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 June 30, 2000
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 7, 2000
Class A Common Stock-$.33 1/3 Par Value 2,594,027
Class B Common Stock-$.33 1/3 Par Value 3,586,469
---------
6,180,496
SAUCONY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999.......................................3
Condensed Consolidated Statements of Income for the thirteen weeks and
twenty-six weeks ended June 30, 2000 and
July 2, 1999................................................4
Condensed Consolidated Statements of Cash Flows for the
twenty-six weeks ended June 30, 2000 and July 2, 1999.......6-7
Notes to Condensed Consolidated Financial Statements -
June 30, 2000...............................................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 2001 Annual Meeting of
Stockholders...................................................17
Item 6. Exhibits and Reports on Form 8-K...........................18
Signature...........................................................19
<TABLE>
ITEM 1: FINANCIAL STATEMENTS
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(in thousands)
<CAPTION>
ASSETS
(Unaudited) (Audited)
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................$ 2,227 $ 3,515
Accounts receivable, net..................................................... 35,720 23,968
Inventories, net............................................................. 35,835 35,270
Prepaid expenses and other current assets.................................... 4,892 3,727
-------- ---------
Total current assets....................................................... 78,674 66,480
-------- ---------
Property, plant and equipment, net.............................................. 7,331 8,279
-------- ---------
Other assets.................................................................... 2,059 2,422
-------- ---------
Total assets....................................................................$ 88,064 $ 77,181
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................................................$ 10,296 $ 1,928
Current maturities of long term debt......................................... 370 375
Accounts payable............................................................. 5,814 5,897
Accrued expenses and other current liabilities............................... 7,659 7,203
-------- ---------
Total current liabilities.................................................. 24,139 15,403
-------- ---------
Long-term obligations:
Long-term debt............................................................... 69 292
Deferred income taxes........................................................ 2,093 2,045
Other long-term obligations.................................................. 179 171
-------- ---------
Total long-term obligations................................................ 2,341 2,508
-------- ---------
Minority interest in consolidated subsidiaries.................................. 334 308
-------- ---------
Stockholders' equity:
Common stock, $.33 1/3 par value............................................. 2,242 2,222
Additional paid-in capital................................................... 17,088 16,815
Retained earnings............................................................ 47,260 42,679
Accumulated other comprehensive income....................................... (763) (564)
--------- ----------
Total...................................................................... 65,827 61,152
Less:
Common stock held in treasury, at cost....................................... (4,293) (2,179)
Notes receivable............................................................. (276) 0
Unearned compensation........................................................ (8) (11)
--------- ----------
Total stockholders' equity................................................. 61,250 58,962
-------- ---------
Total liabilities and stockholders' equity......................................$ 88,064 $ 77,181
======== =========
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the Thirteen Weeks and Twenty-Six Weeks Ended June 30, 2000 and July 2, 1999
(Unaudited)
<CAPTION>
(in thousands, except per share data)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales.......................................................$ 43,439 $ 37,706 $ 89,855 $ 80,112
Other revenue................................................... 123 74 262 282
--------- --------- --------- --------
Total revenue................................................... 43,562 37,780 90,117 80,394
--------- --------- --------- --------
Costs and expenses
Cost of sales................................................ 26,636 23,569 55,706 50,554
Selling expenses............................................. 6,926 5,908 14,007 11,341
General and administrative expenses.......................... 4,386 4,246 9,170 8,554
Loss on sale of cycling division and related expenses........ 2,944 0 2,944 0
--------- --------- --------- --------
Total costs and expenses................................... 40,892 33,723 81,827 70,449
--------- --------- --------- --------
Operating income................................................ 2,670 4,057 8,290 9,945
Non-operating income (expense)
Interest, net................................................ (230) (246) (362) (392)
Foreign currency............................................. 1 (11) (46) 15
Other........................................................ (43) 13 44 37
---------- --------- --------- --------
Income before income taxes and minority interest................ 2,398 3,813 7,926 9,605
Provision for income taxes...................................... 1,015 1,543 3,312 3,973
Minority interest in income of consolidated subsidiaries........ 10 13 33 42
--------- --------- --------- --------
Net income......................................................$ 1,373 $ 2,257 $ 4,581 $ 5,590
========= ========= ========= ========
Per share amounts:
Earnings per common share - basic ..............................$ 0.22 $ 0.36 $ 0.73 $ 0.90
========== ========== ========== =========
Earnings per common share - diluted.............................$ 0.22 $ 0.34 $ 0.71 $ 0.86
========== ========== ========== =========
Weighted average common shares and equivalents outstanding...... 6,376 6,625 6,410 6,512
========= ========= ========= ========
Cash dividends per share of common stock........................ 0 0 0 0
========= ========= ========= ========
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Twenty-six Weeks Ended June 30, 2000 and July 2, 1999
<CAPTION>
Increase (decrease) in Cash and Cash Equivalents
(in thousands)
(Unaudited)
