory purchases at December
31, 1993.
The Company can also issue up to $125,000 of commercial paper which is
supported to the extent available by a portion of a $175,000 revolving credit
arrangement which expires in December 1994.
6. LEASING ARRANGEMENTS
The Company leases various offices, warehouses, retail store facilities as well
as certain of its data processing and warehouse equipment under lease
arrangements expiring between 1994 and 2008. Minimum annual rentals for the
five years subsequent to December 31, 1993 and in the aggregate are as follows:
F-8
45
================================================================================
1994 $20,810
1995 15,898
1996 9,680
1997 7,992
1998 7,032
1999 and thereafter 22,774
-------
Total minimum lease obligations $84,186
=======
Total rent expense for all operating leases amounted to $23,868, $20,496 and
$16,342 for the years ended December 31, 1993, 1992 and 1991, respectively.
7. LONG-TERM DEBT
Long-term debt consists of the following:
===============================================================================
December 31 1993 1992
---- ----
9.75% debentures due September 15, 1998, with interest
payable semiannually on March 15 and September 15 $ 99,549 $ 99,453
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 17,667 20,308
-------- --------
137,216 119,761
Less current portion 3,009 3,724
-------- --------
$134,207 $116,037
======== ========
Maturities of long-term debt during the five-year period ending December 31,
1998 are $3,009 in 1994, $14,086 in 1995, $102 in 1996, $66 in 1997, and
$119,629 in 1998.
Land and buildings, having a net book value of $20,846 at December 31, 1993,
are pledged as collateral for certain bank notes payable.
8. 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 1993, 1992 and 1991 were $11,833, $8,536 and
$7,318, respectively.
9. STOCK PLANS
The Company has various stock option 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. Under
the plan for Directors, the exercise price of any stock option granted may not
be less than fair market value, the exercise period cannot exceed ten years
from the date of grant and grants have an automatic vesting period of three
years. The Board of Directors approved the
F-9
46
1994 Equity Incentive Plan on December 15, 1993, subject to shareholder
approval. If this plan is adopted, it will replace three of the Company's
existing stock option and stock bonus plans. Under the new Equity Incentive
Plan, these 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 certain 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 following schedule summarizes the changes in stock options during the three
years ended December 31, 1993:
===============================================================================
NUMBER OF SHARES UNDER OPTION
-----------------------------
INCENTIVE NON-QUALIFIED OPTION
STOCK OPTIONS STOCK OPTIONS PRICE PER SHARE
--------------------------------------------------
Outstanding at December 31, 1990 160,620 5,821,259 1.42-21.71
Granted - 933,500 11.75-30.63
Exercised (156,104) (680,180) 5.33-21.19
Cancelled (1,000) (225,824) 8.75-25.13
------- ---------
Outstanding at December 31, 1991 3,516 5,848,755 1.42-30.63
Granted - 544,000 21.38-39.77
Exercised (3,516) (538,097) 1.42-20.46
Cancelled - (343,520) 10.63-31.25
------- ---------
Outstanding at December 31, 1992 - 5,511,138 8.75-39.77
Granted - 1,605,800 11.38-41.74
Exercised - (310,730) 8.75-27.63
Cancelled - (399,240) 11.38-33.25
------- ---------
Outstanding at December 31, 1993 - 6,406,968 8.75-41.74
======== ========= ==========
At December 31, 1993, options to purchase 2,485,340 shares of common stock were
exercisable, and 5,785,355 options were available for future grants under the
stock option plans. Options outstanding at December 31, 1993 include 814,600
shares granted under the 1994 Equity Incentive Plan, subject to shareholder
approval.
The Company has a stock bonus plan for issuance of common stock to key
employees of the Company. Beneficial ownership vests over a period ranging
from three to five years. These grants give rise to unearned compensation that
is amortized over the applicable vesting periods. During the three years ended
December 31, 1993, a total of 33,058 shares of common stock were approved for
issuance and 2,168 shares of common stock were cancelled under this plan. In
December 1993, 102,400 shares of common stock were approved for issuance under
the 1994 Equity Incentive Plan, subject to shareholder approval.
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 the lower of 85% of market value at the beginning or end of each period.
