10-Q 1 e10-q.txt REEBOK INTERNATIONAL 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 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 (I.R.S. Employer incorporation or organization) Identification No.) 1895 J.W. Foster Boulevard, Canton, Massachusetts 02021 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (781) 401-5000 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) The number of shares outstanding of registrant's common stock, par value $.01 per share, at August 4, 2000 was 56,910,348 shares. 2 REEBOK INTERNATIONAL LTD. INDEX PART I. FINANCIAL INFORMATION: Item 1 Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - June 30, 2000 and 1999, and December 31, 1999........................................ 3-4 Condensed Consolidated Statements of Income - Three and Six months Ended June 30, 2000 and 1999.................. 5 Condensed Consolidated Statements of Cash Flows - Six months Ended June 30, 2000 and 1999...................... 6-7 Notes to Condensed Consolidated Financial Statements................................................... 8-12 Item 2 Management's Discussion and Analysis of Results Of Operations and Financial Condition........................ 13-19 Part II. OTHER INFORMATION: Item 1 Not Applicable.................................................. 20 Item 2 Changes in Securities and Use of Proceeds....................... 20 Item 3 Not Applicable.................................................. 20 Item 4 Submission of Matters to a Vote of Security Holders............. 20 Item 5 Not Applicable.................................................. 21 Item 6 Exhibits........................................................ 21 2 3 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data)
June 30, December 31, 2000 1999 1999 ---------- ---------- ------------ (Unaudited) (See Note 1) Current assets: Cash and cash equivalents $ 212,572 $ 150,111 $ 281,744 Accounts receivable, net of allowance for doubtful accounts (June 2000, $46,532; June 1999, $51,426; December 1999, $46,217) 496,625 512,970 417,404 Inventory 405,528 502,030 414,616 Deferred income taxes 69,331 70,627 88,127 Prepaid expenses and other current assets 42,919 56,219 41,227 ---------- ---------- ---------- Total current assets 1,226,975 1,291,957 1,243,118 ---------- ---------- ---------- Property and equipment, net 161,255 181,717 178,111 Other non-current assets: Intangibles, net of amortization 71,562 73,017 68,892 Deferred income taxes 41,746 49,993 43,868 Other 21,087 31,519 30,139 ---------- ---------- ---------- 134,395 154,529 142,899 ---------- ---------- ---------- Total Assets $1,522,625 $1,628,203 $1,564,128 ========== ========== ==========
3 4 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Amounts in thousands, except per share data)
June 30, December 31, 2000 1999 1999 ----------- ----------- ------------ (Unaudited) (See Note 1) Current liabilities: Notes payable to banks $ 19,097 $ 45,826 $ 27,614 Current portion of long-term debt 85,176 185,172 185,167 Accounts payable 171,964 159,747 153,998 Accrued expenses 310,199 219,495 241,322 Income taxes payable 4,320 28,944 8,302 ----------- ----------- ----------- Total current liabilities 590,756 639,184 616,403 ----------- ----------- ----------- Long-term debt, net of current portion 339,843 423,619 370,302 Minority interest and other long-term liabilities 34,741 29,518 48,607 Commitments and contingencies Stockholders' equity: Common stock, par value $.01; authorized 250,000 shares; issued June 30, 2000, 95,604; issued June 30, 1999, 92,822; issued December 31, 1999, 92,986 956 928 930 Retained earnings 1,245,293 1,181,121 1,170,885 Less shares in treasury at cost: June 30, 2000, 38,716; June 30, 1999, 36,716; December 31,1999, 36,716 (653,370) (617,620) (617,620) Unearned compensation (2,690) Accumulated other Comprehensive loss (32,904) (28,547) (25,379) ----------- ----------- ----------- 557,285 535,882 528,816 ----------- ----------- ----------- Total liabilities and stockholders' equity $ 1,522,625 $ 1,628,203 $ 1,564,128 =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 5 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands except per share data) (Unaudited)
