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 products, including footwear and apparel, as well as the design and marketing of footwear and apparel for non-athletic "casual" use. The Company has two major business groups: the Reebok Division, which is primarily responsible for the Company's REEBOK brand, and the Specialty Business Group, which is responsible for the Company's other major brands and non-athletic products, including Boks (R) casual footwear, the GREG NORMAN brand, the Company's subsidiaries, AVIA Group International, Inc. ("Avia") and The Rockport Company, Inc. ("Rockport"), as well as REEBOK golf products and Reebok's retail operations. (Reebok International Ltd. is referred to herein, together with its subsidiaries, as "Reebok" or the "Company" unless the context requires otherwise.)
During calendar year 1994, net income for the Company increased by 13.9% to $254.5 million, or $3.02 per share, from $223.4 million, or $2.53 per share, for the year ended December 31, 1993, while net sales increased by 13.4%, from $2.894 billion to $3.280 billion. Net income in 1993 was affected by after-tax charges totaling $7.0 million which were taken in the third quarter of 1993 in connection with the sales by the Company of two of its subsidiaries, Boston Whaler, Inc. and Ellesse U.S.A., Inc.
On October 4, 1994, the Company's 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 programs announced in July, 1992 and July, 1993, pursuant to which the Company has repurchased 12,459,300 shares at an aggregate price of approximately $399.2 million through March 20, 1995. This new repurchase will be added to the authorization remaining for the 1993 program, leaving approximately $200.8 million authorized for future purchases as of March 20, 1995.
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. The Division also produces authentic outdoor performance footwear under the REEBOK brand to appeal to outdoor enthusiasts as well as to young people. In addition, the Division produces children's footwear sold under the REEBOK brand, a collection of footwear for infants and toddlers sold under the WEEBOK brand, and WEEBOK (R) apparel and accessories which are produced and sold through a licensee. 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. Additionally, to enhance brand awareness and gain credibility for its technologies, the Company has 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 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 1994, 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 the INSTAPUMP (TM) technology. INSTAPUMP inflatable technology from Reebok brings the features and benefits of THE PUMP technology to lightweight performance shoes through use of an INSTAPUMP inflator containing a carbon dioxide cartridge used to inflate the chambers instantly. In 1994, cleated shoes incorporating INSTAPUMP technology were worn by Reebok athletes in the Super Bowl and basketball shoes incorporating INSTAPUMP technology were worn by Reebok endorser Shaquille O'Neal of the Orlando Magic and by other professional and collegiate basketball players. Basketball and tennis shoes incorporating INSTAPUMP technology were first available at retail stores in Spring 1994. Running shoes incorporating INSTAPUMP technology were available at retail in Fall 1994.
In 1994, 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 system utilizes compressible rearfoot and forefoot chambers formed in the outsole connected by an air transmission duct to provide cushioning. Reebok recently introduced the DynaMaX (TM) technology system, an enhanced development of the DYNAMIC CUSHIONING technology, which utilizes a dynamic air flow system in the midsole to provide heel and forefoot cushioning and comfort. Footwear for the walking category which incorporates DynaMaX (TM) technology is expected to be introduced at retail in Fall 1995. In 1994, 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 1994 with advertisements directed toward both the trade and the ultimate consumer of REEBOK products. The major advertising campaigns in 1994 included the Shoot/Slam/Pass campaign which featured Shaquille O'Neal of the Orlando Magic, which
was aimed at enhancing the Company's performance image in basketball and promoting its signature line of SHAQ (TM) basketball shoes and apparel, a campaign featuring Shawn Kemp which promoted The Kamikaze (TM) shoe, a PRESEASON campaign featuring Reebok endorsers Frank Thomas and Emmitt Smith which was aimed at promoting Reebok's PRESEASON (R) footwear, the "One World" campaign featuring several of the Company's international soccer endorsers for the 1994 World Cup soccer games, and the "Reebok Believes in the Athlete in All of Us" campaign featuring Olympic figure skater Nancy Kerrigan, Olympic track and field star Sandra Farmer-Patrick and U.S. National soccer team player Julie Foudy.
Substantial and increased resources were devoted to promotional activities in 1994, including endorsement agreements with athletes, teams, leagues and sports federations, event sponsorships, in-store promotions and point-of-sale materials. The Division continued its strategic push into 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 and accessories featuring his distinctive logo. Other endorsements in basketball come from professional players such as Dominique Wilkins, Kenny Anderson, Shawn Kemp, Dee Brown, Steve Smith and Muggsy Bogues. In addition, Reebok signed an endorsement agreement with Glenn Robinson in 1995.
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 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 both the 1994 and 1995 Super Bowl games.