The number of options granted to each employee under this plan is limited to a
fair market value of $12.5 during each option period. On December 15, 1993 the
Board of Directors approved an increase of 1,000,000 shares reserved for
issuance under this plan, subject to shareholder
F-10
47
approval. 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. During 1993, 1992 and 1991,
respectively, 149,977, 152,310, and 157,040 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, 1993, 14,384,638 shares of common stock were reserved for
issuance under the Company's various stock plans (including the 1994 Equity
Incentive Plan and the approved increase in shares reserved for issuance under
the 1987 Employee Stock Purchase Plan) and 98,076,034 shares were reserved for
issuance under the shareholders' rights plan. If the 1994 Equity Incentive
Plan is approved, three of the Company's existing stock option and stock bonus
plans will be terminated and thus the number of shares reserved for issuance
under the Company's various stock plans will be 12,157,371 and 95,848,767
shares will be reserved for issuance under the shareholders' rights plan.
10. ACQUISITION OF COMMON STOCK
On July 13, 1993, the Board of Directors authorized the repurchase of up to
$200,000 in Reebok common stock in open market or privately-negotiated
transactions. This authorization was in addition to the $200,000 share
repurchase program adopted by the Company in July 1992. As of December 31,
1993, the Company had approximately $135,800 available for future repurchases
of common stock under these programs.
On April 8, 1991, the Company reacquired 36,210,902 shares of its common stock
from Pentland Group plc. The purchase price consisted of $396,147 paid in cash
and 11,750,000 shares of newly issued common stock of the Company.
11. FAIR VALUE OF 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 corporate bonds 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: the
F-11
48
fair value of the Company's foreign currency exchange contracts is estimated
based on current foreign exchange rates.
The carrying amounts and fair value of the Company's financial instruments at
December 31, 1993 are as follows:
===============================================================================================
Carrying Fair
Amount Value
-------- -----
Long-term debt $137,216 $146,504
Unrealized gains on foreign
currency exchange contracts 1,662 6,272
12. OTHER INCOME
Other income in 1992 included a gain of $29,648 resulting from the sale of
1,161,403 shares of common stock of CML acquired upon the exercise of a warrant
obtained as part of the October 1989 purchase of Boston Whaler.
13. INCOME TAXES
The components of income before income taxes are as follows:
===============================================================================================
1993 1992 1991
---- ---- ----
Domestic $141,428 $ 22,453 $194,669
Foreign 221,819 235,511 195,217
-------- -------- --------
$363,247 $257,964 $389,886
======== ======== ========
The provision for income taxes consists of the following:
=============================================================================
1993 1992 1991
---- ---- ----
Current:
Federal $ 39,725 $ 68,456 $ 70,216
State 14,082 15,588 18,432
Foreign 68,555 97,292 75,071
-------- -------- --------
122,362 181,336 163,719
-------- -------- --------
Deferred:
Federal 16,244 (23,868) (2,512)
State (310) (1,100) 922
Foreign 1,536 (13,222) (6,954)
-------- -------- --------
17,470 (38,190) (8,544)
-------- -------- --------
$139,832 $143,146 $155,175
======== ======== ========
In 1992, deferred tax credits attributable to restructuring charges
approximated $16,200.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $215,559, $161,421 and $113,812 at December 31, 1993, 1992 and
1991, respectively. Those earnings are
F-12
49
considered to be indefinitely reinvested and, accordingly, no provision for
U.S. federal and state income taxes has been provided thereon. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an adjustment
for foreign tax credits) and withholding taxes payable to the various foreign
countries. 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. Withholding
taxes of approximately $8,815 would be payable upon remittance of all
previously unremitted earnings at December 31, 1993.
Income taxes computed at the federal statutory rate differ from amounts
provided as follows:
===============================================================================
1993 1992 1991
---- ---- ----
Tax at statutory rate 35.0% 34.0% 34.0%
State taxes, less federal tax effect 2.5 3.7 3.3
Effect of tax rates of foreign subsidiaries
and joint ventures (.8) 2.1 .7
Amortization of intangibles .6 .8 .5
Restructuring charges - 13.9 -
Other, net 1.2 1.0 1.3
---- ---- ----
Provision for income taxes 38.5% 55.5% 39.8%
===== ===== =====
Effective January 1, 1993, the Company adopted Statement 109. Under Statement
109, the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Prior to the adoption of Statement 109,
income tax expense was based on items of income and expense that were reported
in different years in the financial statements and tax returns and were
measured at the tax rate in effect in the year the difference originated.
