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 July 2, 1999
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 000-05083
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)
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 August 6, 1999
Class A Common Stock-$.33 1/3 Par Value 2,680,527
Class B Common Stock-$.33 1/3 Par Value 3,656,639
---------
6,337,166
<PAGE>
SAUCONY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 2, 1999
and January 1, 1999 3
Condensed Consolidated Statements of Income for the thirteen weeks
and twenty-six weeks ended July 2, 1999 and July 3, 1998 4
Condensed Consolidated Statements of Stockholders' Equity for
the twenty-six weeks ended July 2, 1999 and July 3, 1998 5
Condensed Consolidated Statements of Cash Flows for the
twenty-six weeks ended July 2, 1999 and July 3, 1998 6-7
Notes to Condensed Consolidated Financial Statements -
July 2, 1999 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Stockholder Proposals for the 2000 Annual Meeting of
Stockholders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
<PAGE>
<TABLE>
<CAPTION>
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
ASSETS
July 2, January 1,
1999 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,364 $ 5,495
Marketable securities 208 179
Accounts receivable, net 32,723 19,473
Inventories 29,325 31,072
Prepaid expenses and other current assets 3,683 2,923
--------- ----------
Total current assets 68,303 59,142
--------- ----------
Property, plant and equipment, net 8,111 8,123
--------- ----------
Other assets 2,393 2,614
--------- ----------
Total assets $ 78,807 $ 69,879
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 10,814 $ 7,568
Current maturities of long term debt 371 324
Accounts payable 4,550 6,244
Accrued expenses and other current liabilities 6,213 4,704
--------- ----------
Total current liabilities 21,948 18,840
--------- ----------
Long-term obligations:
Long-term debt 451 559
Deferred income taxes 1,837 1,851
Other long-term obligations 164 157
--------- ----------
Total long-term obligations 2,452 2,567
--------- ----------
Minority interest in consolidated subsidiaries 274 222
--------- ----------
Stockholders' equity:
Common stock, $.33 1/3 par value 2,211 2,178
Additional paid-in capital 16,539 15,921
Retained earnings 37,950 32,360
Accumulated translation (889) (528)
---------- -----------
Total 55,811 49,931
Less:
Common stock held in treasury, at cost (1,665) (1,665)
Unearned compensation (13) (16)
---------- -----------
54,133 48,250
--------- ----------
Total liabilities and stockholders' equity $ 78,807 $ 69,879
========= ==========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the Thirteen Weeks and Twenty-Six Weeks Ended July 2, 1999 and July 3, 1998
(Unaudited)
(in thousands, except per share data)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 37,706 $ 26,562 $ 80,112 $ 56,186
Other revenue 74 158 282 200
--------- --------- --------- --------
Total revenue 37,780 26,720 80,394 56,386
--------- --------- --------- --------
Costs and expenses
Cost of sales 23,569 16,480 50,554 36,131
Selling expenses 5,908 4,779 11,341 9,202
General and administrative expenses 4,246 4,070 8,554 7,580
--------- --------- --------- --------
Total costs and expenses 33,723 25,329 70,449 52,913
--------- --------- --------- --------
Operating income 4,057 1,391 9,945 3,473
Non-operating income (expense)
Interest, net (246) (175) (392) (385)
Foreign currency (11) (57) 15 (68)
Other 13 9 37 43
--------- --------- --------- --------
Income before income taxes and minority interest 3,813 1,168 9,605 3,063
Provision for income taxes 1,543 494 3,973 1,392
Minority interest in income of consolidated subsidiaries 13 1 42 24
--------- --------- --------- --------
Net income $ 2,257 $ 673 $ 5,590 $ 1,647
========= ========= ========= ========
Per share amounts:
Earnings per common share - basic: $ 0.36 $ 0.11 $ 0.90 $ 0.26
========== ========== ========== =========
Earnings per common share - diluted: $ 0.34 $ 0.11 $ 0.86 $ 0.26
========== ========== ========== =========
Weighted average common shares and equivalents outstanding 6,625 6,342 6,512 6,348
========= ========= ========= ========
Cash dividends per share of common stock 0 0 0 0
========= ========= ========= ========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SAUCONY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Twenty-Six Weeks Ended July 2, 1999 and July 3, 1998
