UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 3, 1998 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-05083 HYDE ATHLETIC INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-1465840 (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) Centennial Industrial Park, 13 Centennial Drive, Peabody, MA 01960 (Address of principal executive offices) 978-532-9000 (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 [ ] Class Outstanding as of May 11, 1998 Class A Common Stock-$.33 1/3 Par Value 2,703,227 Class B Common Stock-$.33 1/3 Par Value 3,548,087 --------- 6,251,314 ========= HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of April 3, 1998 and January 2, 1998 3 Condensed Consolidated Statements of Income for the thirteen weeks ended April 3, 1998 and April 4, 1997 4 Condensed Consolidated Statements of Stockholders' Equity for the thirteen weeks ended April 3, 1998 and April 4, 1997 5 Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended April 3, 1998 and April 4, 1997 6-7 Notes to Condensed Consolidated Financial Statements -- April 3, 1998 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signature 14 PART I. FINANCIAL INFORMATION HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (Amounts in thousands) ASSETS April 3, January 2, 1998 1998 ---- ---- Current assets: Cash and cash equivalents $ 2,118 $ 4,432 Marketable securities 173 148 Accounts receivable 27,605 18,730 Inventories 23,126 23,471 Prepaid expenses and other current assets 4,361 3,514 ---------- ---------- Total current assets 57,383 50,295 ---------- ---------- Property, plant and equipment, net 8,114 8,135 ---------- ---------- Other assets 3,257 3,194 ---------- ---------- Total assets $ 68,754 $ 61,624 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 8,735 $ 2,885 Current maturities of long-term debt 2,320 3,639 Accounts payable 3,589 3,881 Accrued expenses and other current liabilities 4,909 2,910 ---------- ---------- Total current liabilities 19,553 13,315 ---------- ---------- Long-term obligations: Long-term debt 688 771 Deferred income taxes 1,919 1,921 Other long-term obligations 147 144 ---------- ---------- Total long-term obligations 2,754 2,836 ---------- ---------- Minority interest in consolidated subsidiaries 219 195 ---------- ---------- Stockholders' equity: Common stock, $.33 1/3 par value 2,150 2,150 Additional paid in capital 15,652 15,652 Retained earnings 29,961 28,987 Accumulated translation (449) (417) ----------- ----------- Total 47,314 46,372 Less: Common stock held in treasury, at cost (1,054) (1,054) Unearned compensation (32) (40) ----------- ----------- 46,228 45,278 ---------- ---------- Total liabilities and stockholders' equity $ 68,754 $ 61,624 ========== ========== See notes to condensed consolidated financial statements HYDE ATHLETIC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THIRTEEN WEEKS ENDED APRIL 3, 1998 AND APRIL 4, 1997 (Unaudited) (Amounts in thousands, except per share data) 13 Weeks 13 Weeks Ended Ended April 3, 1998 April 4, 1997 ------------- ------------ Net sales $ 29,624 $ 25,217 Other income (expense) 76 (151) ---------- ----------- Total revenue 29,700 25,066 ---------- ---------- Costs and expenses Cost of sales 19,651 16,632 Selling expenses 4,423 3,964 General and administrative expenses 3,510 3,234 Interest expense 221 249 ---------- ---------- Total costs and expenses 27,805 24,079 ---------- ---------- Income from continuing operations before income taxes and minority interest 1,895 987 Provision for income taxes 898 382 Minority interest in income of consolidated subsidiaries 23 35 ---------- ---------- Income from continuing operations 974 570 Discontinued operations: Loss from discontinued operations (net of tax benefit of $190) 0 (287) ---------- ----------- Net income $ 974 $ 283 ========== ========== Per share amounts: Earnings per common share - basic: Net income from continuing operations $ 0.16 $ 0.10 Loss from discontinued operations 0.00 (0.05) ---------- ------------ Net income per common share - basic $ 0.16 $ 0.05 ========== =========== Earnings per common share - diluted: Net income from continuing operations $ 0.16 $ 0.10 Loss from discontinued operations 0.00 (0.05) ---------- ------------ Net income per common share - diluted $ 0.16 $ 0.05 ========== =========== Weighted average common shares and equivalents outstanding 6,293 6,270 ========== ========== Cash dividends per share of common stock 0 0 ========== ========== See notes to condensed consolidated financial statements HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THIRTEEN WEEKS ENDED APRIL 3, 1998 AND APRIL 4, 1997 (Amounts in thousands, except