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 report ended October 2, 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
SAUCONY, 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 November 9, 1998
Class A Common Stock-$.33 1/3 Par Value 2,689,027
Class B Common Stock-$.33 1/3 Par Value 3,493,487
--------
6,182,514
==========
SAUCONY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 2, 1998
and January 2, 1998
Condensed Consolidated Statements of Income for the
thirteen weeks and thirty-nine weeks ended October 2, 1998
and October 3, 1997, respectively
Condensed Consolidated Statements of Stockholders' Equity for
the thirty-nine weeks ended October 2, 1998 and October 3, 1997
Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended October 2, 1998 and October 3, 1997
Notes to Condensed Consolidated Financial Statements -
October 2, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signature
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(Unaudited)
(in thousands)
ASSETS
October 2 January 2,
1998 1998
------- --------
Current assets:
Cash and cash equivalents $ 2,701 $ 4,432
Marketable securities 137 148
Accounts receivable 22,561 18,730
Inventories 22,946 23,471
Prepaid expenses and other current assets 3,909 3,514
--------- ---------
Total current assets 52,254 50,295
--------- ---------
Property, plant and equipment, net 7,950 8,135
--------- ---------
Other assets 3,012 3,194
--------- ---------
Total assets $ 63,216 $ 61,624
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,575 $ 2,885
Current maturities of long term debt 306 3,639
Accounts payable 3,224 3,881
Accrued expenses and other current liabilities 6,256 2,910
--------- ---------
Total current assets 13,361 13,315
--------- ---------
Long-term obligations:
Long-term debt 559 771
Deferred income taxes 1,918 1,921
Other long-term obligations 153 144
--------- ---------
Total long-term obligations 2,630 2,836
--------- ---------
Minority interest in consolidated subsidiaries 208 195
--------- ---------
Stockholders' equity:
Common stock, $.33 1/3 par value 2,158 2,150
Additional paid in capital 15,729 15,652
Retained earnings 31,434 28,987
Accumulated translation (696) (417)
---------- ----------
Total 48,625 46,372
Less: Common stock held in treasury, at cost (1,591) (1,054)
Unearned compensation (17) (40)
---------- ----------
47,017 45,278
---------- ---------
Total liabilities and stockholders' equity $ 63,216 $ 61,624
========= =========
See notes to condensed consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the Thirteen Weeks and Thirty-Nine Weeks Ended October 2, 1998 and October 3, 1997
(Unaudited)
(in thousands, except per share data)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 2, October 3, October 2, October 3,
1998 1997 1998 1997
------- ------- ------- -------
Net sales $ 26,056 $ 24,635 $ 82,242 $ 74,251
Other income 362 314 568 263
-------- -------- --------- ---------
Total revenue 26,418 24,949 82,810 74,514
-------- -------- --------- ---------
Costs and expenses
Cost of sales 16,806 16,214 52,937 48,694
Selling expenses 4,331 4,076 13,533 12,605
General and administrative expenses 3,819 3,449 11,399 10,141
Writedown of assets 0 0 0 850
Interest expense 160 165 576 665
-------- -------- --------- ---------
Total costs and expenses 25,116 23,904 78,445 72,955
-------- -------- --------- ---------
Income from continuing operations before
income taxes and minority interest 1,302 1,045 4,365 1,559
Provision for income taxes 497 418 1,889 629
Minority interest in income (loss) of consolidated subsidiaries 5 46 29 (101)
-------- -------- --------- ----------
Income from continuing operations 800 581 2,447 1,031
Discontinued operations:
Loss from discontinued operations (net of tax benefit $262) 0 0 0 (394)
Loss on disposal of Brookfield Athletic Co., Inc. including
operating loss of $94 during the phase out period (net
of tax benefit of $128 and $281, respectively) 0 (172) 0 (413)
-------- --------- --------- ----------
Net income $ 800 $ 409 $ 2,447 $ 224
======== ======== ========= =========
Per share amounts:
Earnings per common share - basic:
Net income from continuing operations $ 0.13 $ 0.09 $ 0.38 $ 0.17
Loss from discontinued operations 0.00 (0.02) 0.00 (0.13)
--------- --------- --------- --------
Net income per common share - basic $ 0.13 $ 0.07 $ 0.38 $ 0.04
========= ======== ========= =======
Earnings per common share - diluted:
Net income from continuing operations $ 0.13 $ 0.09 $ 0.38 $ 0.17
Loss from discontinued operations 0.00 (0.02) 0.00 (0.13)
--------- --------- --------- --------
Net income per common share - diluted $ 0.13 $ 0.07 $ 0.38 $ 0.04
========= ======== ========= ========
Weighted average common shares and equivalents outstanding 6,363 6,264 6,374 6,269
======== ======== ========= =========
Cash dividends per share of common stock 0 0 0 0
======== ======== ========= =========
