SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended January 5, 2001 Commission file number: 000-05083
SAUCONY, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
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(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 532-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act:
Class A Common Stock, $.33-1/3 par value
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(Title of class)
Class B Common Stock, $.33-1/3 par value
----------------------------------------
(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting and non-voting common equity stock held by
non-affiliates of the registrant, as of March 9, 2001, was approximately
$31,745,000 (based on the closing prices of the Class A Common Stock and Class B
Common Stock on such date as reported on the Nasdaq National Market).
The number of shares of the registrant's Class A Common Stock, $.33-1/3 par
value, and Class B Common Stock, $.33-1/3 par value, outstanding on March 9,
2001 was 2,570,127 and 3,516,189, respectively.
Portions of the following documents are incorporated by reference in this
Report.
Documents Incorporated by Reference
Document Form 10-K Part
Proxy Statement for Annual Meeting of Stockholders Part III
of the Registrant to be held on May 24, 2001, to be
filed with the Securities and Exchange Commission.
PART I
ITEM 1 - BUSINESS
OVERVIEW
We design, manufacture and market performance-oriented athletic footwear,
athletic apparel and casual leather footwear. Our principal products are:
o technical running, walking, cross training and outdoor trail shoes, which we
sell under the Saucony brand name;
o technical running shoe models from the early 1980's, which we reintroduced in
1998, as Saucony "Originals", our "classic" footwear line;
o athletic apparel, which we sell under the Hind brand name;
o premium leather casual footwear inspired by our vintage athletic heritage,
which we sell under the Hyde brand name; and
o shoes for coaches and officials and casual leather walking and workplace
footwear, which we sell under the Spot-bilt brand name.
Our products are sold in the United States at more than 5,500 retail locations
and our 10 factory outlet stores and outside the United States in 32 countries
through 20 distributors located throughout the world. For the fiscal year ended
January 5, 2001, we generated total sales of $166.0 million.
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 $1.35 million in cash and the
assumption of approximately $39,000 in liabilities.
Saucony(R), Spot-bilt(R), GRID(R), Hyde(R), and Hind(R) are our registered
trademarks. This annual report on Form 10-K also includes other service marks,
trademarks and trade names of ours and of companies other than us.
SEGMENTS
Our business is organized into two operating segments. The Saucony segment
consists of Saucony(R) technical and Originals footwear, and the Other Products
segment consists of Hind(R) athletic apparel, Hyde(R) Authentics footwear and
Spot-bilt(R) shoes for coaches and officials and casual leather walking and
workplace footwear, together with sales of our products at our 10 factory outlet
stores and sales of our former cycling division.
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 segment and our Other Products segment for the periods and geographic
areas indicated.
Net Sales
(dollars in thousands)
Fiscal 2000 Fiscal 1999 Fiscal 1998
---------------------- --------------------- --------------------
$ % $ % $ %
- - - - - -
Saucony
Domestic..............$ 125,318 75% $ 115,118 75% $ 67,774 64%
International......... 19,631 12% 16,780 11% 18,558 18%
---------- ------- ---------- ------- --------- -------
Total.................$ 144,949 87% $ 131,898 86% $ 86,332 82%
---------- ------- ---------- ------- --------- -------
Other Products
Domestic..............$ 18,786 12% $ 19,910 13% $ 15,590 15%
International......... 2,294 1% 2,250 1% 3,152 3%
---------- ------- ---------- ------- --------- -------
Total.................$ 21,080 13% $ 22,160 14% $ 18,742 18%
---------- ------- ---------- ------- --------- -------
Total....................$ 166,029 100% $ 154,058 100% $ 105,074 100%
========== ======= ========== ==== ========= =======
For further financial information concerning our operating segments and
geographic areas, please see Notes 15 and 16 to our Consolidated Financial
Statements in this Annual Report on Form 10-K.
PRODUCTS
FOOTWEAR
TECHNICAL FOOTWEAR. We sell performance running, walking, cross training and
outdoor trail shoes for athletes under the Saucony brand name, which has been
marketed in the United States for over 30 years. A substantial majority of sales
are in the running shoe category. We have several different products within each
Saucony brand category. These products have different designs and features,
resulting in different cushioning, stability, support characteristics and
prices.