In January, 1995, Reebok entered into a major multi-year agreement with National Football League Properties under which Reebok has been designated a "Pro Line" licensee for the U.S. and international markets with the right to produce and market sideline apparel bearing NFL team logos. REEBOK NFL Pro Line apparel is expected to be available at retail stores beginning in Fall 1995. In addition, pursuant to this agreement, beginning next season, the coaching staff and players of the San Francisco 49ers, Detroit Lions, Seattle Seahawks, and New Orleans Saints will wear REEBOK (R) sideline apparel and Reebok will produce uniforms for the Detroit Lions. This agreement compliments the other agreements which Reebok has with the NFL and NFL Properties, including its agreement with the NFL under which Reebok is one of only three official athletic footwear licensees and has the right to have up to ten players on each team during each game wear REEBOK footwear displaying the Company's logos and to use NFL uniforms and logos in its advertising and promotions. Reebok also entered into an agreement in 1994 with NFL Properties which permitted it to place INSTAPUMP (TM) inflation stations on the sidelines during the 1994 and 1995 Super Bowl games. This agreement provides for Reebok to be one of three league-wide sponsors, and the exclusive apparel supplier, of the World Football League, which will include six European football teams that will begin play in Spring 1995.
In soccer, Reebok has endorsement contracts with Ryan Giggs of Manchester United, Dennis Bergkamp of Inter-Milan and the Dutch national team which competed in the 1994 World Cup, Jurgen Klinsmann of the Tottenham Hotspurs and Gabriel Batistuta of Argentina. Tennis promotions included teaching programs for inner-city youth and
endorsement contracts with well-known professionals including Michael Stich, Michael Chang, Todd Martin, Pat Rafter, Arantxa Sanchez-Vicario and Malivai Washington. Promotional efforts in running included endorsement contracts with such well-known runners as Moses Kiptanui, Elena Meyers, Sonia O'Sullivan, Arturo Barrios, Sandra Farmer-Patrick and Suzy Hamilton.
The Division also continued its promotional efforts in the fitness area. Reebok fitness products and programming are featured on the Cable Health Network, a new 24-hour cable network, pursuant to a programming agreement. Aerobic promotional activities in 1994 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 addition, in 1994 Reebok continued to promote the SLIDE REEBOK (TM) lateral motion training device, which provides a lateral motion training workout, through endorsements by decathlete Dave Johnson and figure skater Nancy Kerrigan. In the walking category, the Company promoted its BODYWALK (SM) and WALK REEBOK (SM) fitness programs.
To gain further visibility for the REEBOK brand, Reebok has entered into a number of sponsorships. Reebok is the official footwear and apparel sponsor of the Russian Olympic Committee and the approximately 25 individual associated Russian sport federations through 1996. The Company also has agreements under which it is 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, the official athletic footwear and apparel sponsor of the U.S. Gymnastics Federation, the official activewear and apparel sponsor of the Brazil and Ecuador soccer federations through 1995 and the Uruguay soccer federation through 1998, and the official sponsor of the U.K., French and German national soccer teams. In addition, Reebok was a worldwide sponsor of the 1994 Goodwill Games.
Reebok also had a major presence in the 1994 Winter Olympic games with Reebok endorsers such as Nancy Kerrigan and its sponsorship of the Russian Olympic Committee. In addition, players for the 12 national ice hockey teams competing in the Olympics wore REEBOK ice hockey uniforms. In 1994, Reebok signed an agreement with the National Broadcasting Corporation under which it will be an official sponsor of NBC's broadcast of the 1996 Summer Olympic games in Atlanta. In addition, Reebok has signed sponsorship agreements with the National Olympic Committees of Jamaica, Poland, Ireland, Brazil, Russia, New Zealand, and South Africa and the track and field federations of China, Holland and Sweden, which will give it a major presence at the 1996 Summer Olympic 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 (R) footwear) totalled approximately $1.410 billion in 1994, compared to $1.271 billion in 1993. REEBOK brand apparel sales in the U.S. in 1994 totalled approximately $150.1 million, compared to approximately $125.4 million in 1993.
In the U.S., the Reebok Division principally uses an employee sales force for its product lines. 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 brand.
The Division's U.S. distribution strategy emphasizes high-quality retailers and seeks to avoid lower-margin mass merchandisers and discount outlets. REEBOK (R) footwear is distributed primarily through specialty athletic retailers, sporting goods stores and department stores. 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 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, France, Germany, The Netherlands, Italy, Poland, Russia, Switzerland and the United Kingdom and majority owned subsidiaries in Japan, China, South Korea, Spain and South Africa. Acquisition of the Belgian distributor took place as of January 1994. Acquisition of a controlling interest in the South Korean distributor took place in June 1994. Acquisition of the Swiss distributor took place in November 1994. In December 1994, Reebok formed a wholly owned Polish subsidiary to act as its distributor in Poland. In November 1994, Reebok's majority owned joint venture commenced operations in the People's Republic of China. In addition, Reebok is in the process of establishing a majority owned subsidiary in India to distribute its products in that country; the Indian distributor is expected to commence operations in late 1995. In January 1995, the Company sold its interest in its Chile distributor, although the Company continues to distribute its products through this distributor. REEBOK products are also marketed internationally through 29 independent distributors and minority owned joint ventures. The Company or its wholly owned U.K. 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 120 countries and territories. The Division's International operations unit also has small design staffs which assist in the design of REEBOK footwear and apparel.