See condensed consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
For the Thirty-Nine Weeks Ended October 2, 1998 and October 3, 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
Issuance of below market options 0 0 8 0
Amortization of unearned compensation 0 0 0 0
Net income 0 0 0 224
Foreign currency translation adjustments 0 0 0 0
-------- -------- --------- ---------
Balance, October 3, 1997 $ 902 $ 1,243 $ 15,589 $ 33,929
======== ======== ========= =========
Balance, January 2, 1998 $ 902 $ 1,248 $ 15,652 $ 28,987
Issuance of 25,500 shares of common
stock, stock option exercise 0 8 77 0
Amortization of unearned compensation 0 0 0 0
Acquisition of 95,400 shares of common stock, at cost 0 0 0 0
Net income 0 0 0 2,447
Foreign currency translation adjustments 0 0 0 0
-------- -------- --------- ---------
Balance, October 2, 1998 $ 902 $ 1,256 $ 15,729 $ 31,434
======== ======== ========= =========
Total
Treasury Stock Unearned Accumulated Stockholders'
Shares Amount Compensation Translation Equity
------- ------- ------------ ----------- ----------
Balance, January 3, 1997 198,400 $ (1,054) $ (65) $ (233) $ 50,079
Issuance of below market options 0 0 0 0 8
Amortization of unearned compensation 0 0 31 0 31
Net income 0 0 0 0 224
Foreign currency translation adjustments 0 0 0 (30) (30)
--------- --------- ------ -------- ----------
Balance, October 3, 1997 198,400 $ (1,054) $ (34) $ (263) $ 50,312
========= ========== ======= ======== =========
Balance, January 2, 1998 198,400 $ (1,054) $ (40) $ (417) $ 45,278
Issuance of 25,500 shares of common
stock, stock option exercise 0 0 0 0 85
Amortization of unearned compensation 0 0 23 0 23
Acquisition of 95,400 shares of common
stock, at cost 95,400 (537) 0 0 (537)
Net income 0 0 0 0 2,447
Foreign currency translation adjustments 0 0 0 (279) (279)
--------- --------- ------ -------- ----------
Balance, October 2, 1998 293,800 $ (1,591) $ (17) $ (696) $ 47,017
========= ========== ======= ======== =========
See notes to condensed consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For The Thirty-Nine Weeks Ended October 2, 1998 And October 3, 1997
Increase (Decrease) In Cash And Cash Equivalents
(in thousands)
(Unaudited)
October 2, October 3,
1998 1997
------- -------
Cash flows from operating activities:
Net income $ 2,447 $ 224
---------- ----------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Loss from discontinued operations 0 807
Depreciation and amortization 1,295 1,159
Deferred income tax benefit (663) (1,067)
Provision for bad debts and discounts 3,821 3,965
Writedown of assets 0 850
Other 264 (65)
Changes in operating assets and liabilities, net of
effects of acquisitions, dispositions and foreign
currency adjustments:
Decrease (increase) in assets:
Marketable securities 11 97
Accounts receivable (7,604) (7,118)
Inventories 1,196 488
Prepaid expenses and other current assets 323 (471)
Increase (decrease) in liabilities:
Accounts payable (728) (582)
Accrued expenses 3,465 58
---------- ----------
Total adjustments 1,380 (1,879)
---------- ----------
Net cash provided (used) by continuing operations 3,827 (1,655)
Net cash provided by discontinued operations 0 2,307
---------- -----------
Net cash provided by operating activities 3,827 652
---------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (716) (647)
Increase in deferred charges, deposits and other (249) (380)
Proceeds from sale of equipment 61 3
Proceeds from sale of Brookfield Athletic Co., Inc. 0 6,000
Payments for business acquisitions, net of cash acquired (863) 0
----------- -----------
Net cash provided (used) by investing activities (1,767) 4,976
----------- ----------
Cash flows from financing activities:
Net short-term borrowings (565) (1,150)
Repayment of long term debt and capital lease obligations (2,268) (2,382)
Common stock repurchased (537) 0
Issuances of common stock, including options 85 0
----------- -----------
Net cash used by financing activities (3,285) (3,532)
Effect of exchange rate changes on cash and cash equivalents (506) 545
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,731) 2,641
Cash and equivalents at beginning of period 4,432 2,803
---------- -----------
Cash and equivalents at end of period $ 2,701 $ 5,444
========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds $ 246 $ 233
========== ==========
Interest $ 526 $ 631
========== ==========
Non-cash investing and financing activities:
Property purchased under capital leases $ 26 $ 66
========== ==========
See condensed consolidated financial statements
SAUCONY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 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 the thirty-nine weeks ended
October 2, 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 and thirty-nine weeks ended October 3, 1997 have been segregated from
continuing operations and are reported separately as discontinued operations.