June 30, July 2,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................$ 4,581 $ 5,590
-------- ---------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization.............................................. 1,010 935
Provision for bad debts and discounts...................................... 2,139 2,791
Loss on sale of cycling division........................................... 2,944 0
Deferred income tax provision (benefit).................................... 217 (370)
Other...................................................................... 44 104
Changes in operating assets and liabilities, net of effect of dispositions and
foreign currency adjustments:
Decrease (increase) in assets:
Marketable securities.................................................... (41) (29)
Accounts receivable...................................................... (14,208) (16,070)
Inventories.............................................................. (3,398) 1,223
Prepaid expenses and other current assets................................ (1,342) (343)
Increase (decrease) in liabilities:
Accounts payable......................................................... (52) (1,605)
Accrued expenses......................................................... (316) 1,795
--------- ---------
Total adjustments.......................................................... (13,003) (11,569)
--------- ----------
Net cash used by operating activities........................................... (8,422) (5,979)
--------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (522) (673)
Increase (decrease) in deferred charges, deposits and other.................. 32 (28)
Proceeds from sale of equipment.............................................. 0 3
Proceeds from the sale of cycling division................................... 1,350 0
-------- ---------
Net cash provided (used) by investing activities................................ 860 (698)
-------- ----------
Cash flows from financing activities:
Net short-term borrowings.................................................... 8,516 3,642
Common stock repurchased..................................................... (2,114) 0
Repayment of long-term debt and capital lease obligations.................... (189) (221)
Issuances of common stock.................................................... 17 366
-------- ---------
Net cash provided by financing activities....................................... 6,230 3,787
-------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................................................. 44 (241)
-------- ----------
Net decrease in cash and cash equivalents....................................... (1,288) (3,131)
Cash and equivalents at beginning of period..................................... 3,515 5,495
-------- ---------
Cash and equivalents at end of period...........................................$ 2,227 $ 2,364
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds...............................................$ 4,350 $ 4,277
======== =========
Interest...................................................................$ 339 $ 343
======== =========
Non-cash investing and financing activities:
Property purchased under capital leases......................................$ 0 $ 160
======== =========
See notes to condensed consolidated financial statements
</TABLE>
SAUCONY, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(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
December 31, 1999. Operating results for twenty-six weeks ended June 30, 2000,
are not necessarily indicative of the results for the entire year.
NOTE 2 - INVENTORIES
Inventories at June 30, 2000 and December 31, 1999 consisted of the following
(in thousands):
June 30, December 31,
2000 1999
---- ----
Finished goods.................................$ 29,998 $ 30,067
Work in progress............................... 359 920
Raw materials.................................. 5,478 4,283
-------- ---------
Total..........................................$ 35,835 $ 35,270
======== =========
NOTE 3 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Thirteen Weeks Ended Thirteen Weeks Ended
June 30, 2000 July 2, 1999
------------------------- -------------------
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....................$ 1,373 $ 1,373 $ 2,257 $ 2,257
========= ======== ========= =========
Weighted-average common shares
outstanding....................................... 6,224 6,224 6,264 6,264
Effect of dilutive securities:
Employee stock options............................ 0 152 0 361
--------- -------- --------- ---------
Weighted-average common shares
and equivalents outstanding....................... 6,224 6,376 6,264 6,625
========= ======== ========= =========
Earnings per share...................................$ 0.22 $ 0.22 $ 0.36 $ 0.34
========= ======== ======== =========
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
June 30, 2000 July 2, 1999
--------------------------- -------------------
Earnings Earnings Earnings Earnings
per per per per
Common Common Common Common
Share - Share - Share - Share -
Basic Diluted Basic Diluted
Net income available for common
shares and assumed conversions....................$ 4,581 $ 4,581 $ 5,590 $ 5,590
========= ======== ========= =========
Weighted-average common shares
outstanding....................................... 6,245 6,245 6,246 6,246
Effect of dilutive securities:
Employee stock options............................ 0 165 0 266
--------- -------- --------- ---------
Weighted-average common shares
and equivalents outstanding....................... 6,245 6,410 6,246 6,512
========= ======== ========= =========
Earnings per share...................................$ 0.73 $ 0.71 $ 0.90 $ 0.86
========= ======== ======== =========
</TABLE>
NOTE 4 - STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(in thousands)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
June 30, 2000 July 2, 1999 June 30, 2000 July 2, 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income...........................................$ 1,373 $ 2,257 $ 4,581 $ 5,590
Other comprehensive income:
Foreign currency translation adjustment........... (60) (175) (199) (361)
Income tax benefit related to other
comprehensive expense........................... 25 19 78 154
--------- -------- --------- ---------
Other comprehensive income, net of tax............... (35) (156) (121) (207)
---------- --------- ---------- ----------
Comprehensive income.................................$ 1,338 $ 2,101 $ 4,460 $ 5,383
========= ======== ========= =========
</TABLE>
NOTE 5 - 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 June 30,
2000 and July 2, 1999, 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 December 31, 1999.