As permitted by Statement 109, the Company has elected not to restate the
financial statements of any prior years. The effect of the change on net
income for 1993 was not material.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-13
50
Deferred taxes are attributable to the following temporary differences at
December 31, 1993:
- --------------------------------------------------------------------------------
Inventory $27,595
Accounts receivable 26,252
Other - net 2,187
-------
$56,034
=======
14. OPERATIONS BY GEOGRAPHIC AREA
Sales to unaffiliated customers, net income and identifiable assets by
geographic area are summarized below:
==============================================================================
1993 1992 1991
---- ---- ----
Sales:
United States $1,775,496 $1,982,153 $1,882,646
United Kingdom 434,249 414,745 380,108
Europe 465,770 425,451 295,546
Other countries 218,385 200,278 176,174
---------- ---------- ----------
$2,893,900 $3,022,627 $2,734,474
========== ========== ==========
Net income:
United States $ 98,692 $ (852) $ 139,731
United Kingdom 65,734 75,112 59,737
Europe 34,575 24,964 17,901
Other countries 24,414 15,594 17,342
-------- ---------- ----------
$223,415 $ 114,818 $ 234,711
========== ========== ==========
Identifiable assets:
United States $ 916,962 $ 929,495 $1,010,009
United Kingdom 152,206 172,012 165,367
Europe 146,541 95,384 105,273
Other countries 176,002 148,455 141,634
---------- ---------- ----------
$1,391,711 $1,345,346 $1,422,283
========== ========== ==========
There are various differences between income before income taxes for domestic
and foreign operations as shown in Note 13 and net income shown above.
15. MAJOR CUSTOMER
One customer accounted for 11.3% of net sales for 1991. No customer accounted
for 10% or more of the Company's net sales in 1993 or 1992.
16. CONTINGENCIES
On February 5, 1993, a lawsuit was filed against the Company and its then
wholly owned subsidiary Ellesse U.S.A., Inc., in the United States District
Court for the District of Massachusetts. A second related lawsuit was filed on
August 10, 1993 in the United States District Court for the District of
Massachusetts. These two cases have been consolidated. Both complaints
allege, among other things, that the Company breached an agreement with the
plaintiff and misappropriated trade secrets in connection with the development
of the Company's THE PUMP (TM) inflatable technology and its procurement of its
patent for the basic THE PUMP technology. The complaint requests a declaratory
judgment stating that the plaintiff is the owner/inventor of the Company's THE
PUMP patent, an
F-14
51
assignment of the Company's patent, recovery of the Company's profits and other
substantial damages from the Company.
On July 1, 1993, a lawsuit was filed against the Company in the Central
District of Los Angeles County Superior Court and subsequently moved to the
United States District Court for the District of California. The complaint
alleges, among other things, fraud, misappropriation and conversion, unfair
competition, tortious interference with prospective economic advantage in
connection with the development of the Company's THE PUMP technology. The
complaint requests compensatory damages, punitive damages, costs and attorneys'
fees.
On February 7, 1994, a lawsuit was filed against the Company in California
Superior Court challenging the Company's resale pricing practices in California
under California state law and seeking unspecified damages, including treble
damages, injunctive relief and costs.
The Company intends to vigorously defend these lawsuits and believes that these
lawsuits are without merit, and further believes that it is unlikely any
subsequent outcome would have a material adverse effect on the financial
condition of the Company.
F-15
52
Quarterly Results of Operations
Amounts in thousands, except per share data
===============================================================================
FIRST QTR SECOND QTR THIRD QTR FOURTH QTR
Year ended December 31, 1993
Net sales $825,220 $657,613 $808,493 $602,574
Gross profit 335,381 267,282 322,644 248,724
Net income 67,769 41,028 63,933 50,685
Net income per common share .74 .46 .74 .59
Cash dividends per common share .075 .075 .075 .075
Year ended December 31, 1992
Net sales $797,372 $701,982 $863,212 $660,061
Gross profit 313,568 287,468 350,351 261,936
Net income (loss) 62,303 45,812 74,367 (67,664)
Net income (loss) per common share .67 .49 .80 (.74)
Cash dividends per common share .075 .075 .075 .075
Net income for the third quarter of 1993 includes an after-tax restructuring
charge of $7,037 ($.08 per share). Net income for the fourth quarter of 1992
includes the effects of restructuring charges, $135,439 after-tax ($1.46 per
share) and after-tax gains of $17,967 ($.19 per share) from the sale of
investments.