NOTE C - INVENTORIES
Inventories at October 2, 1998 and January 2, 1998 consisted of the following:
October 2, January 2,
1998 1998
------ ------
Finished goods $18,110 $17,534
Work in progress 664 514
Raw materials 4,172 5,423
------- -------
$22,946 $23,471
======= =======
NOTE D - EARNINGS PER SHARE
(Unaudited)
(amounts in thousands, except per share amounts)
Thirteen Weeks Thirteen Weeks
ended October 2, 1998 ended October 3, 1997
--------------------- ---------------------
Earnings per Earnings per Earnings per Earnings per
Common Common Common Common
Share - Share - Share - Share -
Basic Diluted Basic Diluted
------- ------- ------- -------
Consolidated income
Income from continuing operations $ 800 $ 800 $ 581 $ 581
Loss from discontinued operations 0 0 (172) (172)
-------- --------- ---------- ---------
Net income available for common
shares and assumed conversions $ 800 $ 800 $ 409 $ 409
======== ========= ========= ========
Weighted average common shares
and equivalents outstanding 6,229 6,229 6,237 6,237
Effect of dilutive securities:
Employee stock options 0 134 0 27
-------- --------- --------- --------
6,229 6,363 6,237 6,264
-------- --------- --------- --------
Earnings per share:
Income from continuing operations $ 0.13 $ 0.13 $ 0.09 $ 0.09
Loss from discontinued operations 0.00 0.00 (0.02) (0.02)
------- -------- ---------- --------
Net income $ 0.13 $ 0.13 $ 0.07 $ 0.07
======= ======== ========= ========
Thirty-Nine Weeks Thirty-Nine Weeks
ended October 2, 1998 ended October 3, 1997
--------------------- ---------------------
Earnings per Earnings per Earnings per Earnings per
Common Common Common Common
Share - Share - Share - Share -
Basic Diluted Basic Diluted
------- ------- ------- --------
Consolidated income
Income from continuing operations $ 2,447 $ 2,447 $ 1,031 $ 1,031
Loss from discontinued operations 0 0 (807) (807)
-------- --------- ---------- ---------
Net income available for common
shares and assumed conversions $ 2,447 $ 2,447 $ 224 $ 224
======== ========= ========= ========
Weighted average common shares
and equivalents outstanding 6,235 6,235 6,237 6,237
Effect of dilutive securities:
Employee stock options 0 139 0 32
-------- --------- --------- --------
6,235 6,374 6,237 6,269
-------- --------- --------- --------
Earnings per share:
Income from continuing operations $ 0.39 $ 0.38 $ 0.17 $ 0.17
Loss from discontinued operations 0.00 0.00 (0.13) (0.13)
-------- -------- ---------- --------
Net income $ 0.39 $ 0.38 $ 0.04 $ 0.04
======= ======== ========= ========
NOTE E - STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands; except per share amounts)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 2, October 3, October 2, October 3,
1998 1997 1998 1997
------- -------- -------- --------
Net income $ 800 $ 409 $ 2,447 $ 224
Other comprehensive loss:
Foreign currency translation adjustments (63) (7) (279) (30)
Income tax benefit related to other
comprehensive loss (38) (2) (124) (4)
--------- ---------- ---------- ---------
Other comprehensive loss, net of tax (25) (5) (155) (26)
--------- ---------- ---------- ---------
Comprehensive income $ 775 $ 404 $ 2,292 $ 198
======== ========= ========= ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth net sales and the percentages of net sales of the
Company's Saucony and other product lines in the thirteen weeks and thirty-nine
weeks ended October 2, 1998 and October 3, 1997, respectively (in thousands):
Thirteen Weeks Ended October 2, 1998 and October 3, 1997