<TABLE>
<CAPTION>
(in thousands)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
June 30, 2000 July 2, 1999 June 30, 2000 July 2, 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Saucony $ 38,263 $ 32,606 $ 80,398 $ 70,433
Other products 5,299 5,174 9,719 9,961
---------- --------- ---------- ----------
$ 43,562 $ 37,780 $ 90,117 $ 80,394
========== ========= ========== ==========
Income (loss) before income taxes:
Saucony $ 5,845 $ 4,169 $ 12,141 $ 10,234
Other products (3,447) (356) (4,215) (629)
------------ ---------- ----------- -----------
$ 2,398 $ 3,813 $ 7,926 $ 9,605
========== ========= ========== ==========
</TABLE>
NOTE 6 - LOSS ON SALE OF CYCLING DIVISION AND RELATED EXPENSES
On June 29, 2000, the Company sold substantially all of the assets and business
of its cycling division, consisting of inventory, prepaid expenses, equipment
and tradenames to QR Merlin Acquisition LLC for $1,350 in cash and the
assumption of $39 in liabilities. In connection with the sale, the Company
recorded a pre-tax loss of $2,944, inclusive of $1,240 of expenses associated
with the transaction and resulting from the exit of the cycling business, or
$1,727 after-tax or $0.27 per diluted share. As a result of the transaction, a
majority of the cycling division employees were severed and certain long-lived
assets used exclusively in the cycling business were deemed impaired. Expenses
associated with the sale and exit of the cycling division are as follows:
Transaction costs.............................................$ 444
Costs to exit facility and equipment leases and
other non-cancelable contractual commitments................ 251
Employee severance and termination benefits................... 243
Writeoff leasehold improvements............................... 84
Writeoff goodwill and other deferred charges.................. 218
---------
Total.........................................................$ 1,240
---------
Included in accrued expenses at June 30, 2000 are $738 of costs associated with
the sale and exit of the cycling business, which the Company expects will be
paid by the end of fiscal 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Dollar amounts throughout this Item 2 are in thousands, except per share
amounts.
<TABLE>
HIGHLIGHTS
<CAPTION>
Thirteen Weeks and Twenty-Six Weeks Ended June 30, 2000 Compared to
Thirteen Weeks and Twenty-Six Weeks Ended July 2, 1999
Percent Change
Increase (Decrease)
Thirteen Twenty-Six
Weeks Weeks
<S> <C> <C>
Net sales..................................................... 15.2% 12.2%
Gross profit...................................................18.9 15.5
Selling, general and administrative............................11.4 16.5
$ Change
Thirteen Twenty-Six
Weeks Weeks
Operating income..............................................($1,387) ($1,655)
Income before tax............................................. (1,415) (1,679)
Net income.................................................... (884) (1,009)
Percent of Net Sales
Thirteen Weeks Twenty-Six Weeks
2000 1999 2000 1999
---- ---- ---- ----
Gross margin....................................... 38.7% 37.5% 38.0% 36.9%
Selling, general and administrative................ 26.0 26.9 25.8 24.8
Operating income................................... 6.1 10.8 9.2 12.4
Income before tax.................................. 5.5 10.1 8.8 12.0
Net income......................................... 3.2 6.0 5.1 7.0
</TABLE>
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony product line and our other product lines for the thirteen weeks and
twenty-six weeks ended June 30, 2000 and July 2, 1999:
<TABLE>
<CAPTION>
Thirteen Weeks Ended June 30, 2000 and July 2, 1999
2000 1999
---------------------- -------------
<S> <C> <C> <C> <C>
Saucony..........................$ 38,107 87.7% $ 32,578 86.4%
Other............................ 5,332 12.3% 5,128 13.6%
--------- ------- --------- ------
Total............................$ 43,439 100.0% $ 37,706 100.0%
========= ======= ========= ======
Twenty-Six Weeks Ended June 30, 2000 and July 2, 1999
-----------------------------------------------------
2000 1999
--------------------- ---------------------
Saucony..........................$ 80,109 89.2% $ 70,252 87.7%
Other............................ 9,746 10.8% 9,860 12.3%
--------- ------- --------- ------
Total............................$ 89,855 100.0% $ 80,112 100.0%
========= ======= ========= ======
</TABLE>
THIRTEEN WEEKS ENDED JUNE 30, 2000 COMPARED TO THIRTEEN WEEKS ENDED JULY 2, 1999
CONSOLIDATED NET SALES
Net sales increased 15% to $43,439 in the thirteen weeks ended June 30, 2000
from $37,706 in the thirteen weeks ended July 2, 1999. At constant currency
exchange rates, the net sales increase for the thirteen weeks ended June 30,
2000 would have been 16%.