share data) Common Stock Paid-in Retained Class A Class B Capital Earnings ------ ------ ------ -------- Balance, January 3, 1997 $ 902 $ 1,243 $ 15,581 $ 33,705 Amortization of unearned compensation -- -- -- -- Net income -- -- -- 283 Foreign currency translation adjustments -- -- -- -- -------- -------- --------- --------- Balance, April 4, 1997 $ 902 $ 1,243 $ 15,581 $ 33,988 ======== ======== ========= ========= Balance, January 2, 1998 $ 902 $ 1,248 $ 15,652 $ 28,987 Amortization of unearned compensation -- -- -- -- Net income -- -- -- 974 Foreign currency translation adjustments -- -- -- -- -------- -------- --------- --------- Balance, April 3, 1998 $ 902 $ 1,248 $ 15,652 $ 29,961 ======== ======== ========= ========= Total Treasury Stock Unearned Accumulated Stockholders' Shares Amount Compensation Translation Equity ------ ------ ------------ ---------- ------ Balance, January 3, 1997 198,400 $(1,054) $ (65) $ (233) $ 50,079 Amortization of unearned compensation -- -- 10 -- 10 Net income -- -- -- -- 283 Foreign currency translation adjustments -- -- -- (23) (23) -------- ------- ------- -------- --------- Balance, April 4, 1997 198,400 $(1,054) $ (55) $ (256) $ 50,349 ======== ======== ======== ======== ======== Balance, January 2, 1998 198,400 $(1,054) $ (40) $ (417) $ 45,278 Amortization of unearned compensation -- -- 8 -- 8 Net income -- -- -- -- 974 Foreign currency translation adjustments -- -- -- (32) (32) -------- ------- ------- -------- --------- Balance, April 3, 1998 198,400 $(1,054) $ (32) $ (449) $ 46,228 ======== ======== ======== ======== ======== See notes to condensed consolidated financial statements HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTEEN WEEKS ENDED APRIL 3, 1998 AND APRIL 4, 1997 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (in thousands) (Unaudited) April 3, April 4, 1998 1997 ---- ---- Cash flows from operating activities: Net income $ 974 $ 283 --------- --------- Adjustments to reconcile net income to net cash Provided (used) by operating activities: Loss from discontinued operations 0 287 Depreciation and amortization 413 364 Deferred income tax benefit (490) (272) Provision for bad debts and discounts 1,814 1,624 Other 104 95 Changes in operating assets and liabilities, net effects of acquisitions, dispositions and foreign currency adjustments: Decrease (increase) in assets: Marketable securities (25) 0 Accounts receivable (10,565) (9,057) Inventories 604 1,067 Prepaid expenses and other current assets (351) (293) Increase (decrease) in liabilities: Accounts payable (345) 513 Accrued expenses 2,047 (39) --------- ---------- Total adjustments (6,794) (5,711) ---------- ---------- Net cash used by continuing operations (5,820) (5,428) Net cash provided by discontinued operations 0 1,340 --------- --------- Net cash used by operating activities (5,820) (4,088) ---------- ---------- Cash flows from investing activities: Purchase of property, plan and equipment (179) (213) Increase in deferred charges, deposits and other (120) (260) Payments for business acquisitions (624) 0 ---------- --------- Net cash used by investing activities (923) (473) ---------- --------- Cash flows from financing activities: Net short-term borrowings 4,572 3,885 Repayment of long-term debt and capital lease obligations (100) (152) ---------- ---------- Net cash provided by financing activities 4,472 3,733 Effect of exchange rate changes on cash and cash equivalents (43) 267 ---------- --------- Net decrease in cash and cash equivalents (2,314) (561) Cash and equivalents at beginning of period 4,432 2,803 --------- --------- Cash and equivalents at end of period $ 2,118 $ 2,242 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes, net of refunds $ 106 $ 30 ========= ========= Interest $ 129 $ 172 ========= ========= Non-cash investing and financing activities: Property purchased under capital leases $ 0 $ 30 ========= ========= See notes to condensed consolidated financial statements HYDE ATHLETIC INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 3, 1998 (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation have been included. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes, thereto, included in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, for the year ended January 2, 1998. Operating results for thirteen weeks ended April 3, 1998, are not necessarily indicative of the results for the entire year. NOTE B - RECLASSIFICATION On July 4, 1997, Brookfield Athletic Co., Inc. ("Brookfield"), a wholly-owned subsidiary of the Company, sold substantially all of the assets used in the Brookfield business. The results of operations for Brookfield for the thirteen weeks ended April 4, 1997 have been segregated from continuing operations and are reported separately as discontinued operations. NOTE C - INVENTORIES Inventories at April 3, 1998 and January 2, 1998 consisted of the following (in thousands): April 3, January 2, 1998 1998 ---- ---- Finished goods $17,877 $17,534 Work in progress 679 514 Raw materials 4,570 5,423 ------- ------- $23,126 $23,471 ======= ======= NOTE D - EARNINGS PER SHARE (Unaudited) (in thousands, per share amounts in dollars) Thirteen Weeks Ended Thirteen Weeks Ended April 3, 1998 April 4, 1997 -------------------------- -------------------------- Earnings Earnings Earnings Earnings per per per per Common Common Common Common Share - Share - Share - Share - Basic Diluted Basic Diluted ---- ------ ---- ------- Income from continuing operations $ 974 $ 974 $ 570 $ 570 Loss from discontinued operations 0 0 (287) (287) ----------- ----------- ------------ ----------- Net income available for common shares and assumed conversions $ 974 $ 974 $ 283 $ 283 =========== =========== =========== ========== Weighted average common shares outstanding 6,251 6,251 6,237 6,237 Effect of dilutive securities: Employee stock options 0 42 0 33 ----------- ----------- ----------- ---------- Weighted average common shares and equivalents outstanding 6,251 6,293 6,237 6,270 =========== =========== =========== ========== Earnings per share: Income from continuing operations $ 0.16 $ 0.16 $ 0.10 $ 0.10 Loss from discontinued operations 0.00 0.00 (0.05) (0.05) ---------- ---------- ------------ ----------- Net income $ 0.16 $ 0.16 $ 0.05 $ 0.05 ========== ========== ========== ========== NOTE E - STATEMENT OF COMPREHENSIVE INCOME (in thousands) 13 Weeks 13 Weeks Ended Ended April 3, 1998 April 4, 1997 ------------- ------------ Net income $ 974 $ 283 Other comprehensive income: Foreign currency translation adjustments (32) (23) Income tax benefit related to other comprehensive income (12) (7) ------- ------ Other comprehensive income, net of tax (20) (16) ------- ------ Comprehensive income $ 954 $ 267 ====== ===== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth net sales (in thousands) and percentages of net sales of the Company's product lines in the thirteen weeks ended April 3, 1998 and April 4, 1997: 1998 1997 ------------------ ------------------ Saucony $ 25,851 87.3% $ 21,266 84.3% Other 3,773 12.7% 3,951 15.7% -------- ------- -------- ------- Total $ 29,624 100.0% $ 25,217 100.0% ======== ======= ======== ======= Thirteen Weeks Ended April 3, 1998 Compared to Thirteen Weeks Ended April 4, 1997 The Company's net income increased 244% to $974,000, or $0.16 per diluted share, in the thirteen weeks ended April 3, 1998 as compared to $283,000, or $0.05 per diluted share, in the thirteen weeks ended April 4, 1997. Income from continuing operations increased 71% to $974,000, or $0.16 per diluted share, in the thirteen weeks ended April 3, 1998, as compared to $570,000, or $0.10 per diluted share, in the thirteen weeks ended April 4, 1997. The Company had a loss from discontinued operations of $287,000, or $0.05 per diluted share, in the thirteen weeks ended April 4, 1997. The Company's net sales increased 18% to $29,624,000 in the thirteen weeks ended April 3, 1998 from $25,217,000 in the thirteen weeks ended April 4, 1997. Net sales of the Company's Saucony products increased 22% to $25,851,000 in the thirteen weeks ended April 3, 1998 from $21,266,000 in the thirteen weeks ended April 4, 1997, due primarily to increased footwear unit volume. Saucony domestic net sales increased 27% to $18,988,000 in the thirteen weeks ended April 3, 1998 from $14,915,000 in the thirteen weeks ended April 4, 1997, due primarily to increased footwear unit shipment volume and, to a lesser extent, higher selling prices of the Company's recently introduced products. Saucony foreign net sales increased 8% to $6,863,000 in the thirteen weeks ended April 3, 1998 from $6,351,000 in the thirteen weeks ended April 4, 1997, primarily due to increased footwear unit volume and, to a lesser extent, increased apparel sales. Net sales of other products decreased 5% to $3,773,000 in the thirteen weeks ended April 3, 1998 from $3,951,000 in the thirteen weeks ended April 4, 1997. Domestic net sales of other products increased 86% to $2,785,000 in the thirteen weeks ended April 3, 1998 from $1,500,000 in the thirteen weeks ended April 4, 1997, due to increased sales of Quintana Roo products and the introduction of Hind and Merlin products, which were not offered by the Company in the thirteen weeks ended April 4, 1997. Foreign net sales of other products decreased 60% to $988,000 in