We design and market separate lines for men and women within most technical
footwear categories. We currently sell approximately 39% of our technical shoes
to men and 61% to women. In keeping with our emphasis on performance, we market
and sell our technical footwear to athletes who have a high participation rate
in their sport of choice. We address this market through our "Loyal to the
Sport" advertising campaign. We believe that these consumers are more brand
loyal than those who buy athletic footwear for casual use. The suggested
domestic retail prices for most of our technical footwear products are in the
range of $50 to $85 per pair, with our top-of-the-line running shoes having
suggested domestic retail prices of up to $125 per pair. During fiscal 2000 we
introduced several new shoes targeted at the mid-priced footwear segment, which
is the largest segment of the running shoe market, with retail prices ranging
from $60 to $80 per pair.
The Saucony brand is recognized for its technical innovation and performance. As
a result of our application of biomechanical technology in the design process,
we believe that our Saucony footwear has a distinctive "fit and feel" that is
attractive to athletic users. A key element in the design of our shoes is an
anatomically correct toe and heel configuration that provides support and
comfort for the particular activity for which the shoe is designed.
We build a variety of technical features into our shoes. Most of our technical
running and other athletic shoes incorporate our Ground Reaction Inertia Device,
or GRID system, an innovative midsole system that employs molded strings
engineered to create a feeling similar to that of the "sweet spot" of a tennis
racquet. In contrast with conventional athletic shoe midsoles, the GRID system
is designed to react to various stress forces differently, thereby maximizing
shock absorption and minimizing rear foot motion. We have continually improved
the GRID system since it was first introduced in 1991.
We design our Saucony technical cross training, women's walking and outdoor
technical trail shoes with many of the same performance features and "fit and
feel" characteristics as are found in Saucony technical running shoes.
Currently, our most popular non-running technical athletic shoe is a woman's
performance walking shoe.
Technical footwear accounted for approximately 51%, 48% and 72% of our fiscal
2000, fiscal 1999 and fiscal 1998 consolidated net sales, respectively.
ORIGINALS FOOTWEAR. In 1998, we reintroduced a number of our technical running
shoe models from the early 1980's under the name "Originals." These shoes appeal
to younger consumers who do not generally wear them for athletic purposes. We
believe our Originals shoes have benefited from the trend toward "retro"
products in footwear and apparel. We offer these shoes in a variety of styles
with over 100 combinations of colors and materials. The suggested retail prices
for our Originals are in the range of $40 to $60 per pair.
Our initial Originals offering consisted of two models, the "Jazz Originals" and
the "Shadow Originals." In light of the success of these products, we expanded
the Originals product line to include color and material variations on our
initial Originals. During fiscal 2000, we introduced additional Originals
products, including "retro" footwear products, or contemporary-styled
reintroductions of our technical running shoe models from the early 1980's, or
athletic footwear designed for the 12 to 25 year old footwear consumer.
Originals accounted for approximately 35%, 37% and 9% of our fiscal 2000, fiscal
1999 and fiscal 1998 consolidated net sales, respectively.
SPOT-BILT
We sell shoes for coaches and officials and casual leather walking and workplace
footwear under the Spot-bilt brand name through the same distribution channels
as our Saucony brand shoes.
HYDE AUTHENTICS
We offer premium leather casual footwear under the Hyde Authentics brand name.
We introduced the initial collection of Hyde Authentics in November 2000. This
line consists of 14 models in oxford and boot styles that are based upon our
offerings of baseball, football and coaches shoes from the 1940's, 1950's and
1960's. We designed these shoes for the 25 to 40 year old male consumer who
chooses lifestyle footwear as an important part of his wardrobe.
ATHLETIC APPAREL
HIND
We sell a full line of technical apparel under the Hind brand name for use in a
variety of sports, including bicycling, swimming and running. We believe that
our Hind products have a reputation among athletes for delivering comfort and
performance. Most of our Hind products incorporate our moisture management
technology, which transfers moisture away from the wearer's skin to maximize
comfort. In addition, we frequently add innovations to our Hind product
offerings in an effort to incorporate the latest fabric technology.