--------------------------------------------------------
1998 1997
--------------- --------------
$ % $ %
------- ----- ------ -----
Saucony $20,976 80.5% $20,709 84.1%
Other 5,080 19.5% 3,926 15.9%
------ ------ ------ ------
Total $26,056 100.0% $24,635 100.0%
======= ====== ======= ======
Thirty-Nine Weeks Ended October 2, 1998 and October 3, 1997
-----------------------------------------------------------
1998 1997
------------- ------------
$ % $ %
------ ---- ------ ----
Saucony $ 68,451 83.2% $ 63,115 85.0%
Other 13,791 16.8% 11,136 15.0%
-------- ------- --------- -----
Total $ 82,242 100.0% $ 74,251 100.0%
========= ====== ======== ======
Thirteen Weeks Ended October 2, 1998 Compared to Thirteen Weeks Ended October 3,
1997
The Company's net income increased to $800,000, or $0.13 per diluted share, in
the thirteen weeks ended October 2, 1998 as compared to net income of $409,000,
or $0.07 per diluted share, in the thirteen weeks ended October 3, 1997. Income
from continuing operations increased to $800,000, or $0.13 per diluted share, in
the thirteen weeks ended October 2, 1998, as compared to income from continuing
operations of $581,000, or $0.09 per diluted share, in the thirteen weeks ended
October 3, 1997. The Company had a loss from discontinued operations of
$172,000, or $0.02 per diluted share, in the thirteen weeks ended October 3,
1997.
The Company's net sales increased 6% to $26,056,000 in the thirteen weeks ended
October 2, 1998 from $24,635,000 in the thirteen weeks ended October 3, 1997.
Net sales of the Company's Saucony products increased 1% to $20,976,000 in the
thirteen weeks ended October 2, 1998 from $20,709,000 in the thirteen weeks
ended October 3, 1997, due primarily to increased footwear unit volume. Saucony
domestic net sales increased 16% to $16,523,000 in the thirteen weeks ended
October 2, 1998 from $14,221,000 in the thirteen weeks ended October 3, 1997,
due primarily to strong sales of the Company's Jazz Original shoes. Saucony
foreign net sales decreased 31% to $4,453,000 in the thirteen weeks ended
October 2, 1998 from $6,488,000 in the thirteen weeks ended October 3, 1997,
primarily due to decreased footwear unit volume caused by the termination of the
Company's Australian operations, reduced sales by the Company's foreign
distributors and, to a lesser extent, unfavorable currency exchange.
Net sales of other products increased 29% to $5,080,000 in the thirteen weeks
ended October 2, 1998 from $3,926,000 in the thirteen weeks ended October 3,
1997. Domestic net sales of other products increased 47% to $4,424,000 in the
thirteen weeks ended October 2, 1998 from $3,016,000 in the thirteen weeks ended
October 3, 1997, due to increased sales of Quintana Roo products and Hind
apparel products and the introduction of Merlin bicycle products, which were not
offered by the Company in the thirteen weeks ended October 3, 1997. Foreign net
sales of other products decreased 28% to $656,000 in the thirteen weeks ended
October 2, 1998 from $910,000 in the thirteen weeks ended October 3, 1997, due
to decreased sales of non-corporate brands caused by the termination of the
Company's Australian operations.
Other income increased 15% to $362,000 in the thirteen weeks ended October 2,
1998 from $314,000 in the thirteen weeks ended October 3, 1997 due to foreign
currency transaction gains on U.S. dollar-denominated obligations held by
certain of the Company's foreign subsidiaries, offset in part by decreased
royalty income in the thirteen weeks ended October 2, 1998.