(in thousands, except share data)
Common Stock Paid-in Retained
Class A Class B Capital Earnings
<S> <C> <C> <C> <C>
Balance, January 2, 1998 $ 902 $ 1,248 $ 15,652 $ 28,781
Issuance of 25,500 shares of common stock
upon exercise of stock options 0 8 77 0
Amortization of unearned compensation 0 0 0 0
Net income 0 0 0 1,647
Foreign currency translation adjustments 0 0 0 0
--------- --------- --------- --------
Balance, July 3, 1998 $ 902 $ 1,256 $ 15,729 $ 30,428
========= ========= ========= ========
Balance, January 1, 1999 $ 902 $ 1,276 $ 15,921 $ 32,360
Issuance of 100,274 shares of common stock
upon exercise of stock options 0 33 333 0
Amortization of unearned compensation 0 0 0 0
Tax benefit related to stock options 0 0 261 0
Issuance of non-qualified stock options 0 0 24 0
Net income 0 0 0 5,590
Foreign currency translation adjustments 0 0 0 0
--------- --------- --------- --------
Balance, July 2, 1999 $ 902 $ 1,309 $ 16,539 $ 37,950
========= ========= ========= ========
<CAPTION>
Total
Treasury Stock Unearned Accumulated Stockholders'
Shares Amount Compensation Translation Equity
<S> <C> <C> <C> <C> <C>
Balance, January 2, 1998 198,400 $ (1,054) $ (40) $ (417) $ 45,072
Issuance of 25,500 shares of common stock
upon exercise of stock options 0 0 0 0 85
Amortization of unearned compensation 0 0 16 0 16
Net income 0 0 0 0 1,647
Foreign currency translation adjustments 0 0 0 (216) (216)
-------- --------- ------- ------- ----------
Balance, July 3, 1998 198,400 $ (1,054) $ (24) $ (633) $ 46,604
======== ========== ======== ======= =========
Balance, January 1, 1999 305,400 $ (1,665) $ (16) $ (528) $ 48,250
Issuance of 100,274 shares of common stock
upon exercise of stock options 0 0 0 0 366
Amortization of unearned compensation 0 0 3 0 3
Tax benefit related to stock options 0 0 0 0 261
Issuance of non-qualified stock options 0 0 0 0 24
Net income 0 0 0 0 5,590
Foreign currency translation adjustments 0 0 0 (361) (361)
-------- --------- ------- ------- ----------
Balance, July 2, 1999 305,400 $ (1,665) $ (13) $ (889) $ 54,133
======== ========== ======== ======= =========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 2, 1999 AND JULY 3, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
(Unaudited)
July 2, July 3,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,590 $ 1,647
-------- ---------
Adjustment to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 935 843
Provision for bad debts and discounts 2,791 2,685
Deferred income tax benefit (370) (222)
Other 104 194
Changes in operating assets and liabilities, net of effects of acquisitions,
dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Marketable securities (29) (39)
Accounts receivable (16,070) (6,632)
Inventories 1,223 (835)
Prepaid expenses and other current assets (343) 440
Increase (decrease) in liabilities:
Accounts payable (1,605) (439)
Accrued expenses 1,795 1,975
-------- ---------
Total adjustments (11,569) (2,030)
--------- ----------
Net cash used by operating activities (5,979) (383)
--------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (673) (499)
Increase in deferred charges, deposits and other (28) (180)
Proceeds from sale of equipment 3 15
Payments for business acquisitions 0 (579)
-------- ----------
Net cash used by investing activities (698) (1,243)
--------- ----------
Cash flows from financing activities:
Net short-term borrowings 3,642 2,143
Repayment of long-term debt and capital lease obligations (221) (2,178)
Issuances of common stock 366 85
-------- ---------
Net cash provided by financing activities 3,787 50
-------- ---------
Effect of exchange rate changes on cash and
cash equivalents (241) (39)
--------- ----------
Net decrease in cash and cash equivalents (3,131) (1,615)
Cash and equivalents at beginning of period 5,495 4,432
-------- ---------
Cash and equivalents at end of period $ 2,364 $ 2,817
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds $ 4,277 $ 218
======== =========
Interest $ 343 $ 413
======== =========
Non-cash investing and financing activities:
Property purchased under capital leases $ 160 $ 0
======== =========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
SAUCONY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 2, 1999
(Unaudited)
NOTE 1 - 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 1, 1999. Operating results for twenty-six weeks ended July 2,
1999, are not necessarily indicative of the results for the entire year.