In 1994, Reebok re-entered the South African market through a distributor which Reebok owns in partnership with a local group of South Africans, who hold a minority equity interest. Reebok's South African distributor has pledged to contribute 6% of its pre-tax earnings to local charities for community activities.
During 1994, 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 $1.253 billion from $1.083 billion in 1993 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 1994 because some of the Division's distributors are not subsidiaries and thus their sales to retailers are not included in the calculation of the Division's international sales. If the full wholesale value of all international sales of REEBOK products are included, total sales of REEBOK products outside the United States represent approximately $1.536 billion in wholesale value, consisting of approximately 37 million pairs of shoes totalling approximately $1.196 billion in wholesale value of footwear sold outside the United States in 1994 (compared with approximately 33 million pairs totalling approximately $1.08 billion in 1993) and approximately $340 million in wholesale value of REEBOK apparel sold outside the United States in 1994 (compared with approximately $278 million in 1993).
SPECIALTY BUSINESS GROUP
The Company established the Specialty Business Group to provide a focus for the Company's other major brands and non-athletic products and to pursue more aggressively markets outside Reebok's primary focus. The Specialty Business Group includes the ROCKPORT brand, the Boks (R) casual footwear line, the GREG NORMAN brand, as well as the Company's Avia subsidiary. The Group is also responsible for the Company's golf products and its retail operations.
Boks (R) Products
The Boks (R) 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 principally through an employee sales force.
GREG NORMAN Brand
The Company also produces a collection of footwear and apparel marketed under the GREG NORMAN (TM) name and logo, as well as a REEBOK line of golf products. Golf products are distributed principally at on-course pro-shops, golf specialty stores and certain department and sporting goods stores and are sold principally 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.
Net sales of ROCKPORT products increased by approximately $31.8 million in 1994, to $314.5 million from $282.7 million in 1993. In 1994, Rockport focused on the growth of its woman's casual footwear business.
Rockport markets its products to authorized retailers throughout the United States through a locally based employee sales staff. Internationally, Rockport markets its products through over 20 locally based distributors in approximately 26 foreign countries and territories. A majority of the international distributors are either subsidiaries of the Company or joint venture partners or independent distributors which also sell REEBOK brand products.
Rockport distributes its products predominantly through 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.
Traditionally, Rockport's marketing has emphasized the comfort, design, and performance aspects 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 1994 focused on increasing consumer awareness of the performance aspects of the ROCKPORT product line through its sponsorship of the 1993/1994 Whitbread Round the World Race and the Leadville Trail 100, a one hundred mile marathon race run at approximately two miles above sea level.
Avia
Avia designs, develops and markets athletic footwear and apparel under the AVIA (R) brand. Net sales for Avia increased from $131.0 million in 1993 to $152.6 million in 1994. Avia has focused its marketing efforts and resources on consumers who seek performance products in the categories of aerobics, cross training, tennis, basketball, outdoor, running and walking. In 1994, the TINLEY (TM) brand was transferred from Reebok to Avia. Avia regards the TINLEY brand as a key part of its enhanced apparel offerings. Avia now markets and sells activewear for men and women and technical apparel and bodywear for women under the AVIA brand and its technical apparel for men under the TINLEY brand.
Avia continues to use its F M (R) technology, introduced in 1992, which is designed to provide cushioning and increase comfort. In 1995, Avia will introduce its Advanced Cantilever System (ACS), designed to improve cushioning and stability, which was developed as a significant update on Avia's patented CANTILEVER (R) sole. 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.
In 1994, Avia altered certain of its international distribution arrangements. Avia dissolved its wholly owned subsidiaries in the United Kingdom and Germany, through which
it previously distributed its products, and now distributes its products in those countries through wholly owned subsidiaries of the Company. In addition, in 1994, Avia began distribution of its products in Australia through the Company's distributor in this market. In Spain, Portugal, and France, Avia distributes its products through a joint venture with the local distributor. In other international markets, Avia distributes its products through a network of independent distributors. Avia's distribution arrangements with independent distributors cover approximately 50 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 a number of factory direct retail stores and plans to open additional stores in 1995.