the thirteen weeks ended April 3, 1998 from $2,451,000 in the thirteen weeks ended April 4, 1997, due to decreased sales of non-corporate brands by the Company's Australian subsidiary. Other income (expense) increased to $76,000 in the thirteen weeks ended April 3, 1998 from ($151,000) in the thirteen weeks ended April 4, 1997 due to decreased foreign currency transaction losses on U.S. dollar-denominated obligations held by certain of the Company's foreign subsidiaries. The Company's gross profit increased 16% to $9,973,000 in the thirteen weeks ended April 3, 1998 from $8,585,000 in the thirteen weeks ended April 4, 1997. The Company's gross margin decreased to 33.7% in the thirteen weeks ended April 3, 1998 from 34.0% in the thirteen weeks ended April 4, 1997 due to lower margins for Saucony products. The gross margin decrease for Saucony products in the thirteen weeks ended April 3, 1998 resulted from increased domestic sales of lower-margin special make-up footwear, increased foreign sales of non-current models and the continued negative impact of the comparatively stronger U.S. dollar. Selling, general and administrative expenses increased to $7,933,000, or 26.8% of net sales, in the thirteen weeks ended April 3, 1998 from $7,198,000, or 28.5% of net sales, in the thirteen weeks ended April 4, 1997. Advertising and promotion expenses decreased $95,000 in the thirteen weeks ended April 3, 1998 due to reduced promotional spending by the Company's foreign subsidiaries. Selling expenses increased $554,000 in the thirteen weeks ended April 3, 1998 due to increased selling commissions, increased domestic and foreign sales staffs and increased payroll costs and selling and marketing expenses related to the introduction of Hind apparel. General and administrative expenses increased $276,000 in the thirteen weeks ended April 3, 1998 due to increased domestic payroll costs and increased administrative costs attributable to the introduction of Hind apparel and continued expansion of Quintana Roo's infrastructure. Interest expense decreased 11% to $221,000 in the thirteen weeks ended April 3, 1998, from $249,000 in the thirteen weeks ended April 4, 1997 due to the paydown of the Company's senior notes. The provision for income taxes increased to $898,000 in the thirteen weeks ended April 3, 1998 from $382,000 in the thirteen weeks ended April 4, 1997, due primarily to increased pre-tax income from continuing operations. The effective income tax rate increased 23% to 47.4% in the thirteen weeks ended April 3, 1998 from 38.7% in the thirteen weeks ended April 4, 1998, due primarily to a deferred tax valuation allowance recorded in the thirteen weeks ended April 3, 1998, and to a lesser extent, relative effect of fixed tax credits on higher level of pre-tax income in the thirteen weeks ended April 3, 1998. This deferred tax valuation allowance relates to foreign net operating losses that are not expected to be realized. Liquidity and Capital Resources - ------------------------------- As of April 3, 1998, the Company's cash and cash equivalents totaled $2,118,000, a decrease of $2,314,000 from January 2, 1998. The decrease was the result of increase in accounts receivable of $8,751,000, net of the provision for bad debt and discounts of $1,814,000, offset somewhat by an increase in accrued liabilities of $2,047,000 and an increase in short-term borrowings of $4,572,000. The increase in accounts receivable is due to increased net sales of the Company's Saucony and Hind products in the thirteen weeks ended April 3, 1998. The Company's days sales outstanding for its accounts receivable decreased to 85 days in the thirteen weeks ended April 3, 1998 from 92 days in the thirteen weeks ended April 4, 1997. Inventories decreased in the thirteen weeks ended April 3, 1998 due to lower raw material requirements. The Company's inventory turns ratio increased to 3.4 turns in the thirteen weeks ended April 3, 1998 from 2.8 turns in the thirteen weeks ended April 4, 1997 due to improved domestic inventory management. For the thirteen weeks ended April 3, 1998, the Company used $5,820,000 of net cash in operating activities, expended $179,000 to acquire capital assets, expended $624,000 to acquire the assets of Merlin Metalworks, Inc., expended $100,000 to reduce long-term debt and increased short-term borrowings by $4,572,000 to finance working capital requirements. Principal factors (other than net income, accounts receivable, provision for bad debts and discounts and inventory) affecting the operating cash flows for the thirteen weeks ended April 3, 1998, included an increase of $351,000 in prepaid expenses (due to advance