NOTE 2 - RECLASSIFICATION
Certain items in prior years Consolidated Financial Statements have been
reclassified to conform to the 1999 presentation.
NOTE 3 - INVENTORIES
Inventories at July 2, 1999 and January 1, 1999 consisted of the following (in
thousands):
July 2, January 1,
1999 1999
Finished goods $ 23,109 $ 24,194
Work in progress 1,124 834
Raw materials 5,092 6,044
----------- -----------
$ 29,325 $ 31,072
=========== ===========
<PAGE>
NOTE 4 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
(Unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Thirteen Weeks Ended
July 2, 1999 July 3, 1998
--------------------------- --------------------------
Earnings Earnings Earnings Earnings
per per per per
Common Common Common Common
Share - Share - Share - Share -
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Net income available for common
shares and assumed conversions $ 2,257 $ 2,257 $ 673 $ 673
========== ========= ========== ==========
Weighted-average common shares
outstanding 6,264 6,264 6,262 6,262
Effect of dilutive securities:
Employee stock options 0 361 0 80
---------- --------- ---------- ----------
Weighted-average common shares
and equivalents outstanding 6,264 6,625 6,262 6,342
========== ========= ========== ==========
Earnings per share $ 0.36 $ 0.34 $ 0.11 $ 0.11
========== ========= ========= ==========
<CAPTION>
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
July 2, 1999 July 3, 1998
--------------------------- --------------------------
Earnings Earnings Earnings Earnings
per per per per
Common Common Common Common
Share - Share - Share - Share -
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Net income available for common
shares and assumed conversions $ 5,590 $ 5,590 $ 1,647 $ 1,647
========== ========= ========== ==========
Weighted-average common shares
outstanding 6,246 6,246 6,267 6,267
Effect of dilutive securities:
Employee stock options 0 266 0 81
---------- --------- ---------- ----------
Weighted-average common shares
and equivalents outstanding 6,246 6,512 6,267 6,348
========== ========= ========== ==========
Earnings per share $ 0.90 $ 0.86 $ 0.26 $ 0.26
========== ========= ========= ==========
</TABLE>
<PAGE>
NOTE 5 - STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(in thousands)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 2, 1999 July 3, 1998 July 2, 1999 July 3, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 2,257 $ 673 $ 5,590 $ 1,647
Other comprehensive income:
Foreign currency translation adjustment (175) (184) (361) (216)
=
Income tax benefit related to other
comprehensive expense (19) (74) (154) (86)
----------- ---------- ----------- -----------=
Other comprehensive income, net of tax (156) (110) (207) (130)
----------- ---------- ----------- -----------
Comprehensive income $ 2,101 $ 563 $ 5,383 $ 1,517
========== ========= ========== ==========
</TABLE>
NOTE 6 - OPERATING SEGMENT DATA
The Company's operating segments are organized based on the nature of products
and consist of the Saucony Segment and Other Products Segment. The determination
of the reportable segments for the thirteen and twenty-six weeks ended July 2,
1999 and July 3, 1998, as well as the basis of measurement of segment profit or
loss, is consistent with the segment reporting disclosed in the Company's Annual
Report on Form 10-K as filed for the fiscal year ended January 2, 1999.