OTHER BRANDS
We also market athletic apparel under the Saucony label. We target our Saucony
apparel line at the mainstream running consumer. We believe that our Saucony
athletic apparel supports our Saucony athletic footwear products by enhancing
the visibility of the Saucony brand.
PRODUCT DESIGN AND DEVELOPMENT
We believe that the technical performance of our Saucony footwear and other
product lines is important to the ultimate consumers of our products. We
continually strive to produce products that improve athletic performance and
maximize comfort. We use the consulting services of professional designers as
well as podiatrists, orthopedists, athletes, trainers and coaches as part of our
product development program. We maintain a staff of 16 design and development
specialists in Peabody, Massachusetts and Boulder, Colorado to undertake
continuing product development.
In fiscal 2000 we spent approximately $1.08 million on our product development
programs, compared to approximately $1.68 million in each of fiscal 1999 and
fiscal 1998. Most of our research and development expenditures relate to Saucony
brand products.
SALES AND MARKETING
SAUCONY
We sell our Saucony footwear products at more than 5,500 retail outlets in the
United States, primarily higher-end, full-margin sporting goods chains,
independent sporting goods stores, athletic footwear specialty stores and
department stores. Retail outlets include Foot Locker, Lady Foot Locker, The
Athlete's Foot, The Shoe Show, Road Runner Sports, FootStar and The Finish Line.
We maintain a corporate sales team that is directly responsible for the sales
activity in our largest 42 accounts. We also sell our footwear and apparel to
retail outlets in the United States through 12 independent manufacturer agents,
whose organizations employ approximately 44 sales representatives. We coordinate
the efforts of these representatives through our field sales management team.
Our web sites (saucony.com and sock-a-knee.com) receive thousands of "hits"
weekly from consumers looking for new product information, race and event data,
as well as general Saucony information.
We sell our Saucony products outside the United States in 32 countries through
20 distributors located throughout the world, through our Canadian subsidiary,
in which we hold an 85% ownership interest, and through our wholly owned
subsidiaries located in the Netherlands and the United Kingdom.
We strive to enhance our reputation and image in the marketplace and increase
recognition of the Saucony brand name by advertising our products through print
media and television advertising. For our technical footwear, we advertise
primarily in magazines such as "Runner's World," "Maxim," "ESPN" and "Cooking
Light." We also sponsor sporting events and telecasts to drive brand awareness
and image of our technical footwear to athletes. Examples include "Saucony
Running and Racing" seen monthly on ESPN, as well as sponsorship of the Los
Angeles Marathon and Chase Corporate Challenge race series. To build in-store
presence, we use account-specific and in-store promotions, such as athlete
appearances, special events and discounts for store employee purchases of our
products. For our Originals line, we generally advertise in "lifestyle"
magazines that target 12 to 25 year olds, such as "Teen People," "Vibe," "Jump"
and "Spin."
Most of our advertising and promotional programs for our Saucony brand are
directed toward the ultimate consumer. We also promote the Saucony brand to the
retail trade through attendance at trade shows and similar events and employ a
cooperative advertising program, which is intended to maximize advertising
resources by having our retailers share in the cost of promoting our Saucony
brand in print advertising, while affording our retailers the opportunity to
promote their stores.
OTHER PRODUCTS
We sell our Hind products domestically and internationally at independent
sporting goods stores and specialty sporting equipment stores through 13
independent manufacturers' agents, whose organizations employ approximately 32
sales representatives. We market our Spot-bilt line through our Saucony brand
distribution channels and directly to customers through our website at
Spotbilt.com. We introduced our Hyde Authentics products in November 2000 and
are currently selling these products domestically to a limited number of men's
fashion and men's footwear retail outlets through six independent manufacturers'
agents, whose organizations employ approximately 16 sales representatives. We
advertise these other brands in magazines and at trade shows and similar events.
FACTORY STORES
We currently operate 10 factory outlet stores at which we sell our Saucony,
Hind, Spot-bilt and Hyde products. To avoid competing against the full-margin
retail outlets, we generally limit the items offered at these stores to products
with cosmetic defects, discontinued merchandise and certain slow-moving
products. As part of our growth strategy, we intend to expand our factory stores
to target regions where we believe the Saucony brand is underdeveloped by
establishing clusters of factory stores, which we believe will strengthen
Saucony brand name recognition. During fiscal 2000 we opened four factory outlet
stores and closed two under-performing stores. We intend to open two additional
factory outlet stores in fiscal 2001.