On a geographic basis, domestic net sales increased $5,081, or 15%, to $38,322
in the thirteen weeks ended June 30, 2000 from $33,241 in the thirteen weeks
ended July 2, 1999. International net sales increased $652, or 15%, to $5,117 in
the thirteen weeks ended June 30, 2000 from $4,465 in the thirteen weeks ended
July 2, 1999.
SAUCONY BRAND SEGMENT SALES
Worldwide net sales of Saucony-branded footwear and apparel increased 17% to
$38,107 in the thirteen weeks ended June 30, 2000 from $32,578 in the thirteen
weeks ended July 2, 1999, primarily due to 13% unit volume growth in the
footwear category. Overall average selling prices increased 4% in the thirteen
weeks ended June 30, 2000 due to higher prices for new Original product
offerings and due also to a greater proportion of technical footwear in our
domestic product mix, as compared to the comparable prior period.
On a geographic basis, domestic net sales increased $4,982, or 17%, to $33,687
in the thirteen weeks ended June 30, 2000 from $28,705 in the thirteen weeks
ended July 2, 1999 due primarily to a 10% increase in footwear unit volumes and
higher average per pair wholesale sell prices. In the thirteen weeks ended June
30, 2000 average per pair wholesale sell prices increased 8% as compared to the
thirteen weeks ended July 2, 1999. Originals unit volume accounted for 59% of
domestic unit volume in the thirteen weeks ended June 30, 2000 compared to 65%
of domestic unit volume in the thirteen weeks ended July 2, 1999.
International net sales increased $547, or 14%, to $4,420 in the thirteen weeks
ended June 30, 2000 from $3,873 in the thirteen weeks ended July 2, 1999 due
primarily to increased distributor footwear unit volume and increased unit
shipment volume in Canada, offset in part by the impact of currency exchange
rates.
OTHER PRODUCTS SEGMENT SALES
Net sales of Other Products increased $204, or 4%, to $5,332 in the thirteen
weeks ended June 30, 2000 from $5,128 in the thirteen weeks ended July 2, 1999,
due primarily to increased factory outlet store sales resulting from the
addition of two factory outlet stores and, to a lesser extent, increased unit
volume shipments of Hind-branded apparel, offset in part by a 23% reduction in
cycling division sales due to lower unit volume.
COST AND EXPENSES
Our gross profit increased 19% to $16,803 in the thirteen weeks ended June 30,
2000 from $14,137 in the thirteen weeks ended July 2, 1999 due primarily to
higher domestic footwear unit volumes. Gross margin improved 1.2 percentage
points to 38.7% in the thirteen weeks ended June 30, 2000 from 37.5% in the
thirteen weeks ended July 2, 1999 due to a change in our product mix and lower
levels of product returns and discounts resulting from the product mix change.
Selling, general and administrative expenses increased in absolute dollars to
$11,312 in the thirteen weeks ended June 30, 2000 from $10,154 in the thirteen
weeks ended July 2, 1999. As a percent of net sales, selling, general and
administrative expenses decreased to 26.0% of net sales, in the thirteen weeks
ended June 30, 2000, from 26.9% of net sales, in the thirteen weeks ended July
2, 1999. The increase in selling, general and administrative expenses was due to
planned increases in television and print media, increased event sponsorship,
increased variable selling expenses, administrative staffing increases,
increased costs associated with the addition of two factory outlet stores and
increased professional fees, offset in part by lower provisions for doubtful
accounts. Selling expenses as a percent of net sales increased to 15.9% in the
thirteen weeks ended June 30, 2000 from 15.7% in the thirteen weeks ended July
2, 1999, while general and administrative expenses decreased to 10.1% of net
sales in the thirteen weeks ended June 30, 2000 from 11.2% in the thirteen weeks
ended July 2, 1999.