<TABLE>
<CAPTION>
(in thousands)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 2, 1999 July 3, 1998 July 2, 1999 July 3, 1998
<S> <C> <C> <C> <C>
Revenues:
Saucony $ 32,606 $ 21,778 $ 70,433 $ 47,662
Other products 5,174 4,942 9,961 8,724
---------- --------- ---------- ----------
$ 37,780 $ 26,720 $ 80,394 $ 56,386
========== ========= ========== ==========
Income (loss) before income taxes:
Saucony $ 4,169 $ 2,078 $ 10,234 $ 4,258
Other products (356) (910) (629) (1,195)
----------- ---------- ----------- -----------
$ 3,813 $ 1,168 $ 9,605 $ 3,063
========== ========= ========== ==========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Highlights
The following table sets forth the comparison, as a percent change and in
absolute dollars, of certain items in the consolidated statement of earnings for
the thirteen and twenty-six weeks ended July 2, 1999 and July 3, 1998 and, for
the periods indicated, the percentage of certain items in the consolidated
statement of earnings relative to net sales.
<TABLE>
<CAPTION>
Percent Change
Increase (Decrease)
Thirteen Twenty-Six
Weeks Weeks
<S> <C> <C>
Net sales 42.0% 42.6%
Gross profit 40.2 47.4
Selling, general and administrative 14.7 18.5
<CAPTION>
$ Change
(in thousands)
Thirteen Twenty-Six
Weeks Weeks
<S> <C> <C>
Operating income $ 2,666 $ 6,472
Income before tax and minority interest 2,645 6,542
Net income 1,584 3,943
<CAPTION>
Percent of Net Sales
Thirteen Twenty-Six
Weeks Weeks
----- -----
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross margin 37.5% 38.0% 36.9% 35.7%
Selling, general and administrative 27.0 33.3 24.8 29.9
Operating income 10.8 5.2 12.4 6.2
Income before tax and minority interest 10.1 4.4 12.0 5.5
Net income 6.0 2.5 7.0 2.9
</TABLE>
The following table sets forth net sales (in thousands) and percentages of net
sales of the Company's product lines in the thirteen and twenty-six weeks ended
July 2, 1999 and July 3, 1998, respectively:
<TABLE>
<CAPTION>
Thirteen Weeks Ended July 2, 1999 and July 3, 1998
1999 1998
---------------------- ----------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C>
Saucony $ 32,578 86.4% $ 21,624 81.4%
Other products 5,128 13.6% 4,938 18.6%
---------- --------- ---------- ---------
Total $ 37,706 100.0% $ 26,562 100.0%
========== ========= ========== =========
<CAPTION>
Twenty-Six Weeks Ended July 2, 1999 and July 3, 1998
1999 1998
---------------------- ----------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C>
Saucony $ 70,253 87.7% $ 47,475 84.5%
Other products 9,859 12.3% 8,711 15.5%
---------- --------- ---------- ---------
Total $ 80,112 100.0% $ 56,186 100.0%
========== ========= ========== =========
</TABLE>
Thirteen Weeks Ended July 2, 1999 Compared to Thirteen Weeks Ended July 3, 1998
Consolidated Net Sales
Net sales increased 42% to $37,706,000 in the thirteen weeks ended July 2, 1999
from $26,562,000 in the thirteen weeks ended July 3, 1998. The impact of foreign
exchange rate changes in the thirteen weeks ended July 2, 1999 was negligible.
Saucony Brand Segment
Worldwide net sales of branded Saucony footwear and apparel increased 51% to
$32,578,000 in the thirteen weeks ended July 2, 1999 from $21,624,000 in the
thirteen weeks ended July 3, 1998, primarily due to an 86% unit volume growth in
the footwear category. Overall average sell prices declined 23% in the thirteen
weeks ended July 2, 1999 due to a higher proportion of more moderately-priced
Originals footwear in the Company's domestic product mix.