Three months Ended Six months Ended June 30 June 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net sales $ 685,076 $ 697,393 $ 1,454,905 $ 1,483,177 Other income (expense), net (916) (2,740) 3,929 (1,572) ----------- ----------- ----------- ----------- 684,160 694,653 1,458,834 1,481,605 Costs and expenses: Cost of sales 423,614 432,592 902,318 920,358 Selling, general and administrative expenses 234,799 243,357 469,318 495,611 Amortization of intangibles 1,059 1,599 2,179 2,735 Interest expense 10,940 12,431 21,021 26,427 Interest income (3,774) (1,582) (8,080) (2,977) ----------- ----------- ----------- ----------- 666,638 688,397 1,386,756 1,442,154 ----------- ----------- ----------- ----------- Income before income taxes and minority interest 17,522 6,256 72,078 39,451 Income tax expense 6,606 2,252 27,173 14,202 ----------- ----------- ----------- ----------- Income before minority interest 10,916 4,004 44,905 25,249 Minority interest 246 (564) 2,523 2,776 ----------- ----------- ----------- ----------- Net income $ 10,670 $ 4,568 $ 42,382 $ 22,473 =========== =========== =========== =========== Basic earnings per share $ .19 $ .08 $ .75 $ .40 =========== =========== =========== =========== Diluted earnings per share $ .19 $ .08 $ .74 $ .40 =========== =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 6 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Six months Ended June 30, ----------------------- 2000 1999 -------- -------- Cash flows from operating activities: Net income $ 42,382 $ 22,473 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,508 22,622 Minority interest 2,523 2,776 Deferred income taxes 18,975 (2,767) Net gain on sale of assets (2,518) Changes in operating assets and liabilities: Accounts receivable (84,723) (15,634) Inventory (4,117) 19,649 Prepaid expenses (2,681) (7,107) Other 1,562 (3,371) Accounts payable and accrued expenses 66,595 2,857 Income taxes payable (4,495) 5,459 -------- -------- Total adjustments 12,629 24,484 -------- -------- Net cash provided by operating activities 55,011 46,957 -------- -------- Cash flows from investing activities: Proceeds from the sale of assets 30,506 Payments to acquire property and equipment (15,135) (29,238) Investments in subsidiaries (1,390) -------- -------- Net cash provided by (used for) investing activities 13,981 (29,238) -------- --------
6 7 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd) (Amounts in thousands) (Unaudited)
Six months Ended June 30, ------------------------- 2000 1999 --------- --------- Cash flows from financing activities: Net borrowings (payments) of notes payable to banks $ (7,715) $ 21,931 Payments of long-term debt (129,976) (53,060) Proceeds from issuance of common stock to employees 1,667 1,904 Dividends to minority shareholders (10,224) Repurchases of common stock (16,559) --------- --------- Net cash used for financing activities (136,024) (56,008) --------- --------- Effect of exchange rate changes on cash and cash equivalents (2,140) 8,330 --------- --------- Net decrease in cash and cash equivalents (69,172) (29,959) --------- --------- Cash and cash equivalents at beginning of period 281,744 180,070 --------- --------- Cash and cash equivalents at end of period $ 212,572 $ 150,111 ========= ========= Supplemental disclosures of cash flow information: 2000 1999 --------- --------- Cash paid during the period for: Interest $ 22,595 $ 26,285 Income taxes 9,294 3,559
The accompanying notes are an integral part of the condensed consolidated financial statements. 7 8 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollar amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles ("GAAP") for complete financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and reflect all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods. The interim financial information and notes thereto should be read in conjunction with the Company's latest annual report to shareholders. The results of operations for the six months ended June 30, 2000 are not necessarily indicative of results to be expected for the entire year. Certain amounts in the prior year have been reclassified to conform to the 2000 presentation. NOTE 2 - SPECIAL CHARGE Details of the special charge activity are as follows:
Termination of Legal Employee Fixed Asset Marketing Leases and Total Settlement Severance Write-downs Contracts Other ----- ---------- --------- ----------- --------- ------------- Balance, December 31, 1999 $65,557 $21,424 $ 18,917 $ 15,534 $ 9,091 $591 2000 Utilization 9,580 691 5,119 2,386 1,131 253 ------- ------- --------- --------- --------- ---- Balance, June 30, 2000 $55,977 $20,733 $ 13,798 $ 13,148 $ 7,960 $338 ======= ======= ========= ========= ========= ====
The fixed asset write-downs relate to assets that will be abandoned or sold. The remaining accruals will be utilized throughout fiscal 2000 8 9 and 2001, as leases expire, consolidations occur, contractual obligations come due and severance payments are made. 9 10 NOTE 3 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands, except per share data):
Three Months Ended Six Months Ended June 30 June 30 -------------------- -------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Numerator: Net income $10,670 $ 4,568 $42,382 $22,473 ------- ------- ------- ------- Denominator for basic earnings per share: Weighted average shares 56,688 55,975 56,606 56,020 Dilutive employee stock options 762 902 494 707 ------- ------- ------- ------- Denominator for diluted earnings per share: Weighted average shares and assumed conversions 57,450 56,877 57,100 56,727 ======= ======= ======= ======= Basic earnings per share $ .19 $ .08 $ .75 $ .40 Diluted earnings per share $ .19 $ .08 $ .74 $ .40