As a result of the competitive environment of the cycling market and our
inability to improve upon the operating performance of the cycling division,
notwithstanding management's efforts in consolidating operations, reducing the
operating cost structure and outsourcing production, we concluded that
divestiture of the cycling business was warranted and that this action would
allow management to focus our efforts and investment on our footwear and apparel
businesses. On June 29, 2000, we sold substantially all of the assets and
business of our cycling division, consisting of inventory, prepaid expenses,
equipment and tradenames to QR Merlin Acquisition LLC for $1,350 in cash and the
assumption of $39 in liabilities. In connection with the sale, we recorded a
pre-tax loss of $2,944, inclusive of $1,240 of expenses associated with the
transaction and expenses resulting from our exit of the cycling business, or
$1,727 after-tax or $0.27 per diluted share. As a result of the transaction, a
majority of the cycling division employees were severed and certain long-lived
assets used exclusively in the cycling business were deemed impaired and have
been written off. Expenses associated with the sale and exit of the cycling
division are as follows:
Transaction costs......................................................$ 444
Costs to exit facility and equipment leases and
other non-cancelable contractual commitments................ 251
Employee severance and termination benefits................... 243
Writeoff leasehold improvements............................... 84
Writeoff goodwill and other deferred charges.................. 218
---------
Total.........................................................$ 1,240
---------
Included in accrued expenses at June 30, 2000 are $738 of costs associated with
the sale and the exit of the cycling business, which we expect will be paid by
the end of fiscal 2000.
Net sales from the cycling division, which are included in our Other Product
Segment, represented approximately 3.5% and 3.0% of consolidated net sales for
the thirteen weeks and twenty-six weeks ended June 30, 2000, respectively. The
cycling division has historically had lower gross margins than our other
products and has reduced net income. We do not expect any significant
improvement to our future consolidated margins, as a result of the sale of the
cycling division, given the relative size of the cycling division in comparison
to the business as a whole, and expect only marginal improvement in net income.
Net interest expense decreased 7% to $230 in the thirteen weeks ended June 30,
2000 from $246 in the thirteen weeks ended July 2, 1999 due to lower average
debt levels in the thirteen weeks ended June 30, 2000, offset in part by higher
borrowing rates.
INCOME BEFORE TAX AND MINORITY INTEREST
Thirteen Weeks Ended
June 30, July 2,
2000 1999
---- ----
Segment
Saucony Brand.................$ 5,845 $ 4,169
Other Products................ (3,447) (356)
--------- --------
Total.........................$ 2,398 $ 3,813
======== =======
Consolidated income before tax and minority interest decreased to $2,398 in the
thirteen weeks ended June 30, 2000 from $3,813 in the thirteen weeks ended July
2, 1999 due primarily to the loss on the sale of the cycling division, which is
included in the Other Products Segment and to a lesser extent, operating losses
incurred at our cycling division prior to the sale, due to a sales decrease of
23% on lower unit volume and lower profits from our factory outlet division due
to the startup costs associated with the addition of two stores.
INCOME TAXES
The provision for income taxes decreased to $1,015 in the thirteen weeks ended
June 30, 2000 from $1,543 in the thirteen weeks ended July 2, 1999, due
primarily to the loss on the sale of the cycling division, which reduced
domestic pre-tax income. The effective tax rate increased to 42.3% in the
thirteen weeks ended June 30, 2000 from 40.5% in the thirteen weeks ended July
2, 1999 due primarily to a shift in the composition of domestic and foreign
pre-tax earnings.
NET INCOME
Net income decreased to $1,373 in the thirteen weeks ended June 30, 2000 from
$2,257 in the thirteen weeks ended July 2, 1999. Diluted earnings per share
decreased to $0.22 in the thirteen weeks ended June 30, 2000 compared to $0.34
in the thirteen weeks ended July 2, 1999. The loss on the sale of the cycling
division reduced net income and diluted earnings per share by $1,727 and $0.27,
respectively, in the thirteen weeks ended June 30, 2000. Weighted average common
shares and equivalent shares used to calculate diluted earnings per share were
6,376 and 6,625, respectively, in the thirteen weeks ended June 30, 2000 and
July 2, 1999.
TWENTY-SIX WEEKS ENDED JUNE 30, 2000 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 2,
1999
CONSOLIDATED NET SALES
Net sales increased 12% to $89,855 in the twenty-six weeks ended June 30, 2000
from $80,112 in the twenty-six weeks ended July 2, 1999. At constant currency
exchange rates, the net sales increase for the twenty-six weeks ended June 30,
2000 would have been 13%.