The Company's gross profit increased 10% to $9,250,000 in the thirteen weeks
ended October 2, 1998 from $8,421,000 in the thirteen weeks ended October 3,
1997. The Company's gross margin increased to 35.5% in the thirteen weeks ended
October 2, 1998 from 34.2% in the thirteen weeks ended October 3, 1997 due to
higher margins for Saucony products. The gross margin increase for Saucony
products in the thirteen weeks ended October 2, 1998 resulted from increased
domestic net sales of higher-margin inline footwear, offset in part by the
inventory liquidation by the Company's Australian subsidiary and the continued
negative impact of the comparatively stronger U.S. dollar. The gross margin for
other products decreased in the thirteen weeks ended October 2, 1998 as a result
of poor margin performance realized by the Company's bicycle brands and Hind
apparel.
Selling, general and administrative expenses increased to $8,150,000, or 31.3%
of net sales, in the thirteen weeks ended October 2, 1998 from $7,525,000, or
30.5% of net sales, in the thirteen weeks ended October 3, 1997. Advertising
and promotion expenses decreased $63,000 in the thirteen weeks ended October 2,
1998 due to reduced promotional spending by the Company's foreign subsidiaries.
Selling expenses increased $318,000 in the thirteen weeks ended October 2, 1998
due to increased domestic and foreign payroll costs and selling and marketing
expenses related to the introduction of Hind apparel and to the Quintana Roo and
Merlin bicycle brands. General and administrative expenses increased $370,000
in the thirteen weeks ended October 2, 1998 due to increased domestic payroll
costs, increased legal and other professional fees, increased administrative
costs attributable to the continued expansion of the Hind apparel and Quintana
Roo infrastructures and the absence of reimbursement of corporate services from
the discontinued Brookfield operations.
The Company recorded a charge of $300,000 ($172,000 after tax, or $0.02 per
diluted share) in the thirteen weeks ended October 3, 1997 to reflect the agreed
upon Closing Balance Sheet in connection with the disposal of the assets of
Brookfield Athletic Co., Inc., a wholly-owned subsidiary of the Company.
Interest expense decreased 3% to $160,000 in the thirteen weeks ended October 2,
1998, from $165,000 in the thirteen weeks ended October 3, 1997, due to the pay
down in April, 1998 of the Company's senior notes, offset by increased domestic
borrowings under the Company's credit facility.
The provision for income taxes increased to $497,000 in the thirteen weeks ended
October 2, 1998 from $418,000 in the thirteen weeks ended October 3, 1997, due
primarily to increased pre-tax income from continuing operations. The effective
income tax rate decreased 1.8% to 38.2% in the thirteen weeks ended October 2,
1998 from 40.0% in the thirteen weeks ended October 3, 1997, due primarily to a
change in the composition of domestic and foreign pretax profits.
Thirty-Nine Weeks Ended October 2, 1998 Compared to Thirty-Nine Weeks Ended
October 3, 1997
The Company's net income increased to $2,447,000, or $0.38 per diluted share, in
the thirty-nine weeks ended October 2, 1998 as compared to net income of
$224,000, or $0.04 per diluted share, in the thirty-nine weeks ended October 3,
1997. Income from continuing operations increased to $2,447,000, or $0.38 per
diluted share, in the thirty-nine weeks ended October 2, 1998, as compared to
income from continuing operations of $1,031,000, or $0.17 per diluted share, in
the thirty-nine weeks ended October 3, 1997. The Company had a loss from
discontinued operations of $807,000, or $0.13 per diluted share, in the thirty-
nine weeks ended October 3, 1997.
The Company's net sales increased 11% to $82,242,000 in the thirty-nine weeks
ended October 2, 1998 from $74,251,000 in the thirty-nine weeks ended October 3,
1997.
Net sales of the Company's Saucony products increased 8% to $68,451,000 in the
thirty-nine weeks ended October 2, 1998 from $63,115,000 in the thirty-nine
weeks ended October 3, 1997, due primarily to increased footwear unit volume.
Saucony domestic net sales increased 16% to $52,674,000 in the thirty-nine weeks
ended October 2, 1998 from $45,396,000 in the thirty-nine weeks ended October 3,
1997, due primarily to strong sales of the Company's Jazz Original shoes.