Avia believes that purchasers of its products combine sports and fitness participation into their daily lives and value functionality and performance as key product features. Avia's new marketing campaign "Real Stuff for Real People" is aimed at reaching these consumers. Avia's new marketing efforts include advertising 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 operates over 50 factory direct stores which sell footwear, apparel and accessories bearing the REEBOK, WEEBOK, Boks, GREG NORMAN and ROCKPORT trademarks. The Company intends to continue to open additional factory direct stores, although its policy is to locate and operate these retail outlets in such a way as to minimize disruption to its normal channels of distribution.
The Company also has REEBOK (R) "concept" stores located in Boston, Massachusetts, in Santa Monica, California, and in New York City. 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 wide selection of current, in-line REEBOK (R), WEEBOK (R), Boks (R) and GREG NORMAN (TM) footwear and apparel. Internationally, there are a number of REEBOK retail stores owned by the Company, its subsidiaries or its independent distributors. The Company opened a retail store in Moscow, Russia in Spring 1993 and in St. Petersburg, Russia in February 1994. In addition, Reebok opened a retail store in Johannesburg, South Africa in June 1994 in connection with its re-entry into that market. Reebok dedicated retail shops are expected to be an important means of launching the brand in new markets such as China and India and in other international markets.
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 (SM) 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 1995.
LICENSING AND EQUIPMENT
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 brands 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 1994, the Company's licensee, Sport Maska, Inc. continued sales of CCM ice hockey and in-line skates with INSTAPUMP (TM) technology, and the Company's licensee, Bell Sports, continued sales of its line of bicycle helmets using 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 gloves, football gloves, running gloves, court/racquetball gloves, fitness/weightlifting gloves, cycling gloves, and soccer goalkeeper gloves, all featuring the REEBOK trademark and Reebok's Performance Logo. In 1994, the Company's licensees, Sun Sport Optics, Inc. and the Renaissance Group, began selling a collection of REEBOK (R) sports performance sunglasses. In addition, basketballs with the BLACKTOP (R) and ABOVE THE RIM (R) trademarks were sold by Sports by Design and a line of gymnastic apparel based on the uniforms worn by the U.S. Gymnastic team was sold under the REEBOK trademark by Tighe Industries.
In 1994, the Company also licensed the REEBOK trademark to Polygram International who, together with Reebok, will produce, market and sell a line of REEBOK (R) fitness videos.
In the equipment area, the Company continued sales of its STEP REEBOK (R) platform and SLIDE REEBOK (TM) lateral motion training device.
The Company also licensed its WEEBOK (R) trademark in 1994 to the Haddad Organization for infant and toddler apparel and accessories and to Baby Optics for a line of infant and toddler sunglasses.
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, subject in most cases to the terms of a formal manufacturing agreement between the Company and such manufacturers. All contract manufacturing is performed in accordance with detailed specifications furnished by the operating unit, subject to strict quality control standards, with a right to reject products that do not meet specifications. To date, the Company has not encountered any significant problem with product rejection or customer returns. The Company generally considers its relationships with its contract manufacturers to be good.
Footwear and Apparel
In 1994, the Company continued to place increased levels of production in China and Indonesia. China, Indonesia, Thailand and South Korea were the Company's primary sources for such footwear, accounting for approximately 29%, 28%, 14%, and 9%, respectively, of the Company's total footwear production during 1994. The Company's largest manufacturer, which has several factory locations, accounted for approximately 6% of the Company's total footwear production in 1994.
Reebok's wholly-owned Hong Kong subsidiary, and a network of related parties in China, Indonesia, Thailand, Taiwan, South Korea and the Philippines, provide quality assurance, quality control, and inspection services with respect to footwear purchased by the Reebok Division's U.S. and International operations. In addition, this network of related parties inspect certain components and materials purchased by unrelated manufacturers for use in footwear production. The network of related parties also facilitates the shipment of footwear from the shipping point to point of destination, as well as arranging for the issuance to the unrelated footwear manufacturers of letters of credit, which are the primary means used to pay manufacturers for finished products. The Company's apparel group utilizes the services of independent third parties, as well as the Company's Hong Kong subsidiary and its network of related parties in the Far East, to assist in the placement, inspection and shipment of apparel and accessories orders internationally. Production of apparel in the United States is through independent contractors which are retained and managed by the Company's apparel group. 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.
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 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 and restrictions, labor unrest and political instability. See "TRADE POLICY" below. The Company believes that it has the ability to develop, over time, adequate substitute sources of supply for the products obtained from present foreign suppliers. If, however, events should prevent the Company from acquiring products from its suppliers in 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. In February 1995, the U.S. threatened substantially higher duty rates on a broad list of imports from China as a result of China's trade policies. However, this issue has been resolved and such duties were not imposed.