NOTE 4 - COMPREHENSIVE INCOME Comprehensive income (loss) for the quarter ended June 30, 2000 and June 30, 1999 was $6,729 and $(409) respectively. Comprehensive income for the six months ended June 30, 2000 and June 30, 1999 was $34,857 and $9,575 respectively. Comprehensive income for all periods presented represents net income and changes in foreign currency translation adjustments. NOTE 5 - CONTINGENCIES The Company is involved in various legal proceedings generally incidental to its business. While it is not feasible to predict or determine the outcome of these proceedings, management does not 10 11 believe that they should result in a materially adverse effect on the Company's financial position, results of operations or liquidity. 11 12 NOTE 6 - ACQUISITION OF TREASURY STOCK During the second quarter of 2000, the Company acquired 2,000,000 shares of treasury stock in a non cash exchange pursuant to a stock option exercise by a major shareholder. See Item 2. 12 13 REEBOK INTERNATIONAL LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements with regard to the Company's revenues, earnings, spending, margins, cash flow, orders, inventory, products, actions, plans, strategies and objectives. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "intend," "plan," "project," "will be," "will continue," "will result," "could," "may," "might," or any variations of such words or other words with similar meanings. Any such statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those discussed in such forward-looking statements. Prospective information is based on management's then current expectations or forecasts. Such information is subject to the risk that such expectations or forecasts, or the assumptions underlying such expectations or forecasts, become inaccurate. Risks and uncertainties that could affect the Company's actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of the Company include, but are not limited to, the following: technological, marketing, product, promotional or other success by one or more of the Company's competitors; changes in consumer preferences; failure by the Company to adequately forecast consumer demand and sales volume, leading to increased spending, inventory risk, tooling and other costs; inability to obtain desired pricing margins and profitability because of industry conditions, production inefficiencies, increased costs of goods, currency trends, the general retail environment or the lack of success of the Company's products or marketing; higher-than-anticipated levels of customer cancellations or returns; lack of success in the Company's retail operations due to general retail market conditions or loss of market share to competitors; failure to meet delivery deadlines because of design, production or distribution problems; currency fluctuations, government actions, import regulations, political instability or general economic factors that negatively impact the Company's business in one or more international regions; interruption or unavailability of sources of supply; inability to make timely payments on the Company's indebtedness or to meet debt covenants; loss of one or more significant customers; inability to protect significant trademarks, patents or other intellectual property of the Company; negative results in litigation; general economic factors impacting consumer purchasing power and preferences; changes in the Company's tax rate or its ability to fully utilize deferred tax assets; the Company's ability to achieve desired operating and logistical efficiencies in the areas of distribution and information systems; disruptions due to Year 2000 non-compliance in 13 14 the systems of its key suppliers, customers, distributors or other business partners; and other factors mentioned or incorporated by reference in this report or other reports. This list of risk factors is not exhaustive. Other risks and uncertainties are discussed elsewhere in this report and in further detail under the caption entitled Issues and Uncertainties included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 which has been filed with the Securities and Exchange Commission and is incorporated herein by reference. In addition, the Company operates in a highly competitive and rapidly changing environment. Therefore, new risk factors can arise, and it is not possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on the Company's business or the extent to which any individual risk factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. OPERATING RESULTS SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999 Net sales for the quarter ended June 30, 2000 were $685.1 million, a 1.8% decrease from 1999's second quarter net sales of $697.4 million. The Reebok Division's worldwide sales (including the sales of the Greg Norman Collection) were $559.6 million, a 1.8% decrease from sales of $570.1 million in the second quarter of 1999. Sales comparisons are adversely affected by the weakening of the Euro over the past several quarters. On a constant dollar basis, which eliminates the effect of currency fluctuations, worldwide sales for the Reebok Division increased approximately $1.6 million or .3%. U.S. footwear sales of the Reebok Brand increased .9% to $247.3 million in the second quarter of 2000 from $245.1 million in the second quarter of 1999. Consistent with the Company's strategy to focus on certain key franchises, U.S. footwear sales in many categories increased. The Basketball category doubled and the running, men's and women's training and children's categories experienced double digit growth. The Classics category declined, as planned, partially due to the timing of the separate product launches which is in line with the Company's three tiered segmentation strategy. The Company expects the Classics category in the U.S. to grow in the second half of 2000. U.S. apparel sales of the Reebok Division (including the sales of the Greg Norman Collection) decreased in the second quarter by 10.6% to $52.9 million from $59.2 million in the second quarter of 1999. Despite the sales decline in the quarter, the Company's apparel profits increased, as gross margin improved over 710 basis points and expenses declined 14 15 17.3%. Sales of Greg Norman apparel decreased 11.3% as compared to the second quarter of 1999, however, gross margins improved by 1310 basis points domestically and operating expenses declined 5.1% in the current quarter as compared to the second quarter of 1999. International sales of the Reebok Brand (including footwear and apparel) were $259.4 million in the second quarter of 2000, a decrease of 2.4% from $265.8 million in the second quarter of 1999. On a constant dollar basis, International sales increased approximately 2.0% in the second quarter of 2000 as compared to the second quarter 1999. International comparisons were also adversely impacted by the changes to the Company's international distribution network. Effective January 1, 2000, the Company's Switzerland and Russia subsidiaries were sold and became independent distributors. Also, last year at this time, the Company had issues with the opening of its new European Distribution Center which caused shipping delays. This resulted in shipping what should have been first quarter 1999 sales for Germany in the second quarter of 1999. European sales decreased $25.1 million or 12.4%. However, removing the adverse impact of currency, the effect of the sale of Russia and Switzerland and the effect of the timing of Germany shipments last year at this time, net sales in Europe increased $10.4 million or 6.2% as compared to the second quarter of 1999. The Asia Pacific region reported a sales increase of 25.1% in the quarter. In Latin America, the Company's sales to its independent distributors increased approximately 17.9% as these distributors increased their purchases to meet local consumer demand. International categories that generated sales increases in the second quarter of 2000 were basketball, running, tennis, and women's fitness. International footwear sales increased approximately 3.1%, whereas international apparel sales decreased by approximately 7.2%. Rockport's second quarter 2000 sales were $96.8 million as compared to sales of $104.0 million in the second quarter of 1999. Domestic sales for the Rockport brand decreased by 12.7% ,while International sales increased by 10.7%. Domestically, sales decreased in most categories. In the second half of 2000, the Company plans to substantially increase the quantity of new product introductions. The Company's new World Tour shoe collection, which debuted at retail in July, will be the largest product launch in the history of The Rockport Company. The launch is supported by a fully integrated marketing program, including print and radio advertising. Initial sell-through results for this collection have been encouraging. International revenues accounted for 23.3% of Rockport's sales in the second quarter of 2000 as compared to 19.6% in the second quarter of 1999. Sales of the Company's Polo Ralph Lauren Footwear products were $28.7 million in the second quarter of 2000, an increase of 23.2% from $23.3 million in the second quarter of 1999. This division continues to expand its product offerings to reach an even broader consumer with the introduction in the second half of this year of a children's and a jeans line of footwear. 