Saucony foreign net sales decreased 11% to $15,777,000 in the thirty-nine weeks
ended October 2, 1998 from $17,719,000 in the thirty-nine weeks ended October 3,
1997, primarily due to decreased footwear unit volume caused by the termination
of the Company's Australian operations, reduced sales by the Company's foreign
distributors and unfavorable currency exchange.
Net sales of other products increased 24% to $13,791,000 in the thirty-nine
weeks ended October 2, 1998 from $11,136,000 in the thirty-nine weeks ended
October 3, 1997. Domestic net sales of other products increased 69% to
$11,025,000 in the thirty-nine weeks ended October 2, 1998 from $6,529,000 in
the thirty-nine weeks ended October 3, 1997, due to increased sales of Quintana
Roo products and Hind apparel products and the introduction of Merlin bicycle
products, which were not offered by the Company in the thirty-nine weeks ended
October 3, 1997. Foreign net sales of other products decreased 40% to
$2,766,000 in the thirty-nine weeks ended October 2, 1998 from $4,607,000 in the
thirty-nine weeks ended October 3, 1997, due to decreased sales of non-corporate
brands caused by the termination of the Company's Australian operations.
Other income increased 116% to $568,000 in the thirty-nine weeks ended October
2, 1998 from $263,000 in the thirty-nine weeks ended October 3, 1997, due to
foreign currency transaction gains on U.S. dollar denominated obligations held
by certain of the Company's foreign subsidiaries and, to a lesser extent, the
receipt of proceeds from an insurance settlement, offset in part by decreased
royalty income in the thirty-nine weeks ended October 2, 1998.
The Company's gross profit increased 15% to $29,305,000 in the thirty-nine weeks
ended October 2, 1998 from $25,557,000 in the thirty-nine weeks ended October 3,
1997. The Company's gross margin increased to 35.6% in the thirty-nine weeks
ended October 2, 1998 from 34.4% in the thirty-nine weeks ended October 3, 1997,
due to higher margins for both Saucony products and other products. The gross
margin increase for Saucony products in the thirty-nine weeks ended October 2,
1998 resulted from increased domestic net sales of higher-margin inline
footwear, offset in part by the inventory liquidation by the Company's
Australian subsidiary and the continued negative impact of the comparatively
stronger U.S. dollar. The gross margin for other products increased in the
thirty-nine weeks ended October 2, 1998 due to decreased sales in the thirty-
nine weeks ended October 2, 1998 of non-current models by the Company's
Australian subsidiary, as compared to the thirty-nine weeks ended October 3,
1997.
Selling, general and administrative expenses increased to $24,932,000, or 30.3%
of net sales, in the thirty-nine weeks ended October 2, 1998 from $22,746,000,
or 30.6% of net sales, in the thirty-nine weeks ended October 3, 1997.
Advertising and promotion expenses decreased $251,000 in the thirty-nine weeks
ended October 2, 1998 due to reduced promotional spending by the Company's
foreign subsidiaries. Selling expenses increased $1,179,000 in the thirty-nine
weeks ended October 2, 1998 due to increased domestic sales commissions,
increased domestic and foreign payroll costs and selling and marketing expenses
related to the introduction of Hind apparel and to the Quintana Roo and Merlin
bicycle brands. General and administrative expenses increased $1,258,000 in the
thirty-nine weeks ended October 2, 1998 due to increased domestic payroll costs,
increased legal and other professional fees, increased bad debt expense,
increased costs related to the Company's upgraded information system, increased
administrative costs attributable to the continued expansion of the Hind apparel
and Quintana Roo infrastructures and the absence of reimbursement of corporate
services from the discontinued Brookfield operations.
The Company recorded a non-recurring charge of $850,000 ($508,000 after tax, or
$0.08 per diluted share) in the thirty-nine weeks ended October 3, 1997, to
reduce the carrying value of the Company's distribution facility in East
Brookfield, Massachusetts to market. In addition, the Company recorded a non-
recurring charge of $694,000 which included operating losses of $94,000 during
the phase-out period ($413,000 after tax or $0.07 per diluted share) in
connection with the disposal of the assets of Brookfield Athletic Co., Inc., a
wholly-owned subsidiary of the Company.