The European Union ("EU") imposed import quotas on footwear from China in 1994. The effect of such quota scheme on Reebok has not been significant because only a small portion 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 is available for most REEBOK and AVIA products. In 1995, this quota scheme is expected to continue, but with an expanded exemption which will allow continued supply of the European market.
The EU initiated a dumping case during 1995 against footwear from China, Indonesia and Thailand. However, a broad exception for athletic footwear has been incorporated in such action significantly reducing the potential exposure to the Company. Nevertheless, if
dumping duties are imposed, certain of the Company's product lines could be affected adversely, although it does not believe that its products will be more severely restricted than those of its major competitors. Moreover, any such duties are unlikely to be imposed before the second quarter of 1996.
Various other countries have taken steps to restrict footwear imports, which actions affect the Company as well as other footwear importers. Although such actions have in some cases had an adverse effect on the Company's sales in such countries, they have not had a material adverse effect on the Company as a whole.
PRINCIPAL PRODUCTS
Sales of the following categories of products contributed more than 10% to the Company's total consolidated revenue in the years indicated: 1994, footwear (approximately 88%) and apparel (approximately 12%); 1993, footwear (approximately 88%) and apparel (approximately 11%); 1992, footwear (approximately 89%).
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company believes that its trademarks, especially the REEBOK and ROCKPORT trademarks, are of great value, and the Company is vigilant in protecting them from counterfeiting or infringement. Loss of the REEBOK 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 $762 million of uncommitted facilities, substantially all of which are available to the Company's foreign subsidiaries. Of this amount, $211 million is available for short-term borrowings and bank overdrafts, with the remainder available for letters of credit for inventory purchases. At December 31, 1994, approximately $331 million was outstanding for open letters of credit for inventory purchases, in addition to $63.8 million in notes payable to banks.
On November 1, 1994, the Company replaced its existing $175 million credit agreement with a $200 million credit agreement which expires on October 31, 1995 and a $100 million loan agreement which expires on October 31, 1999.
The Company can also issue up to $125 million of commercial paper which is supported to the extent available by a portion of its new $200 million revolving credit agreement. As of December 31, 1994, 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. No indebtedness is currently outstanding under this program.
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 1994.
BACKLOG
The Company's backlog of orders at December 31, 1994 (many of which are cancelable by the purchaser), totalled approximately $1.125 billion, compared to $1.022 billion as of December 31, 1993. The Company expects that all of these orders will be shipped in 1995. 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 (R) 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 REEBOK (R), AVIA (R), and TINLEY (TM) apparel lines compete with well-known brands such as Nike and Adidas. Rockport's DRESSPORTS (R) line competes 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, 1994, the Company had approximately 6500 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 51 President, Chief Executive Officer and Chairman of the Board of Directors
Paul R. Duncan 54 Executive Vice President, Chief Financial Officer and Director
John H. Duerden 54 Executive Vice President, Joint President and Chief Operations Officer of the Reebok Division and Director
Robert Meers 51 Executive Vice President, President of the Specialty Business Group and Director
Angel R. Martinez 39 Executive Vice President, President and Chief Executive Officer of The Rockport Company
Roberto F. Muller 51 Executive Vice President, Joint President and Chief Marketing Officer of the Reebok Division
Kenneth I. Watchmaker 52 Executive Vice President, Finance and Systems, Reebok Division
John B. Douglas III 41 Senior Vice President, Law and Human Resources and General Counsel
Officers hold office until the first meeting of the Board of Directors following the annual meeting of stockholders, or special meeting in lieu thereof, and thereafter until their respective successors are chosen and qualified.
Paul B. Fireman is the founder of the Company and has served as its Chief Executive Officer since the Company's founding in 1979 and its Chairman of the Board since 1986. Mr. Fireman served as President of the Company from 1979 to 1987 and was appointed again to that position in 1989. Mr. Fireman has been a director since 1979.
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 Joint President and Chief Operations Officer of the Reebok Division, with responsibility for global sales, finance, operations and production in September 1994. He has been an Executive Vice President of the Company since February 1994 and a director of the Company since 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, as President of the Company's Specialty Business Group, for the Company's subsidiaries Rockport and Avia, Boks casual footwear, the GREG NORMAN Brand, REEBOK golf products and Reebok's 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.
Angel R. Martinez was appointed President and Chief Executive Officer of The Rockport Company in August 1994. He has been an Executive Vice President of the Company since February 1994. Prior to that, Mr. Martinez was the 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 Joint President and Chief Marketing Officer of the Reebok Division, responsible for product marketing, marketing services and design and development in January 1995. He has been an Executive Vice President of the Company since February 1994. 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 finance and management information systems. Prior to that, he was Executive Vice President, Operations and Finance, Reebok Division from July 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. In June, 1994, he was given responsibility for the Company's human resources department. Prior to that, he had been Vice President and General Counsel of the Company since 1986.