15 16 During the second quarter of 2000, the Company's overall gross margin was 38.2% of sales, this compares to 38.0% for 1999's second quarter. During the quarter, the Company continued to improve the Reebok Brand margins due to improved inventory management, reduced cancellations and fewer closeout sales. Some of this improvement was offset by margin erosion in Europe caused by the weakening of the Euro against the U.S. dollar. Selling, general and administrative expenses for the second quarter of 2000 were $234.8 million, or 34.3% of sales, as compared to $243.4 million, or 34.9% of sales in 1999's second quarter. The Company has benefited from programs initiated in the prior year to reduce total general and administrative spending however, the Company recognizes the need to lower general and administrative expenses as a percentage of sales. The Company plans to continue to work to reduce non-brand building expenses and to find additional operating efficiencies within the organization in order to accomplish this. In addition, if revenues increase, the Company could generate operating leverage from such sales improvement. Net interest expense was $7.2 million for the second quarter of 2000, a decrease of $3.7 million as compared to the second quarter of 1999. The decrease was a result of improved cash flow and debt repayments. The effective income tax rate was 37.7% in the second quarter of 2000 as compared to 36.0% in the second quarter of 1999. However, the rate could fluctuate from quarter to quarter depending on where the Company earns income geographically, and, if the Company incurs non-benefitable losses in certain jurisdictions, the rate could increase further. FIRST SIX MONTHS 2000 COMPARED TO FIRST SIX MONTHS 1999 Net sales for the first six months ended June 30, 2000 were $1.455 billion, a 1.9% decrease from 1999's first six months net sales of $1.483 billion. The Reebok Division's worldwide sales (including the sales of the Greg Norman Collection) were $1.201 billion, a 1.7% decrease from sales of $1.222 billion in the first six months of 1999. U.S. footwear sales of the Reebok Brand decreased 1.2% to $505.5 million in the first six months of 2000 from $511.4 million in the first six months of 1999. Sales comparisons are adversely affected by the weakening of the Euro over the past several quarters. On a constant dollar basis, which eliminates the effect of currency fluctuations, worldwide sales for the Reebok Division increased approximately $13.6 million or 2.6%. Consistent with the Company's strategy to focus on certain key franchises, U.S. footwear sales in many categories increased, including basketball, running, men's and women's training and children's. The Classics category declined, as planned, partially due to the timing of the separate product launches 16 17 which is in line with the Company's three tiered segmentation strategy. The Company expects the Classics category in the U.S. to grow in the second half of 2000. U.S. apparel sales of the Reebok Division (including the sales of the Greg Norman Collection) decreased in the first six months by 13.2% to $110.6 million from $127.4 million in the first six months of 1999. Despite the sales decline in the first six months, the Company's apparel profits increased, as gross margin improved 960 basis points and expenses declined 22.6%. Sales of Greg Norman apparel decreased 11.5% as compared to the first six months of 1999, however, gross margins improved by 860 basis points and operating expenses declined 10.2% in the first six months of 2000 as compared to the first six months of 1999. International sales of the Reebok Brand (including footwear and apparel) were $585.0 million in the first six months of 2000, an increase of .4% from $582.8 million in the first six months of 1999. On a constant dollar basis, International sales increased approximately 8.9% in the first six months of 2000 as compared to the first six months of 1999. International comparisons were also adversely impacted by the changes to the Company's international distribution network. Effective January 1, 2000, the Company's Switzerland and Russia subsidiaries were sold and became independent distributors. European sales decreased $30.4 million or 6.7%. However, removing the adverse impact of currency and the effect of the sale of Russia and Switzerland, net sales in Europe increased approximately 5.6% as compared to the first six months of 1999. The Asia Pacific region reported a sales increase of 17.8% in the six months ended June 2000. In Latin America, the Company's sales to its independent distributors increased approximately 44% as these distributors increased their purchases to meet local consumer demand. International categories that generated sales increases in the first six months of 2000 were basketball, running, tennis, and women's fitness. International footwear sales increased approximately 6.5%, whereas international apparel sales decreased by approximately 4.8%. Rockport's sales for the first six months of 2000 were $197.8 million as compared to sales of $213.7 million in the first six months of 1999. Domestic sales for the Rockport brand decreased by 10.8% and International sales were flat. Domestically, sales decreased in most categories. In the