Interest expense decreased 13% to $576,000 in the thirty-nine weeks ended
October 2, 1998, from $665,000 in the thirty-nine weeks ended October 3, 1997,
due to the pay down in April, 1998 of the Company's senior notes, offset in part
by increased domestic and foreign borrowings under the Company's credit
facilities.
The provision for income taxes increased to $1,889,000 in the thirty-nine weeks
ended October 2, 1998 from $629,000 in the thirty-nine weeks ended October 3,
1997, due primarily to increased pre-tax income from continuing operations. The
effective income tax rate increased 3.0% to 43.3% in the thirty-nine weeks ended
October 2, 1998 from 40.3% in the thirty-nine weeks ended October 3, 1997, due
primarily to the deferred tax valuation allowance recorded in the thirty-nine
weeks ended October 2, 1998. This deferred tax valuation allowance relates to
foreign net operating losses for which tax benefits are not expected to be
realized.
Liquidity and Capital Resources
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As of October 2, 1998, the Company's cash and cash equivalents totaled
$2,701,000, a decrease of $1,731,000 from January 2, 1998. The decrease was the
result of an increase in accounts receivable of $3,783,000, net of the provision
for bad debt and discounts of $3,821,000, the acquisitions of Merlin Metalworks,
Inc. and Real Product Design, Inc. of $863,000 and the repurchase of shares of
the Company's Common Stock of $537,000, offset somewhat by an increase in
accrued liabilities of $3,465,000. The increase in accounts receivable was
primarily due to increased net sales of the Company's Saucony and Hind products
in the thirty-nine weeks ended October 2, 1998. In addition, the Company's days
sales outstanding for its accounts receivable decreased to 75 days in the
thirty-nine weeks ended October 2, 1998 from 77 days in the thirty-nine weeks
ended October 3, 1997. Inventories decreased $1,196,000 in the thirty-nine
weeks ended October 2, 1998 due to the sale by Saucony SP Pty Limited, the
Company's wholly-owned Australian subsidiary, of its footwear business inventory
to Acier Sportswear Pty Limited and the liquidation of the remaining inventory
which was not subject to an asset purchase agreement. The Company's inventory
turns ratio increased to 3.0 turns in the thirty-nine weeks ended October 2,
1998 from 2.7 turns in the thirty-nine weeks ended October 3, 1997 due primarily
to strong sales of the Company's Jazz Original shoes.
For the thirty-nine weeks ended October 2, 1998, the Company generated
$3,827,000 in net cash from operating activities, expended $716,000 to acquire
capital assets, expended $624,000 and $239,000 to acquire the assets of Merlin
Metalworks, Inc. and Real Product Design, Inc., respectively, expended
$2,268,000 to reduce long-term debt, decreased short-term borrowings by
$565,000, expended $537,000 to repurchase shares of the Company's Common Stock,
received $61,000 from the sale of capital assets and received $85,000 from the
issuance of common stock in connection with the exercise of employee stock
options.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting the operating cash flows for the
thirty-nine weeks ended October 2, 1998, included a decrease of $323,000 in
prepaid expenses (due to a decrease in advance payments for inventory and
certain administrative expenses), a decrease of $728,000 in accounts payable
(due to the timing of inventory purchases) and an increase in accrued expenses
of $3,465,000 (due to increased administrative and selling 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 $506,000.
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.
On August 31, 1998, the Company entered into a revolving credit agreement under
the terms of which a bank committed a maximum of $15,000,000 to the Company for
cash borrowings and letters of credit. The credit facility terminates on July
31, 2001 and borrowings under the facility are made at the bank's prime rate of
interest, less .5%, or at the LIBO rate, plus 2.0%. As of October 2, 1998,
there were no borrowings outstanding under the facility. The Company had open
commitments at such date related to letters of credit in the amount of
$3,042,000. The credit facility contains various covenants including;
restrictions on additional indebtedness, restrictions on the declaration or
payment of dividends, a minimum tangible net worth, as defined, restrictions on
the annual amount of capital expenditures, a minimum current ratio, as defined,
a minimum leverage ratio, and a minimum interest coverage, as defined. The
revolving credit agreement replaces a prior credit facility which terminated on
August 31, 1998.