Item 2.
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. In 1994, this lease was amended to extend the initial term of the lease until June 30, 1996 and to give Reebok an interim renewal option to extend the lease for an additional six months or one year after the initial term, with two additional three-year renewal options thereafter. This facility and two other smaller facilities, one of which is leased and the other of which was purchased by the Company in November 1994, 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 is currently exploring various alternative solutions to address its need for additional space at its corporate headquarters. In 1994, the Company purchased a building in Avon, Massachusetts containing approximately 400,000 square feet of space which it uses as a warehouse. The Company also leases approximately 330,000 square feet of space in Memphis, Tennessee which it uses as a warehouse and distribution center.
In 1993, Rockport purchased its corporate headquarters facility in Marlboro, Massachusetts, containing approximately 80,000 square feet of floor space. In 1992, Rockport purchased approximately 140 acres of land in Lancaster, Massachusetts on which it is constructing a distribution center scheduled for completion in 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, Reebok Canada, 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 to meet their space requirements. Except as otherwise indicated, the Company believes that these arrangements are satisfactory to meet its needs.
Item 3.
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 lawsuits are 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, and patent infringement. 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 Varano 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.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not applicable.
PART II
Item 5.
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 1993 and 1994.
_________________________________________________________________ 1994 1993 High Low High Low
First Quarter 35 3/4 29 3/4 38 32 7/8 Second Quarter 34 1/8 28 3/8 38 5/8 26 7/8 Third Quarter 38 5/8 29 1/8 28 3/8 23 Fourth Quarter 40 1/4 35 5/8 32 1/8 23 3/4 ====== ====== ====== ======
The number of record holders of the Company's common stock at December 31, 1994 was 8,302. Information regarding dividends is set forth under the heading "Quarterly Results of Operations" in the Supplementary Data included in Item 8 and presented as a separate section of this report.
Item 6.
Item 6. Selected Financial Data.
Balance Sheet Data
The accompanying notes are an integral part of the consolidated financial statements.
REEBOK INTERNATIONAL LTD. Consolidated Statements of Income
The accompanying notes are an integral part of the consolidated financial statements.
REEBOK INTERNATIONAL LTD.
Consolidated Statements of Stockholders' Equity
The accompanying notes are an integral part of the consolidated financial statements.
REEBOK INTERNATIONAL LTD. Consolidated Statements of Cash Flows
The accompanying notes are an integral part of the consolidated financial statements.
REEBOK INTERNATIONAL LTD.
Notes to Consolidated Financial Statements Dollar amounts in thousands, except per share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY The Company and its subsidiaries design and market sports and fitness products, including footwear and apparel, as well as footwear and apparel for non-athletic "casual" use, under various trademarks, including REEBOK, WEEBOK, THE PUMP, INSTAPUMP, Boks, the GREG NORMAN Logo, AVIA, ROCKPORT, and TINLEY.
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.
RECOGNITION OF REVENUES Sales are recognized upon shipment of products.
ADVERTISING Advertising production costs are expensed the first time the advertisement is run. Media (TV and print) placement costs are expensed in the month the advertising appears. Advertising expense (excluding cooperative advertising) amounted to $133,004, $125,027 and $158,980 for the years ended December 31, 1994, 1993 and 1992, respectively.
CASH EQUIVALENTS Cash equivalents are defined as highly liquid investments with maturities of three months or less at date of purchase.
INVENTORY VALUATION Inventory, substantially all finished goods, is recorded at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed principally on the straight line method over the assets' estimated useful lives. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets.
INTANGIBLES Excess purchase price over the fair value of assets acquired is amortized using the straight line method over periods ranging from 5 to 40 years. Other intangibles are amortized using the straight line method over periods ranging from 3 to 40 years.
FOREIGN CURRENCY TRANSLATION Assets and liabilities of most of the Company's foreign subsidiaries are translated at current exchange rates. Revenues, costs and expenses are translated at the average exchange rates for the period. Translation adjustments resulting from changes in exchange rates are reported as a separate component of stockholders' equity. Other foreign currency transaction gains and losses are included in the determination of net income.
For those foreign subsidiaries operating in a highly inflationary economy or having the U.S. dollar as their functional currency, net nonmonetary assets are translated at historical rates and net monetary assets are translated at current rates. Translation adjustments are included in the determination of net income.
INCOME TAXES The Company accounts for income taxes in accordance with FASB Statement No. 109 "Accounting for Income Taxes" ("Statement 109"). Tax provisions and credits are recorded at statutory rates for taxable items included in the consolidated statements of income regardless of the period for which such items are reported for tax purposes. Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities 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 1994 presentation.