Domestic net sales increased 67% to $28,705,000 due primarily to increased unit
volumes and higher average unit sell prices for Saucony's Originals (introduced
in the second quarter of 1998).
International net sales decreased 13% to $3,873,000 due primarily to the
discontinuance of operations in Australia, which was offset in part by increased
distributor unit volume and increased unit volumes recorded by the Company in
Canada and Western Europe.
Other Products Segment
Net sales of Other Products increased 4% to $5,128,000 in the thirteen weeks
ended July 2, 1999 from $4,938,000 in the thirteen weeks ended July 3, 1998,
reflecting revenue growth in both bicycle and related products, increased
domestic and international sales of the Company's Hind apparel brand and, to a
lesser extent, increased sales at the Company's factory outlet stores, offset in
part by lower international sales of non-Saucony brands due to the cessation of
operations in Australia in July 1998. The growth in bicycle and related products
revenue is due in large measure to the growth in the Merlin business and the
acquisition of Real Design in August 1998.
Cost and Expenses
The Company's gross profit increased 40% to $14,137,000 in the thirteen weeks
ended July 2, 1999 from $10,082,000 in the thirteen weeks ended July 3, 1998 due
to higher domestic unit volumes. The Company's gross margin decreased to 37.5%
in the thirteen weeks ended July 2, 1999 from 38.0% in the thirteen weeks ended
July 3, 1998 due to inefficiencies in domestic manufacturing operations.
Selling, general and administrative expenses increased to $10,154,000, or 27.0%
of net sales, in the thirteen weeks ended July 2, 1999 from $8,849,000, or 33.3%
of net sales, in the thirteen weeks ended July 3, 1998. Selling expenses
increased $1,129,000 in the thirteen weeks ended July 2, 1999 due to increased
domestic spending for print media, athlete and event sponsorship and
co-operative advertising, as well as increased sales commissions and payroll and
related expenses. General and administrative expenses increased $176,000 in the
thirteen weeks ended July 2, 1999 due to increased staffing, performance-based
compensation, increased bad debt expense, increased administrative cost to
sustain the growth of the Hind apparel and bicycle division, offset in part by
reduced international administrative spending as a result of the cessation of
operations in Australia in July 1998.
Net interest expense increased 41% to $246,000 in the thirteen weeks ended July
2, 1999 from $175,000 in the thirteen weeks ended July 3, 1998 due to increased
borrowings against the Company's domestic credit facility to finance working
capital requirements.
Income Before Tax (in thousands)
1999 1998
---- ----
Segment
Saucony Brand $ 4,169 $ 2,078
Other Products (356) (910)
---------- ---------
Consolidated $ 3,813 $ 1,168
========= ========
Consolidated income before tax increased to $3,813,000 in the thirteen weeks
ended July 2, 1999 from $1,168,000 in the thirteen weeks ended July 3, 1998 due
primarily to increased domestic Saucony Brand income and the improved financial
performance of Hind apparel.
Income Taxes
The provision for income taxes increased to $1,543,000 in the thirteen weeks
ended July 2, 1999 from $494,000 in the thirteen weeks ended July 3, 1998, due
primarily to increased domestic pre-tax income. The effective tax rate decreased
to 40.5% in the thirteen weeks ended July 2, 1999 from 42.3% in the thirteen
weeks ended July 3, 1998 due primarily to a shift in the composition of domestic
and foreign pre-tax earnings.
Net Income
Net income increased to $2,257,000 in the thirteen weeks ended July 2, 1999 from
$673,000 in the thirteen weeks ended July 3, 1998. Diluted earnings per share
increased to $0.34 in the thirteen weeks ended July 2, 1999 compared to $0.11 in
the thirteen weeks ended July 3, 1998.
Twenty-Six Weeks Ended July 2, 1999 Compared to Twenty-Six Weeks Ended July 3,
1998
Consolidated Net Sales
Net sales increased 43% to $80,112,000 in the twenty-six weeks ended July 2,
1999 from $56,186,000 in the twenty-six weeks ended July 3, 1998. The impact of
foreign exchange rate changes in the twenty-six weeks ended July 2, 1999 was
negligible.