payments for certain selling and administrative expenses), a decrease of $345,000 in accounts payable (due to the timing of inventory purchases) and an increase in accrued expenses of $2,047,000 (due to increased administrative costs and increased income tax accruals resulting from higher pre-tax earnings). The weakening of the U.S. dollar decreased the value of cash and cash equivalents by $43,000. The liquidity of the Company is contingent upon a number of factors, principally the Company's future operating results. Management believes that the Company's current cash and cash equivalents, credit facilities and internally generated funds are adequate to meet its working capital requirements and to fund its capital investment needs and debt service payments. Inflation and Currency Risk - --------------------------- The effect of inflation on the Company's results of operations over the past three years has been minimal. The impact of currency fluctuation on the purchase of inventory by the Company from foreign suppliers has been minimal as the transactions were denominated in U.S. dollars. The Company, however, is subject to currency fluctuation risk with respect to the operating results of the Company's foreign subsidiaries and certain foreign currency denominated payables. The Company has entered into certain forward foreign exchange contracts to minimize the transaction currency risk. Year 2000 - --------- The Company has evaluated and documented the effect of the turn-of-the-century on its computer hardware, operating systems and software applications. A plan is in place to correct year 2000 problems in the Company's long-term, technical assets. This plan is substantially funded by existing maintenance contracts and by normal, recurring upgrades to the computer systems. Correcting year 2000 problems in the Company's long-term technical assets will not have a material impact on the Company's consolidated financial position. The Company has also considered the impact of the year 2000 issue on its customers and suppliers. The footwear and apparel industry is less advanced, in terms of automation, than many other industries. Customers have shared their awareness of the year 2000 issue with the Company, but have not provided management with formal year 2000 compliance reports. The Company's suppliers of raw materials and components are less technically sophisticated than the Company's customers, often relying on personal computers and manual systems for their own business needs. However, the apparel and footwear industry is characterized by numerous companies competing in an open market. No customer makes up 10% of sales volume. Purchase contracts and sources of supply can be negotiated and geographically moved within a six-month period. For these reasons, management does not expect a major disruption in supply of inventory or a major decline in customer purchases as the year 2000 approaches. SFAS 131 - -------- The Financial Accounting Standards Board issued Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131) in June 1997. SFAS 131 establishes the reporting standards for operating segments in annual financial statements and requires selected information on operating segments in interim financial statements. SFAS 131 revises the disclosure requirements for segment reporting by defining the characteristics and quantitative thresholds for which segment information is required to be disclosed. SFAS 131 is effective for fiscal years commencing after December 15, 1997, application of which is not required to interim periods during the initial year of adoption. The Company expects to incorporate the added disclosure requirements of SFAS 131 into its Form 10-K filing for the fiscal year ending January 1, 1999. PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K a. Exhibits 10.1 - Letter Agreement dated February 20, 1998, between Registrant and State Street Bank and Trust Company. 10.2 - Letter Agreement dated April 2, 1998, among Registrant, State Street Bank and Trust Company and CoreState Bank, N.A. 27.0 - Financial Data Schedule 99.1 - Certain Factors That May Affect Future Results, set out on pages 25-27 of the Company's Annual Report on Form 10-K for the period ended January 2, 1998. Such Form 10-K shall not be deemed to be filed except to the extent that portions thereof are expressly incorporated by reference herein. b. Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Hyde Athletic Industries, Inc. Date: May 15, 1998 By: /s/ Charles A. Gottesman ---------------------------- Charles A. Gottesman Executive Vice President Chief Operating Officer (Duly authorized officer and principal financial officer)