2. SPECIAL CHARGES
In December 1992, the Company's Board of Directors approved a 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 special 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 special charge in 1993 of $8,449.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following: _________________________________________________________________ December 31 1994 1993 ____ ____
Land $ 32,243 $ 27,994 Buildings 60,440 41,709 Machinery and equipment 156,046 124,568 Leasehold improvements 34,506 25,355 _______ _______ 283,235 219,626 Less accumulated depreciation and amortization 118,387 89,019 _______ _______ $164,848 $130,607 ======= =======
4. INTANGIBLES
Intangibles consist of the following: _________________________________________________________________ December 31 1994 1993 ____ ____
Excess of purchase price over fair value of assets acquired (net of accumulated amortization of $128,545 in 1994 and $126,316 in 1993) $ 49,811 $ 45,808
Other intangible assets: Purchased technology 52,827 52,827 Company tradename and trademarks 50,104 50,019 Other 13,693 13,731 _______ _______ 116,624 116,577 Less accumulated amortization 70,239 68,123 _______ _______ 46,385 48,454 _______ _______ $ 96,196 $ 94,262 ======= =======
5. SHORT-TERM BORROWINGS
The Company has various arrangements with numerous banks which provide an aggregate of approximately $762,000 of uncommitted facilities, substantially all of which are available to the Company's foreign subsidiaries. Of this amount, $211,000 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 $331,000 was outstanding for open letters of credit for inventory purchases at December 31, 1994.
On November 1, 1994, the Company replaced its existing $175,000 credit agreement with a $200,000 credit agreement which expires on October 31, 1995 and a $100,000 loan agreement which expires on October 31, 1999. These agreements, to the extent available, support the Company's commercial paper program under which it can issue up to $125,000.
The weighted average interest rate on notes payable to banks was 4.9% and 5.6% at December 31, 1994 and 1993, respectively.
6. LEASING ARRANGEMENTS
The Company leases various offices, warehouses, retail store facilities and certain of its data processing and warehouse equipment under lease arrangements expiring between 1995 and 2008. Minimum annual rentals for the five years subsequent to December 31, 1994 and in the aggregate are as follows:
_________________________________________________________________ 1995 $ 29,049 1996 20,966 1997 15,073 1998 12,803 1999 10,154 2000 and thereafter 21,302 _______ Total minimum lease obligations $109,347 =======
Total rent expense for all operating leases amounted to $29,167, $23,868 and $20,496 for the years ended December 31, 1994, 1993 and 1992, respectively.
7. LONG-TERM DEBT
Long-term debt consists of the following: _________________________________________________________________ December 31 1994 1993 ____ ____
9.75% debentures due September 15, 1998, with interest payable semiannually on March 15 and September 15 $ 99,645 $ 99,549
Medium-term notes, bearing interest at rates approximating 6%, due February 11, 1998, with interest payable semiannually on February 15 and August 15 20,000 20,000
Bank and other notes payable 17,344 17,667 _______ _______ 136,989 137,216 Less current portion 5,190 3,009 _______ _______ $131,799 $134,207 ======= =======
Maturities of long-term debt during the five-year period ending December 31, 1999 are $5,190 in 1995, $4,316 in 1996, $3,758 in 1997, $123,313 in 1998, and $88 in 1999.
Land and buildings, having a net book value of $24,168 at December 31, 1994, 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 1994, 1993 and 1992 were $13,660, $11,833 and $8,536 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. The Board of Directors approved the 1994 Equity Incentive Plan on December
15, 1993 which replaced three of the Company's existing stock option and stock bonus plans. Under this new Equity Incentive Plan, options may be incentive stock options or "non-qualified options" under applicable provisions of the Internal Revenue Code. The exercise price of any stock option granted may not be less than fair market value at the date of grant except in 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. With respect to the Plan for Directors, grants vest in equal annual installments over three years.
The following schedule summarizes the changes in stock options during the three years ended December 31, 1994:
At December 31, 1994 and 1993, options to purchase 3,241,684 and 2,485,340 shares of common stock were exercisable, and 4,351,514 and 5,785,355 options, respectively, were available for future grants under the Company's stock option plans.
The 1994 Equity Incentive Plan also provides for the Company to grant restricted stock to key employees, and other persons or entities who make significant contributions to the success of the Company. The vesting schedule for restricted stock granted under this Plan is determined by the Compensation Committee of the Board of Directors.
The Company has two employee stock purchase plans. Under the 1987 Employee Stock Purchase Plan eligible employees are granted options to purchase shares of the Company's common stock through voluntary payroll deductions during two option periods, running from January 1 to June 30 and from July 1 to December 31, at 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. 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 1994, 1993 and 1992, respectively, 158,965, 149,977, and 152,310 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, 1994, 11,176,621 shares of common stock were reserved for issuance under the Company's various stock plans and 92,121,330 shares were reserved for issuance under the shareholders' rights plan.