On a geographic basis, domestic net sales increased $8,627, or 12%, to $78,784
in the twenty-six weeks ended June 30, 2000 from $70,157 in the twenty-six weeks
ended July 2, 1999. International net sales increased $1,116, or 11%, to $11,071
in the twenty-six weeks ended June 30, 2000 from $9,955 in the twenty-six weeks
ended July 2, 1999.
SAUCONY BRAND SEGMENT SALES
Worldwide net sales of Saucony-branded footwear and apparel increased $9,857, or
14%, to $80,109 in the twenty-six weeks ended June 30, 2000 from $70,252 in the
twenty-six weeks ended July 2, 1999, primarily due to 13% unit volume growth in
the footwear category. Overall average selling prices increased 1% in the
twenty-six weeks ended June 30, 2000 due to higher prices for new Original
product offerings.
On a geographic basis, domestic net sales increased $8,864, or 14%, to $70,212
in the twenty-six weeks ended June 30, 2000 from $61,348 in the twenty-six weeks
ended July 2, 1999 due primarily to a 11% increase in footwear unit volumes and
higher average per pair wholesale sell prices. In the twenty-six weeks ended
June 30, 2000 average per pair wholesale sell prices increased 4% as compared to
the twenty-six weeks ended July 2, 1999. Originals unit volume accounted for 58%
of domestic unit volume in the twenty-six weeks ended June 30, 2000 compared to
54% of domestic unit volume in the twenty-six weeks ended July 2, 1999.
International net sales increased $993, or 11%, to $9,897 in the twenty-six
weeks ended June 30, 2000 from $8,904 in the twenty-six weeks ended July 2, 1999
due primarily to increased distributor footwear unit volume and increased unit
shipment volume in Canada, offset in part by the impact of currency exchange
rates.
OTHER PRODUCTS SEGMENT SALES
Net sales of Other Products decreased $114, or 1%, to $9,746 in the twenty-six
weeks ended June 30, 2000 from $9,860 in the twenty-six weeks ended July 2,
1999, due primarily to lower unit volume at our cycling division resulting in a
sales decrease of 24%, offset in part by increased sales at our factory outlet
division stores due to the addition of two factory outlet stores and, to a
lesser extent, increased unit volume shipments of Hind-branded apparel.
COST AND EXPENSES
Our gross profit increased 16% to $34,149 in the twenty-six weeks ended June 30,
2000 from $29,558 in the twenty-six weeks ended July 2, 1999 due primarily to
higher domestic footwear unit volumes. Gross margin improved 1.1 percentage
points to 38.0% in the twenty-six weeks ended June 30, 2000 from 36.9% in the
twenty-six weeks ended July 2, 1999 due to a change in our product mix and lower
levels of product returns and discounts resulting from the product mix change.
Selling, general and administrative expenses increased in absolute dollars and
as a percent of net sales to $23,177, or 25.8% of net sales, in the twenty-six
weeks ended June 30, 2000 from $19,895, or 24.8% of net sales, in the twenty-six
weeks ended July 2, 1999. The increase in selling, general and administrative
expenses was due to planned increases in television and print media, increased
athlete and event sponsorship, increased variable selling expenses,
administrative staffing increases, increased costs associated with the addition
of two factory outlet stores and increased professional fees, offset in part by
lower provisions for doubtful accounts. Selling expenses as a percent of net
sales increased to 15.6% in the twenty-six weeks ended June 30, 2000 from 14.1%
in the twenty-six weeks ended July 2, 1999, while general and administrative
expenses decreased to 10.2% of net sales in the twenty-six weeks ended June 30,
2000 from 10.7% in the twenty-six weeks ended July 2, 1999.
As a result of the sale of substantially all of the assets used in our cycling
division, we recorded a pre-tax loss of $2,944, or $1,727 after-tax ($0.27 per
diluted share) in the twenty-six weeks ended June 30, 2000. The loss recorded on
the sale of the cycling division is inclusive of personnel termination benefits,
transaction costs and other costs resulting from exiting the business.
Net interest expense decreased 8% to $362 in the twenty-six weeks ended June 30,
2000 from $392 in the twenty-six weeks ended July 2, 1999 due to lower average
debt levels in the twenty-six weeks ended June 30, 2000, offset in part by
higher borrowing rates.