Saucony Brand Segment
Worldwide net sales of branded Saucony footwear and apparel increased 48% to
$70,253,000 in the twenty-six weeks ended July 2, 1999 from $47,475,000 in the
twenty-six weeks ended July 3, 1998, primarily due to an 84% unit volume growth
in the footwear category. Overall average sell prices declined 26% in the
twenty-six weeks ended July 2, 1999 due to a higher proportion of more
moderately-priced Originals in the Company's domestic product mix.
Domestic net sales increased 70% to $61,348,000 due primarily to increased unit
volumes for Saucony's core technical footwear models and Originals (introduced
in the second quarter of 1998).
International net sales decreased 21% to $8,905,000 due primarily to the
discontinuance of operations in Australia and decreased distributor unit
volumes, offset in part by increased unit volumes recorded by the Company in
Canada and Western Europe.
Other Products Segment
Net sales of Other Products increased 13% to $9,859,000 in the twenty-six weeks
ended July 2, 1999 from $8,711,000 in the twenty-six weeks ended July 3, 1998,
reflecting revenue growth in both bicycle and related products, increased
domestic and international sales of the Company's Hind apparel brand and, to a
lesser extent, increased sales at the Company's factory outlet stores, offset in
part by lower international sales due to the cessation of operation in Australia
in July 1998. The growth in bicycles and related products revenue is due in
large measure to the growth in the Merlin business and the acquisition of Real
Design in August 1998.
Cost and Expenses
The Company's gross profit increased 47% to $29,558,000 in the twenty-six weeks
ended July 2, 1999 from $20,055,000 in the twenty-six weeks ended July 3, 1998
due to higher domestic unit volumes. The Company's gross margin improved to
36.9% in the twenty-six weeks ended July 2, 1999 from 35.7% in the twenty-six
weeks ended July 3, 1998 due to lower levels of product returns and markdowns
and a change in the product mix compared to the prior comparable period.
Selling, general and administrative expenses increased to $19,895,000, or 24.8%
of net sales, in the twenty-six weeks ended July 2, 1999 from $16,782,000, or
29.9% of net sales, in the twenty-six weeks ended July 3, 1998. Selling expenses
increased $2,139,000 in the twenty-six weeks ended July 2, 1999 due to increased
domestic spending for print media, athlete and event sponsorship, co-operative
advertising, as well as increased sales commissions and payroll and related
expenses. General and administrative expenses increased $974,000 in the
twenty-six weeks ended July 2, 1999 due to increased staffing, performance-based
compensation, increased bad debt expense, increased administrative cost to
sustain the growth of the Hind apparel and bicycle division, offset in part by
reduced international administrative spending as a result of the cessation of
operations in Australia in July 1998.
Net interest expense increased 2% to $392,000 in the twenty-six weeks ended July
2, 1999 from $385,000 in the twenty-six weeks ended July 3, 1998 due to
increased borrowing under the Company's domestic credit facility to finance
working capital requirements, which was largely offset by lower debt levels
resulting from the paydown of the Company's senior notes payable in the second
quarter of 1998.
Income Before Tax (in thousands)
1999 1998
---- ----
Segment
Saucony Brand $ 10,234 $ 4,258
Other Products (629) (1,195)
---------- ---------
Consolidated $ 9,605 $ 3,063
========= ========
Consolidated income before tax increased to $9,605,000 in the twenty-six weeks
ended July 2, 1999 from $3,063,000 in the twenty-six weeks ended July 3, 1998
due primarily to increased domestic Saucony Brand income and the improved
financial performance of Hind apparel.
Income Taxes
The provision for income taxes increased to $3,973,000 in the twenty-six weeks
ended July 2, 1999 from $1,392,000 in the twenty-six weeks ended July 3, 1998,
due primarily to increased domestic pre-tax income. The effective tax rate
decreased to 41.4% in the twenty-six weeks ended July 2, 1999 from 45.4% in the
twenty-six weeks ended July 3, 1998 due primarily to a deferred tax valuation
allowance recorded in the twenty-six weeks ended July 3, 1998, relating to
foreign operating losses that were not expected to be realized.