10. ACQUISITION OF COMMON STOCK
On October 4, 1994, the Board of Directors authorized the repurchase of up to an additional $200,000 in Reebok common stock in open market or privately-negotiated transactions. This authorization was in addition to the $200,000 share repurchase programs adopted by the Company in July 1992 and July 1993. As of December 31, 1994, the Company had approximately $223,600 available for future repurchases of common stock under these programs.
11. FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments: Cash and cash equivalents and notes payable to banks: the carrying amounts reported in the balance sheet approximate fair value. Long term-debt: the fair value of the Company's 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 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 are as follows:
EXHIBIT INDEX
EXHIBIT LOCATION
3.1 Restated Articles of Organization Incorporated by of the Company, as amended reference
3.2 By-laws, as amended Incorporated by reference
4.1 Indenture, dated September 15, 1988, Incorporated by between Reebok International Ltd. reference and Citibank N.A., as Trustee
4.2 First Supplemental Indenture, Incorporated by dated as of January 22, 1993, reference between Reebok International Ltd. and Citibank N.A., as Trustee
4.3 Common Stock Rights Agreement dated Incorporated by as of June 14, 1990 between the reference Company and The First National Bank of Boston, as Rights Agent, as amended
10.1 Distributorship Agreement between Incorporated by Reebok International Limited and reference the Company
10.2 Trademark License Agreement between Incorporated by Reebok International Limited and the reference Company
10.3 Continuing Letter of Credit Agreement, Incorporated by dated August 1, 1989, between the 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 Credit Facility Agreement between Incorporated by Reebok International Limited and reference Citibank dated November 7, 1991
10.5 Lease Agreement dated March 1, 1988 Incorporated by between Reebok International Ltd. and reference North Stoughton Industrial Park Development Trust
EXHIBIT INDEX
EXHIBIT LOCATION
10.6 Amendments to Lease Agreement Filed herewith dated March 1, 1988 between Reebok International Ltd. and North Stoughton Industrial Park Development Trust
10.7 Purchase and Sale Agreement between Incorporated by Reebok International Ltd. and Pentland reference Group plc dated March 8, 1991
10.8 Agreements with various banks in Hong Incorporated by Kong reflecting arrangements for letter reference of credit facilities
10.9 Third Amended and Restated Master Filed herewith Agreement between the Company and Bank of America Oregon dated as of July 1, 1993, as amended
10.10 $200,000,000 Credit Agreement and Incorporated by $100,000,000 Loan Agreement, each reference dated as of November 1, 1994, among the Company, the Lenders named therein and Credit Suisse as Administrative Agent and Arranger
10.11 Reebok International Ltd. 1994 Equity Filed herewith Incentive Plan
10.12 Reebok International Ltd. Equity and Filed herewith Deferred Compensation Plan for Directors
10.13 Reebok International Ltd. 1985 Stock Incorporated by Option Plan, as amended reference
10.14 Reebok International Ltd. 1987 Stock Incorporated by Option Plan for Directors, as amended reference
10.15 Reebok International Ltd. 1987 Stock Incorporated by Bonus Plan reference
10.16 Reebok International Ltd. Excess Incorporated by Benefits Plan reference
10.17 Stock Option Agreement with Paul Incorporated by B. Fireman reference
EXHIBIT INDEX
EXHIBIT Location
10.18 Split-Dollar Life Insurance Agreement Incorporated by with Paul B. Fireman reference
10.19 Contingent Severance Agreement with Incorporated by Paul R. Duncan reference
10.20 Employment Agreement with John H. Incorporated by Duerden reference
10.21 Contingent Severance Agreement with Incorporated by John H. Duerden reference
10.22 Change of Control Agreement with Incorporated by John B. Douglas III reference
10.23 Employment Agreement with Kenneth Incorporated by Watchmaker reference
10.24 Change of Control Agreement with Incorporated by Kenneth Watchmaker reference
10.25 Supplemental Retirement Program for Incorporated by Kenneth Watchmaker reference
10.26 Employment Agreement with Roberto Incorporated by Muller reference
10.27 Contingent Severance Agreement with Incorporated by Angel Martinez reference
10.28 Lease with Angel Martinez Incorporated by reference
11. Statement Re Computation of Per Filed herewith Share Earnings
12. Statement Re Computation of Ratio Filed herewith of Earnings to Fixed Charges
21.1 List of Subsidiaries of the Company Filed herewith
23.1 The consent of Ernst & Young LLP Filed herewith
27. Financial Data Schedule Filed herewith