MANUFACTURING
We assemble a majority of our domestically sold Saucony technical footwear at
our manufacturing facility in Bangor, Maine, largely with components sourced
from independent manufacturers located overseas. We believe that assembly at our
Bangor facility enables us to produce and deliver finished technical footwear
more quickly than most of our competitors. Independent overseas manufacturers
produce the balance of our Saucony products, including our Originals products,
and all of our Spot-bilt and Hyde Authentics products.
The overseas footwear manufacturers that supply products and components to us
are located in Asia, principally in China. We select footwear manufacturers in
large part on the basis of our prior experience with the manufacturer and the
availability of production capacity. We have developed long-term relationships
with key footwear manufacturers that we believe have yielded many benefits,
including quality control, favorable costs, flexible working arrangements and
predictable production capacity. Although to date we have not experienced
difficulty in obtaining manufacturing services, we seek to develop additional
overseas manufacturing sources from time to time, both to increase our sourcing
capacity and to obtain alternative sources of supply.
We perform an array of quality control procedures at various stages of the
production process, from testing of product prototypes prior to manufacture, to
inspection of finished goods prior to shipment. Our quality control program is
designed to ensure that finished goods meet our established design
specifications and high quality standards. We employ approximately 15 Saucony
footwear quality control personnel in Taiwan as well as quality control
specialists at our manufacturing facilities in the United States. Our personnel
in Taiwan regularly visit our footwear manufacturers throughout Asia to monitor,
oversee and improve the quality control and production processes.
We contract with third parties for the manufacture of our Hind apparel, most of
which is manufactured in the United States of domestically sourced fabrics.
SUPPLIERS
Raw materials required for the manufacture of our products, including leather,
rubber, nylon and other fabrics, are generally available in the country in which
our products are manufactured. We and our suppliers have not experienced any
difficulty in satisfying raw material needs to date.
The number of our foreign suppliers and the percentage of products sourced by us
from particular foreign suppliers varies from time to time. During fiscal 2000,
we purchased footwear products from approximately 10 overseas suppliers. One
such supplier, located in China, accounted for approximately 51% of our total
overseas footwear purchases by dollar volume.
Although we have no long-term manufacturing agreements with our overseas
suppliers and compete with other athletic shoe and apparel companies, including
companies that are much larger than us, for access to production facilities, we
believe that our relationships with our footwear and other suppliers are strong.
We also believe that we have the ability to develop, over time, alternative
sources in various countries for footwear, footwear components and other
products that we source from our current suppliers. However, in the event of a
supply interruption, our operations could be materially and adversely affected
if a substantial delay occurred in locating and securing alternative sources of
supply.
DISTRIBUTION AND INVENTORY
We distribute our products from our owned warehouses in Massachusetts and leased
warehouses in Canada and The Netherlands, as well as through third-party
operated warehouse facilities located in California and the United Kingdom.
To accommodate our domestic customers' requirements and plan for our own product
needs, we employ a "futures" order program for our Saucony technical and
Originals and Hind apparel products under which we take orders in advance of the
selling season for a particular product and commit to ship the product to the
customer in time for the selling season. We offer our customers price discounts
and extended payment terms as an incentive for using this ordering program. Our
futures order program is similar to programs offered by other athletic footwear
companies. We also maintain an open-stock inventory of our technical and Hind
apparel products so that we can satisfy retailers' orders on an "at-once" basis.
We sell our Originals line of footwear only on a "futures" basis, with no
planned inventory position, because we believe that demand for products from our
Originals line is more closely tied to style and fashion trends than demand for
our other products. By maintaining no planned inventory of our Originals line,
we seek to minimize the risk of inventory obsolescence that can result from
unanticipated changes in consumer preferences. We are, however, subject to
inventory risk for our Originals products should we experience significant order
cancellations.