INCOME BEFORE TAX AND MINORITY INTEREST
Twenty-Six Weeks Ended
June 30, July 2,
2000 1999
---- ----
Segment
Saucony Brand...................$ 12,141 $ 10,234
Other Products.................. (4,215) (629)
---------- ---------
Total...........................$ 7,926 $ 9,605
========= ========
Consolidated income before tax decreased to $7,926 in the twenty-six weeks ended
June 30, 2000 from $9,605 in the twenty-six weeks ended July 2, 1999 due
primarily to the loss on the sale of the cycling division, and to a lesser
extent, operating losses incurred at our cycling division prior to the sale due
to a sales decrease of 24% on lower unit volume and lower profits from our
factory outlet division due to the startup costs associated with the addition of
two stores.
INCOME TAXES
The provision for income taxes decreased to $3,312 in the twenty-six weeks ended
June 30, 2000 from $3,973 in the twenty-six weeks ended July 2, 1999, due
primarily to the loss on the sale of the cycling division, which reduced
domestic pre-tax income. The effective tax rate increased to 41.8% in the
twenty-six weeks ended June 30, 2000 from 41.4% in the twenty-six weeks ended
July 2, 1999 due primarily to a shift in the composition of domestic and foreign
pre-tax earnings.
NET INCOME
Net income decreased to $4,581 in the twenty-six weeks ended June 30, 2000 from
$5,590 in the twenty-six weeks ended July 2, 1999. Diluted earnings per share
decreased to $0.71 in the twenty-six weeks ended June 30, 2000 compared to $0.86
in the twenty-six weeks ended July 2, 1999. The loss on the sale of the cycling
division reduced net income and diluted earnings per share by $1,727 and $0.27,
respectively in the twenty-six weeks ended June 30, 2000. Weighted average
common shares and equivalent shares used to calculate diluted earnings per share
were 6,410 and 6,512, respectively, in the twenty-six weeks ended June 30, 2000
and July 2, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, our cash and cash equivalents totaled $2,227, a decrease of
$1,288 from December 31, 1999. The decrease is due primarily to an increase in
accounts receivable of $12,069, net of the provision for bad debt and discounts,
an increase in inventories of $3,398, offset in part by an increase in
borrowings against our domestic and foreign credit facilities of $8,516. The
increase in accounts receivable is due to increased net sales of our Saucony
footwear products in the twenty-six weeks ended June 30, 2000. Our days sales
outstanding for accounts receivable decreased to 72 days in the twenty-six weeks
ended June 30, 2000 from 74 days in the twenty-six weeks ended July 2, 1999.
Inventories increased $3,398 in the twenty-six weeks ended June 30, 2000 due to
near-term shipment requirements. As a consequence of the increased inventory
level, our inventory turns ratio decreased to 3.1 turns in the twenty-six weeks
ended June 30, 2000 from 3.4 turns in the twenty-six weeks ended July 2, 1999.
The number of days sales in inventory increased 11% to 117 days in the
twenty-six weeks ended June 30, 2000 from 105 days in the twenty-six weeks ended
July 2, 1999.
For the twenty-six weeks ended June 30, 2000, we used $8,422 of net cash from
operating activities, expended $522 to acquire capital assets, borrowed $8,516
under our credit facilities, expended $189 to reduce long-term debt and $2,114
to repurchase 197,400 shares of our Common Stock, received proceeds of $1,350
from the sale of the cycling division and received $17 from issuances of shares
of our Common Stock.
Additional 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 June 30, 2000 included a decrease in accrued expenses of
$316 (due primarily to decreased compensation accruals), a decrease in accounts
payable of $52 and an increase in prepaid expenses of $1,342 (due to timing
differences between estimated tax payments and tax provisions).
OVERALL LIQUIDITY
Our liquidity is contingent upon a number of factors, principally our future
operating results. Management believes that our current cash and cash
equivalents, credit facilities and internally generated funds are adequate to
meet our working capital requirements and to fund our capital investment needs
and debt service payments.
INFLATION AND CURRENCY RISK
The effect of inflation on our results of operations over the past three years
has been minimal. The impact of currency fluctuation on our purchase of
inventory from foreign suppliers has been non-existent as the transactions were
denominated in U.S. dollars. We are, however, subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. We have entered into forward
foreign exchange contracts to minimize certain transaction currency risk.