F-16
53
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
REEBOK INTERNATIONAL LTD.
(Amounts in thousands)
Deductions Balance at end of period
Balance at
beginning Amounts
Name of Debtor of period Additions Collected Adjustments Current Not current
Year ended December 31, 1993
Executive Officers,
interest payable at 10% on unpaid balance
due on demand, secured by
residential real estate
John Duerden $100 $10 $110
interest bearing at 6%, due July 22, 1996
Roberto Muller 350 350
---- --- ---- ---
100 360 110 350
--- --- --- ---
Non-executive officers
interest bearing at 8%, due December 19, 1995
guaranteed by general partners
Mad Engine (A) 140 16 124
--- --- -- ---
100 500 126 474
--- --- --- ---
Year ended December 31, 1992
Executive Officers,
non-interest bearing, payable in 1992
secured by residential real estate
Marilyn Tam 100 100
interest payable at 10% on unpaid balance
due on demand, secured by
residential real estate
John Duerden 260 160 100
interest bearing, due December 31, 1992
secured by residential real estate
Robert Meers 314 314
---- --- --- ---
360 314 574 100
==== === === ===
Year ended December 31, 1991
Executive Officers,
non-interest bearing, payable in 1992
secured by residential real estate
Marilyn Tam 100 100
interest payable at 10% on unpaid balance
secured by residential real estate
due on demand
Robert Meers 350 59 409
non-interest bearing, due on demand,
secured by residential real estate
John Duerden 410 150 260
--- --- --- ---
860 59 559 360
=== === === ===
(A) An officer of the Company has a 25% general partnership interest in Mad
Engine.
F-17
54
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
REEBOK INTERNATIONAL LTD.
(Amounts in thousands)
Balance at Charged to Charged to Deductions Balance at
Beginning Costs and Other From End of
DESCRIPTION of Period Expenses Accounts (a) Allowances (b) Period
- ---------------------------------------------------- --------- --------- --------- ---------- --------
YEAR ENDED DECEMBER 31, 1993
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts $43,224 $8,562 $5,331 $46,455
YEAR ENDED DECEMBER 31, 1992
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts 44,751 13,854 15,381 43,224
YEAR ENDED DECEMBER 31, 1991
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts 32,807 18,069 2,228 8,353 44,751
(a) Reserves acquired through business acquisitions
(b) Uncollectible accounts written off, net of recoveries
F-18
55
SCHEDULE IX - SHORT-TERM BORROWINGS
REEBOK INTERNATIONAL LTD.
(Dollar amounts in thousands)
Maximum Average Weighted
Amount Amount Average
Balance at Weighted Outstanding Outstanding Interest Rate
CATEGORY OF AGGREGATE End of Average During the During the During the
SHORT-TERM BORROWINGS Period Interest Rate (A) Period Period (B) Period (C)
- ------------------------------ ---------- ------------- ----------- ----------- -------------
YEAR ENDED DECEMBER 31, 1993
Notes payable to banks $23,852 5.60% $48,316 $28,954 8.97%
Commercial paper 0 N/A 60,000 2,971 3.26%
YEAR ENDED DECEMBER 31, 1992
Notes payable to banks 4,442 11.06% 55,959 35,752 11.35%
Commercial paper 0 N/A 95,000 34,008 4.05%
YEAR ENDED DECEMBER 31, 1991
Notes payable to banks 11,562 8.08% 45,615 28,528 11.67%
Commercial paper 0 N/A 93,410 38,513 6.62%
Interest-bearing accounts
payable to Pentland subsidiary 0 N/A 7,402 951 9.48%
(A) End of the period
(B) Month end balance averaged for period, except for commercial paper - daily
balance averaged for period
(C) Interest expense for the year as a % of average balance
F-19
56
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
REEBOK INTERNATIONAL LTD.