BACKLOG
The athletic and casual footwear and athletic apparel industries that we compete
in are subject to seasonal sales fluctuations. Sales of our Saucony and other
footwear brands are generally highest in the first and third quarters, while
sales of our Hind athletic apparel are highest in the third and fourth quarters.
Because products sold on an "at once" basis are generally shipped as orders are
received, our backlog relates primarily to products sold on a "futures" basis.
Our backlog of unfilled orders was approximately $66.4 million at January 5,
2001 and $65.4 million at December 31, 1999. We expect that all of our backlog
at January 5, 2001 will be shipped in fiscal 2001, provided that our customers
do not cancel their orders. Our backlog does not necessarily represent actual
future shipments, because orders may be cancelled by our customers without
financial penalty. Also, the rate of customer order cancellations can vary
quarter-to-quarter and year-to-year. During the fourth quarter of fiscal 2000,
the order cancellation rate for our Saucony footwear was higher than our
historical average.
During 2000, we derived approximately 14% of our consolidated revenue from sales
to one customer, Venator, which operates Foot Locker, Lady Foot Locker, Kids
Foot Locker, Champs and Eastbay Running stores.
TRADE POLICY
Our practice of sourcing products and components overseas, with subsequent
importation into the United States, exposes us to possible product supply
disruptions and increased costs in the event of actions by United States or
foreign government agencies adverse to continued trade or the enactment of
legislation that restricts trade.
For example, we import significant amounts of our footwear product and
components from China. On October 10, 2000, President Clinton signed legislation
that will establish Permanent Normal Trade Relations ("PNTR") between the United
States and China. However, normal trade relations will go into effect on a
permanent basis only after China finalizes its accession protocol with the World
Trade Organization ("WTO"), a prerequisite for China's membership in the WTO.
There can be no assurance that this will occur or when it will occur. PNTR,
formerly known as "most favored nation" status, allows China to receive the same
favorable tariff treatment that the United States extends to its other "normal"
trading partners.
In the past, the United States has accorded China normal trade relations
treatment, but only on a temporary basis, subject to annual review by the U.S.
Congress. Until China accedes to the WTO, and the United States begins to extend
normal trade relations status to China on a permanent basis, Congress will
continue to review the provisional application of this status to China on an
annual basis. As a result of this review, Congress could seek to revoke normal
trade relations with Taiwan. The cancellation of, or the imposition of
conditions upon, China's normal trade relations status could significantly add
to our cost of goods and could restrict our supply of products and components
from that country.
We are unable to predict whether additional United States customs duties, quotas
or other restrictions may be imposed in the future upon the importation of our
products or components. Any such occurrences might adversely affect our sales or
profitability, possibly materially.
COMPETITION
Competition is intense in the markets in which we sell our products. We compete
with a large number of other companies, both domestic and foreign. Several
competitors are large organizations with diversified product lines, well-known
brands and financial, distribution and marketing resources substantially greater
than ours. The principal competitors for our Saucony products are Nike, New
Balance and Asics. The principal competitors for our Hind products are Nike,
Pearl Izumi and TYR. We believe that the key competitive factors for all of our
products are technical performance, styling, durability, product identification
through promotion, brand awareness and price. We believe that we are competitive
in all of these areas.
TRADEMARKS
We use trademarks on nearly all of our products and believe that having
distinctive marks is an important factor in marketing our products. We have
registered our Saucony(R), Spot-bilt(R), GRID(R), Hyde(R) and Hind(R) marks,
among others, in the United States. We have also registered some of these marks
in a number of foreign countries. Although we have a foreign trademark
registration program for selected marks, we cannot guarantee that we will be
able to register or use such marks in each foreign country in which we seek
registration.