Net Income
Net income increased to $5,590,000 in the twenty-six weeks ended July 2, 1999
from $1,647,000 in the twenty-six weeks ended July 3, 1998. Diluted earnings per
share increased to $0.86 in the twenty-six weeks ended July 2, 1999 compared to
$0.26 in the twenty-six weeks ended July 3, 1998.
Liquidity and Capital Resources
As of July 2, 1999 the Company's cash and cash equivalents totaled $2,364,000, a
decrease of $3,131,000 from January 1, 1999. The decrease is due primarily to an
increase in accounts receivable of $13,279,000, net of the provision for bad
debts and discounts, partially offset by an increase in accrued liabilities of
$1,795,000 and an increase in borrowings against the Company's domestic and
foreign credit facilities of $3,642,000. The increase in accounts receivable is
due to increased net sales of the Company's Saucony, Hind and bicycle products
in the twenty-six weeks ended July 2, 1999. The Company's days sales outstanding
for its accounts receivable remained constant at 74 days in the twenty-six weeks
ended July 2, 1999 as compared to July 3, 1998. Inventories decreased $1,223,000
in the twenty-six weeks ended July 2, 1999 due to the management of domestic
inventory levels. As a consequence of the improved inventory management and the
velocity of Originals, the Company's inventory turns ratio increased to 3.4
turns in the twenty-six weeks ended July 2, 1999 from 3.0 turns in the
twenty-six weeks ended July 3, 1998.
For the twenty-six weeks ended July 2, 1999, the Company used $5,979,000 of net
cash from operating activities, expended $673,000 to acquire capital assets, and
expended $221,000 to reduce long-term debt and received $366,000 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 in the
twenty-six weeks ended July 2, 1999 were, a decrease of $1,605,000 in accounts
payable (due to decreased inventory levels), an increase of $1,795,000 in
accrued expenses (due to increased variable selling and administrative expenses
associated with a higher level net sales) and an increase of $343,000 in prepaid
expenses (due to an increase in advance payments for advertising and inventory).
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 investments needs and debt service payments.
Year 2000
The Company views its 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, under the
coordination of the Vice President Information Systems, is to resolve its
internal Year 2000 problems following sequential phases of evaluation, updating
and testing and to pursue Year 2000 compliance awareness and supporting
documentation from key suppliers and customers. In the evaluation phase, the
Company reviews the applicable system to identify Year 2000 problems and
determines the necessary remediation steps. The updating and testing phases
involve the implementation and testing, respectively, of Year 2000 remediation
measures.
Based on the evaluation of its exposure for the Year 2000 problem, the Company
has modified or replaced portions of its software, computer and other equipment
systems. The Company has incurred costs of approximately $20,000 in fiscal 1998
and expects to incur additional costs of $100,000 to $150,000 in fiscal 1999
related to the Year 2000 modifications. To date, the Company has evaluated
substantially all of its internal computer systems and embedded chips and has
completed the majority of necessary upgrades. The Company expects that full
evaluation, updating and testing will be completed during the fourth quarter of
fiscal 1999.
The Company has interviewed key suppliers to determine their capability to
continue providing goods and services. Based on responses from over 80% of those
surveyed, the Company believes that its suppliers are unlikely to disrupt
inventory agreements due to a Year 2000 problem. Nevertheless, the Company
continues to expand its understanding of the Year 2000 problems of its
significant business partners based on ongoing surveys and interviews and this
process will continue throughout 1999. Contingency plans for supply disruptions
are being formulated and are expected to be completed in the third quarter of
1999.
The Company has also interviewed key customers and all those who utilize
Electronic Data Interface (EDI) as the principal means of placing orders. The
responses received indicate that most customers are in the process of developing
or executing remediation plans to address Year 2000 problems. The Company
believes that customers present a potential Year 2000 business risk because of
the Company's limited ability to influence their actions or internal processes.