Inflation and Currency Risk
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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 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
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In the past, many information technology products were designed with two-digit
year codes that did not recognize century and millennium fields. As a result,
these hardware and software products may recognize a date using "00" as the year
1900 rather than the year 2000. This phenomenon could result in computer system
failures or miscalculations, and is generally referred to as the "Year 2000"
problem or issue.
Generally, the Company has exposure to the Year 2000 problem in three areas:
(i) internal computer systems used to manage the Company's business, (ii)
microprocessors and other electronic devices included as components of equipment
used by the Company ("embedded chips") and (iii) computer systems used by
suppliers and customers of the Company. The Company's plan to resolve its Year
2000 issues in these areas involves the phases of evaluation, updating and
testing. In the evaluation phase, the Company reviews the applicable system to
identify Year 2000 problems and determines any necessary remediation. The
updating and testing phases involve the implementation and testing,
respectively, of Year 2000 remediation measures.
Based on its current evaluation of its exposure to the Year 2000 problem, the
Company has determined that it will have to modify or replace portions of its
software and computer systems so that they will function properly with respect
to dates in the year 2000 and thereafter. The Company at present believes that
necessary modifications or replacements will be made on a timely basis and
expects the total cost relating to these activities to be less than $150,000.
However, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of such modifications or
replacements, or that the Company's suppliers or customers will adequately
prepare for the Year 2000 problem. It is possible that any such delays,
increased costs, or supplier or customer failures could have a material adverse
impact on the Company's operations and financial results by, for example,
impacting the Company's ability to deliver products to its customers. The
Company expects to finalize its Year 2000 evaluation by mid-1999.
To date, the Company has completed updating or testing of most of its internal
computer systems. Other internal computer systems are currently in the
evaluation phase. With respect to embedded chips, the Company has completed
approximately 50% of the evaluation phase, and expects to complete the remainder
of the evaluation phase by March 31, 1999. The Company has recently begun
interviewing suppliers and customers to determine their exposure to the Year
2000 problem, but does not yet have sufficient information to evaluate their
readiness. The Company plans to complete the evaluation phase with respect to
suppliers and customers by mid-1999.
The Company expects to substantially complete the Year 2000 testing phase with
respect to its internal computer systems and embedded chips by September 30,
1999. The Company plans to continue its efforts with respect to suppliers and
customers, but has no means of ensuring that they will adequately address Year
2000 issues.
The Company has not yet developed a contingency plan in the event of a
particular system not being Year 2000 compliant. The Company expects to develop
such a plan if it becomes clear before July 1999 that the Company will not
achieve its scheduled compliance objectives.
The foregoing discussion of the Company's Year 2000 readiness contains forward-
looking statements, including estimates of the timeframes and costs for
addressing the known Year 2000 issues confronting the Company, and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel with required remediation skills, the ability
of the Company to identify and correct all relevant computer code, and the
success of third parties with whom the Company does business in addressing their
Year 2000 issues.
SFAS 131
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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 ended January 1, 1999.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Amendment to the Credit Agreement among the Registrant, State Street
Bank and Trust Company and First Union National Bank (f/k/a CoreStates
Bank, N.A.) dated July 31, 1998.
10.2 Credit Agreement between the Registrant and State Street Bank and
Trust Company dated August 31, 1998.
27.0 Financial Data Schedule
b. Reports on Form 8-K
On July 27, 1998, the Company filed an amendment to a Current Report on
Form 8-K/A dated May 13, 1998 amending Item 7 of the Current Report on Form
8-K filed by the Registrant on May 28, 1998 pursuant to which the Company
reported the acquisition by Hyde International Services, Limited, a wholly-
owned subsidiary of the Company, of an additional 50% interest in the
Company's Australian subsidiary, Saucony, SP, Pty Limited, pursuant to a
share sale agreement dated April 2, 1998 by and among Hyde International
Services Limited and Sheldon B. Pozniak and Frances K. Pozniak.
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.
SAUCONY, INC.
By: /s/ Charles A. Gottesman
---------------------------
Charles A. Gottesman
Executive Vice President
Chief Operating Officer
(Duly authorized officer and
principal financial officer)
Date: November 13, 1998