ACCOUNTING PRONOUNCEMENTS
SFAS 133 AND SFAS 137
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (SFAS 133) (as amended by Financial Accounting Standards No. 137, a
deferral of the effective date of FASB statement No. 133 (SFAS 137)), which is
effective for fiscal quarters of fiscal years commencing after June 15, 2000,
with early adoption permitted. SFAS 133 defines the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. Upon adoption of SFAS 133, all derivatives
must be recognized on the balance sheet at their then fair value and any
deferred gains or losses remaining on the balance sheet under previous
hedge-accounting rules must be removed from the balance sheet. In the period of
adoption, the transition adjustments may effect current earnings and may effect
other comprehensive income. SFAS 133 requires companies to recognize adjustments
to the fair value of derivatives that are not hedges currently in earnings when
they occur. For derivatives that qualify as hedges, changes in the fair value of
the derivatives can be recognized currently in earnings, along with an
offsetting adjustment against the basis of the underlying hedged item or be
deferred in other comprehensive income. We are assessing the impact of the
provisions of SFAS 133 on its hedging activities, which are currently limited to
forward foreign currency exchange contracts. Because of the our minimal use of
derivatives, management does not anticipate that the adoption of SFAS 133 will
have a significant effect on current earnings or on our financial position,
however, at this time, the effect of the adoption of SFAS 133 on our future
earnings and financial position cannot be estimated.
FASB INTERPRETATION NO. 44
On April 3, 2000, The Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions involving
Stock Compensation," an interpretation of APB Opinion No. 25. FIN 44 is
effective July 1, 2000, however, the interpretation applies to certain events
that occur after December 15, 1998 or January 12, 2000, but before July 1, 2000.
FIN 44 addresses and defines the scope of APB 25 with respect to awards of stock
or options to independent contractors, clarifies the definition of an employee
for purposes of applying APB 25 to include non-employee board members, clarifies
the criteria for plan qualification as a noncompensatory plan and provides
guidance on the accounting consequence of modifications to the terms of
previously issued fixed stock options or awards.
We will be adopting FIN 44 in the third quarter of fiscal 2000, the initial
application of which will not have a material effect on earnings or on our
financial position.
STAFF ACCOUNTING BULLETIN NO. 101
On December 8, 1999 the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on properly applying Generally Accepted
Accounting Principles to revenue recognition in financial statements. In March
and June 2000 the SEC issued Staff Accounting Bulletins No. 101A and No. 101B,
respectively, to delay the implementation date of SAB 101 until the fourth
quarter of fiscal years beginning after December 15, 1999. We are currently
evaluating the effect of SAB 101 on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have 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 our results of operations over the past three years has
been minimal. The impact of currency fluctuation on the purchase of inventory by
us from foreign suppliers has been non-existent as all transactions were
denominated in U.S. dollars. However, we are subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. We have entered into certain
forward foreign exchange contracts to minimize the transaction currency risk.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the 2000 Annual Meeting of Stockholders of the Company (the "Annual Meeting")
held on May 18, 2000, 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 approval of an amendment to the Company's 1993 Equity Incentive Plan,
as amended, increasing the number of shares issuable under the plan from
1,150,000 to 1,900,000.
3. The ratification of the selection by the Board of Directors of
PricewaterhouseCoopers LLP as the Company's independent auditors for the
current 2000 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. 2,214,687 -- 244,892 N.A.
John H. Fisher 2,214,687 -- 244,892 N.A.
Phyllis H. Fisher 2,214,687 -- 244,892 N.A.
Charles A. Gottesman 2,214,687 -- 244,892 N.A.
Robert J. LeFort, Jr. 2,214,687 -- 244,892 N.A.
John. J. Neuhauser 2,214,687 -- 244,892 N.A.
2. Approval of the amendment to
the Company's 1993 Equity
Incentive Plan 2,103,698 324,010 31,871 N.A.
3. Ratification of Independent
Auditors 2,452,008 4,850 2,721 N.A.
</TABLE>
ITEM 5 - STOCKHOLDER PROPOSALS FOR THE 2001 ANNUAL MEETING OF STOCKHOLDERS
As set forth in the Company's proxy statement for its 2000 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 2001 Annual Meeting of Stockholders must be
received by the Company on or before December 22, 2000.
In addition, in accordance with 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 2001 Annual Meeting of Stockholders must be
received by the Company on or before March 7, 2001 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Third Amendment dated May 23, 2000 to the Revolving Credit Agreement
dated August 31, 1998 between the Registrant and State Street Bank and Trust
Company.
10.2 Amendment No. 4 to 1993 Equity Incentive Plan, as amended.
27.0 Financial Data Schedule.
99.1 Certain Factors that May Effect Future Results, incorporated herein by
reference to pages 19-21 of the Company's Annual Report on Form 10-K for the
period ended December 31, 1999. Such Form 10-K shall not be deemed to be filed
herewith 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.
SAUCONY, INC.
By: /s/ Michael Umana
Michael Umana
Vice President, Finance
Chief Financial Officer
(Duly authorized officer and principal financial officer)
Date: August 10, 2000