The Company has determined the risks associated with the reasonably worst-case
scenario. Except for the risks associated with customer readiness which are
beyond the Company's control, there are manual backup and outsourcing
opportunities readily available to support the Company's internal fulfillment
systems.
The foregoing discussion of the Company's Year 2000 readiness contains
forward-looking statements and were derived using numerous assumptions. Despite
the Company's belief that its Year 2000 program reduces the risk of an internal
compliance failure and is taking an active approach to assess the readiness of
its business partners, there can be no assurances that all parties will achieve
timely Year 2000 compliance or that such noncompliance will not have a material
adverse impact to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has performed an analysis to assess the potential effect of
reasonably possible near-term changes in inflation and foreign currency exchange
rates. 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.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
At the 1999 Annual Meeting of Stockholders of the Company (the "Annual Meeting")
held on May 20, 1999, the following matters were acted upon by the stockholders
of the Company:
1. The election of John M. Connors, Jr., John H. Fisher, Phyllis H.
Fisher, Charles A. Gottesman, Robert J. LeFort, Jr., and John J.
Neuhauser as directors of the Company.
2. The ratification of the selection by the Board of Directors of
PricewaterhouseCoopers LLP as the Company's independent auditors for
the current 1999 fiscal year.
The results of the voting on each of the matters presented to stockholders at
the Annual Meeting are set forth below:
<TABLE>
<CAPTION>
Votes Votes Broker
For Against Abstentions Non-votes
1. Election of Directors
<S> <C> <C> <C> <C>
John M Connors, Jr. 2,487,616 -- 6,321 N.A.
John H. Fisher 2,487,616 -- 6,321 N.A.
Phyllis H. Fisher 2,487,616 -- 6,321 N.A.
Charles A. Gottesman 2,487,616 -- 6,321 N.A.
Robert J. LeFort, Jr. 2,487,616 -- 6,321 N.A.
John. J. Neuhauser 2,487,616 -- 6,321 N.A.
2. Ratification of Independent
Auditors 2,489,815 3,212 910 N.A.
</TABLE>
ITEM 5 - Stockholder Proposals for the 2000 Annual Meeting of Stockholders
As set forth in the Company's proxy statement for its 1999 Annual Meeting of
Stockholders, stockholder proposals submitted pursuant to Rule 14a-8 under the
Securities and Exchange Act of 1934 (the "Exchange Act") for inclusion in the
Company's proxy materials for its 2000 Annual Meeting of Stockholders must be
received by the Company on or before December 31, 1999.
In addition, in accordance with recent amendments to Rules 14a-4, 14a-5 and
14a-8 under the Exchange Act, written notice of stockholder proposals submitted
outside the processes of Rule 14a-8 for consideration at the 2000 Annual Meeting
of Stockholders must be received by the Company on or before March 22, 2000 in
order to be considered timely for purposes of Rule 14a-4. The persons designated
in the Company's proxy statement and management proxy card will be granted
discretionary authority with respect to any stockholder proposal with respect to
which the Company does not receive timely notice.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
27.0 - Financial Data Schedule
99.1 - Certain Factors that May Effect 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.
<PAGE>
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/ Terence P. Chin
Terence P. Chin
Senior Vice President
Chief Financial Officer
(Duly authorized officer and principal financial officer)
Date: August 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from Saucony, Inc's.
Industries, Inc. Form 10-Q for the period
ended July 2, 1999 and is qualified in
its entirety by reference to such 10-Q.
</LEGEND>
<CIK> 0000049401
<NAME> Saucony, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-02-1999
<PERIOD-END> Jul-02-1999
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<SECURITIES> 208
<RECEIVABLES> 32723
<ALLOWANCES> 1797
<INVENTORY> 29325
<CURRENT-ASSETS> 68303
<PP&E> 18712
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0
0
<COMMON> 2211
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</TABLE>