second half of 2000, the Company plans to substantially increase the quantity of new product introductions. The Company's new World Tour shoe collection, which debuted at retail in July, will be the largest product launch in the history of The Rockport Company. The launch is supported by a fully integrated marketing program, including print and radio advertising. Initial sell-through results for this collection have been encouraging. International revenues accounted for 25.6% of Rockport's sales in the second quarter of 2000 as compared to 23.6% in first six months of 1999. Sales of the Company's Polo Ralph Lauren Footwear products were $56.0 million in the first six months of 2000, an increase of 16.9% from 17 18 $47.9 million in the first six months of 1999. This division continues to expand its product offerings to reach an even broader consumer with the introduction in the second half of this year of a children's and a jeans line of footwear. During the first six months of 2000, the Company's overall gross margin was 38.0% of sales, this compares to 37.9% for 1999's first six months. During the first six months of 2000, the Company continued to improve the Reebok Brand margins due to improved inventory management, reduced cancellations and fewer closeout sales. Some of this improvement was offset by margin erosion in Europe caused by the weakening of the Euro against the U.S. dollar. Selling, general and administrative expenses for the first six months of 2000 were $469.3 million, or 32.3% of sales, as compared to $495.6 million, or 33.4% of sales in 1999's first six months. The Company has benefited from programs initiated in the prior year to reduce total general and administrative spending however, the Company recognizes the need to lower general and administrative expenses as a percentage of sales. The Company plans to continue to work to reduce non-brand building expenses and to find additional operating efficiencies within the organization in order to accomplish this. In addition, if revenues increase, the Company could generate operating leverage from such sales improvement. Net interest expense was $12.9 million for the first six months of 2000, a decrease of $10.5 million as compared to the first six months of 1999. The decrease was a result of improved cash flow and debt repayments. Other income is the net effect of foreign exchange losses offset by the gain on sale of certain non-operating assets. The effective income tax rate was 37.7% in the first six months of 2000 as compared to 36.0% in the first six months of 1999. However, the rate could fluctuate from quarter to quarter depending on where the Company earns income geographically, and, if the Company incurs non-benefitable losses in certain jurisdictions, the rate could increase further. REEBOK BRAND BACKLOG OF OPEN ORDERS The Reebok Brand backlog (including Greg Norman Collection apparel) of open customer orders scheduled for delivery during the period July 1, 2000 through December 31, 2000 declined 1.5% as compared to the same period last year. North American backlog for the Reebok Brand, which includes the U.S. and Canada, increased 1.9%, and, the International backlog decreased 5.8%. On a constant dollar basis, worldwide Reebok Brand backlog increased .8%, and International backlog decreased .6%. U.S. footwear backlog increased 6.2%, which is the fourth consecutive quarter of improvement. U.S. apparel backlog (including Greg Norman Collection apparel) decreased 17.6% as compared to the same period 18 19 last year. While the apparel backlog was down, all of that decline is in the third quarter, with the fourth quarter being positive. These backlog comparisons are not necessarily indicative of future sales trends. Many orders are cancelable, sales by Company-owned retail stores can vary from year to year, many markets in Latin America and Asia Pacific are not included in the open orders since sales are made by independent distributors and the ratio of orders booked early to at-once shipments can vary from period to period. LIQUIDITY AND SOURCES OF CAPITAL At June 30, 2000 the Company's working capital was $628.0 million as compared with $652.8 million at June 30, 1999. The current ratio at June 30, 2000 was 2.1 to 1, as compared to 2.0 to 1 at December 31, 1999 and June 30, 1999. Outstanding bank indebtedness has been reduced by $210.5 million over the last twelve months whereas the Company's cash position as compared with a year ago has increased $62.5 million. Accounts receivable decreased by $16.3 million from June 30, 1999, a decrease of 3.2%. Inventory decreased by $96.5 million or 19.2% from June 30, 1999. This decrease is in line with the Company's plans. In the U.S., the Company's Reebok Brand footwear inventories were down 36.5%. U.S. Reebok Brand apparel inventories were down 32.9% and retail inventories were up 2.6% from last year. Inventories of all brands outside the