(Amounts in thousands)
Charged to costs and expenses
Year ended December 31
---------------------------------------
ITEM 1993 1992 1991
- -------------------------------- --------- --------- ---------
Advertising costs $125,027 $158,980 $122,423
Amounts for maintenance and repairs, depreciation and amortization of
intangible assets, taxes, other than payroll and income taxes, and royalties
are not presented as such amounts are less than 1% of total sales and revenue.
F-20
57
EXHIBIT INDEX
Exhibit Location
- ------- --------
3.1 Restated Articles of Organization of the Company, as amended Incorporated by reference
3.2 By-laws, as amended Incorporated by reference
4.1 Indenture, dated September 15, 1988, between Reebok International Ltd. Incorporated by reference
and Citibank N.A., as Trustee
4.2 First Supplemental Indenture, dated as of January 22, 1993, between Incorporated by reference
Reebok International Ltd. and Citibank N.A., as Trustee
4.3 Common Stock Rights Agreement dated as of June 14, 1990 between the Incorporated by reference
Company and The First National Bank of Boston, as Rights Agent, as
amended
10.1 Distributorship Agreement between Reebok International Limited and the Incorporated by reference
Company
10.2 Trademark License Agreement between Reebok International Limited and the Incorporated by reference
Company
10.3 Continuing Letter of Credit Agreement, dated August 1, 1989, between the Incorporated by reference
Company and State Street Bank and Trust Company; and Letter Agreement
between The Rockport Company, Inc. and Norwest Bank, Master Security
Agreement for Irrevocable Documentary Letters of Credit and Guarantee of
the Company, all dated August 1, 1989
10.4 First Amended and Restated Master Agreement between the Company and Incorporated by reference
Security Pacific dated June 26, 1991
10.5 Credit Facility Agreement between Reebok International Limited and Incorporated by reference
Citibank dated November 7, 1991
10.6 Lease Agreement dated March 1, 1988 between Reebok International Ltd. Incorporated by reference
and North Stoughton Industrial Park Development Trust
58
EXHIBIT INDEX
Exhibit Location
- ------- --------
10.7 Purchase and Sale Agreement between Reebok International Ltd. and Incorporated by reference
Pentland Group plc dated March 8, 1991
10.8 Credit Agreement dated as of December 7, 1992, among the Company, the Incorporated by reference
Lenders named therein, Credit Suisse as Agent and Credit Suisse First
Boston Limited as Syndication Agent
10.9 Agreements with various banks in Hong Kong reflecting arrangements for Incorporated by reference
letter of credit facilities
10.10 Reebok International Ltd. 1985 Stock Option Plan, as amended Incorporated by reference
10.11 Reebok International Ltd. 1987 Stock Option Plan for Directors, as Incorporated by reference
amended
10.12 Reebok International Ltd. 1987 Stock Bonus Plan Incorporated by reference
10.13 Reebok International Ltd. Excess Benefits Plan Incorporated by reference
10.14 Stock Option Agreement with Paul B. Fireman Incorporated by reference
10.15 Split-Dollar Life Insurance Agreement with Paul B. Fireman Incorporated by reference
10.16 Contingent Severance Agreement with Paul R. Duncan Incorporated by reference
10.17 Employment Agreement with John H. Duerden Incorporated by reference
10.18 Contingent Severance Agreement with John H. Duerden Incorporated by reference
10.19 Change of Control Agreement with John B. Douglas III Incorporated by reference
10.20 Employment Agreement with Kenneth Watchmaker Incorporated by reference
10.21 Change of Control Agreement with Kenneth Watchmaker Incorporated by reference
2
59
EXHIBIT INDEX
Exhibit Location
- ------- --------
10.22 Supplemental Retirement Program for Kenneth Watchmaker Incorporated by reference
10.23 Deferred Compensation Plan for Directors Incorporated by reference
10.24 Employment Agreement with Roberto Muller Filed herewith
10.25 Contingent Severence Agreement with Angel Martinez Filed herewith
10.26 Lease with Angel Martinez Filed herewith
11. Statement Re Computation of Per Share Earnings Filed herewith
12. Statement Re Computation of Ratio of Earnings to Fixed Charges Filed herewith
22.1 List of Subsidiaries of the Company Filed herewith
23.1 The consent of Ernst & Young Filed herewith
3