U.S. decreased 20.0%. Cash provided by operations during the first six months of 2000 was $55.0 million, as compared to $47.0 million the first six months of 1999. Cash provided by investing activities was $14.0 million as a result of the proceeds of $30.5 million from the sale of certain assets. Capital expenditures for the six months ended June 30, 2000 were $15.1 million, a decrease from 1999 due to higher investments in 1999 for the Company's European Logistics and Shared Service Companies, international retail expansion and other information systems initiatives. Cash generated from operations during the balance of 2000, together with the Company's existing credit lines and other financial resources, is expected to adequately finance the Company's current and planned 2000 cash requirements. However, the Company's actual experience may differ from the expectations set forth in the preceding sentence. Factors that might lead to a difference include, but are not limited to, the matters discussed above and under the caption entitled Issues and Uncertainties included in the Company's Annual Report of Form 10-K as well as future events that might have the effect of reducing the Company's available cash balances (such as unexpected operating losses or increased capital or other expenditures, as well as increases in the Company's inventory or accounts receivable) or future events that might reduce or eliminate the availability of external financial resources. 19 20 PART II - OTHER INFORMATION ITEM 1 Not Applicable ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS The Company hereby incorporates by reference its Current Report on Form 8-K it filed with the Commission June 6, 2000. ITEM 3 Not Applicable ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Shareholders on May 2, 2000. At the Annual Meeting: 1. Two Class I members of the Board of Directors were elected by shareholders with no abstentions or broker non-votes. Name of Director Votes For Votes Against ---------------- --------- ------------- Mannie L. Jackson 41,379,587 3,702,824 Geofrey Nunes 41,378,682 3,703,729 The terms of office for Paul R. Duncan, William F. Glavin, Richard G. Lesser, Paul B. Fireman, and Thomas M. Ryan as Directors of the Company continued after the Annual Meeting. 2. A shareholder proposal requesting that the Board of Directors take action to declassify the Board was passed by a vote of 18,595,768 For and 17,937,427 Against, with 276,129 Abstentions and 8,273,087 broker non-votes. 3. A shareholder proposal requesting that the Board of Directors NOT adopt a shareholder rights agreement unless the Board has first obtained an affirmative vote of the shareholders was passed by a vote of 19,413,664 For and 17,083,040 Against, with 312,619 Abstentions and 8,273,088 broker non-votes. 20 21 ITEM 5 Not Applicable ITEM 6 (a) EXHIBITS 10.44. Agreement between Reebok International Ltd. and Paul B. Fireman dated May 2, 2000 10.45. Stock Option Agreement between Reebok International Ltd. and Paul B. Fireman dated May 9,2000. 10.46. Promissory Note dated May 9, 2000 made in favor of Reebok International Ltd. by Paul Fireman 10.47. Stock Option Agreement between Reebok International Ltd. and Paul B. Fireman dated May 24, 2000. 10.48. Promissory Note dated May 24, 2000 made in favor of Reebok International Ltd. by Paul Fireman. 27. Financial Data Schedule (b) CURRENT REPORT ON FORM 8-K The Company filed a Current Report on Form 8-K with the Commission on June 6, 2000. Under Item 5 of the Report, the Company reported that it had adopted Amendment #5 to the Company's Common Stock Rights Agreement, which (a) extends the term thereof by 10 years to June 14, 2010; (b) increases from 10% to 15% the amount of outstanding shares of the Company's common stock that any person or group of persons may acquire by purchase, tender, or exchange before triggering the rights; and (c) establishes a Three-Year Independent Director Evaluation (TIDE) who will review the Agreement at least once every three years to assess whether it continues to be in the best interest of the Company or its stockholders. 21 22 SIGNATURE Pursuant to the requirements 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. Dated: August 14, 2000 REEBOK INTERNATIONAL LTD. BY: /s/ KENNETH WATCHMAKER ------------------------- Kenneth Watchmaker Executive Vice President and Chief Financial Officer 22 23 EXHIBIT INDEX 10.44. Agreement between Reebok International Ltd. and Paul B. Fireman dated May 2, 2000 10.45. Stock Option Agreement between Reebok International Ltd. and Paul B. Fireman dated May 9,2000. 10.46. Promissory Note dated May 9, 2000 made in favor of Reebok International Ltd. by Paul Fireman 10.47. Stock Option Agreement between Reebok International Ltd. and Paul B. Fireman dated May 24, 2000. 10.48. Promissory Note dated May 24, 2000 made in favor of Reebok International Ltd. by Paul Fireman. 27. Financial Data Schedule