EMPLOYEES
As of January 5, 2001, we employed approximately 408 people worldwide. Of these
employees, approximately 332 were in the United States and approximately 76 were
in foreign locations. We believe that our employee relations are excellent. We
have never experienced a strike or other work stoppage. Approximately 34
employees in our Peabody, Massachusetts warehouse were represented by a union as
of January 5, 2001. None of our other employees are represented by a union or
are subject to a collective bargaining agreement.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name Age Position
- ------------------------ --- ---------------------------------------
John H. Fisher 53 President, Chief Executive Officer
and Director
Charles A. Gottesman 50 Executive Vice President,
Chief Operating Officer, Treasurer
and Director
Michael Umana 38 Senior Vice President, Finance and
Chief Financial Officer
Arthur E. Rogers, Jr. 38 President, Saucony North America
Wolfgang Schweim 48 President, Saucony International
Roger P. Deschenes 42 Vice President, Controller and
Chief Accounting Officer
Daniel J. Horgan 45 Vice President, Operations
Andrew M. James 44 Vice President, MIS
Samuel S. Ward 38 Vice President, Enterprise Solutions
John H. Fisher has served as our Chief Executive Officer since 1991. He was
elected President and Chief Operating Officer in 1985 after having served as
Executive Vice President from 1981 to 1985 and as Vice President, Sales from
1979 and 1981. Mr. Fisher is a member of the World Federation of Sporting Goods
Industries, is the former Chairman of the Athletic Footwear Council of the
Sporting Goods Manufacturers Association, and is a member of various civic
associations. Mr. Fisher became a director in 1980.
Charles A. Gottesman has served as our Executive Vice President and Chief
Operating Officer since 1992, and served as Executive Vice President, Finance
from 1989 to 1992, Senior Vice President from 1987 to 1989, Vice President from
1985 to 1987, and Treasurer since 1983. Mr. Gottesman became a director in 1983
and is the brother-in-law of John H. Fisher.
Michael Umana has served as Senior Vice President, Finance and Chief Financial
Officer since May 2000. Mr. Umana joined us in October 1999 as Vice President,
Finance and Chief Financial Officer. From 1997 to 1999, Mr. Umana served as Vice
President and Chief Financial Officer of the Analytical Instrument Business
Unit, at PerkinElmer, Inc., a high technology manufacturer. Prior to 1997, Mr.
Umana held various auditing and consulting positions, the most recent being
Senior Manager, Business Consulting, at Arthur Andersen LLP, a professional
services company from 1985 to 1997. Mr. Umana is a Certified Public Accountant.
Arthur E. Rogers, Jr. became the President of Saucony North America in January
1998. Mr. Rogers re-joined us as Senior Director of Global Marketing in 1994,
having previously served as Brand Manager from 1990 to 1992. From 1992 to 1994,
Mr. Rogers held various sales and marketing positions at Converse Shoe, Inc., an
athletic shoe company. From 1994 to 1997, Mr. Rogers served as Vice President of
North American Sales and Worldwide Marketing. Prior to joining us, Mr. Rogers
held various sales and marketing positions at Proctor & Gamble, Inc., a
diversified consumer products company.
Wolfgang Schweim became the President of Saucony International in January 1998
after serving as President of our athletic footwear division from June 1994 to
January 1998. From 1993 to 1994, Mr. Schweim served as Managing Director for
Saucony Europe. From 1989 to 1993, Mr. Schweim was the German Managing Director
and Marketing Sales Manager for Europe at Asics, an athletic shoe manufacturer.
Prior to 1989, Mr. Schweim worked in sales and marketing positions with various
shoe manufacturers, including Nike International, Le Coq Sportif and Adidas AG.
Roger P. Deschenes has served as Vice President, Controller and Chief Accounting
Officer since August 1997, after having served as Controller and Chief
Accounting Officer from October 1995 to August 1997. Mr. Deschenes joined us in
1990 as Corporate Accounting Manager. He was employed at Allen-Bradley Company,
a subsidiary of Rockwell International, Corp., from 1987 to 1990 as Financial
and Cost Reporting Supervisor. Mr. Deschenes is a Certified Management
Accountant.
Daniel J. Horgan became Vice President of Operations in September 1995 after
serving as Senior Director of Operations from September 1994 to September 1995.
Mr. Horgan joined us in 1982 as Manager of Import and Export Operations, served
as Product Procurement and Distribution Manager from 1985 to 1988, Manager of
Production from 1988 to 1992, and Director of International Trade from 1992 to
1994.
Andrew M. James joined us in February 1984. He served as Accounting Manager from
1984 to 1988; Assistant Controller from 1989 to 1993; Senior Director of
Information Systems from 1994 to 1997; and became Vice President, MIS in 1997.
Samuel S. Ward joined Saucony in February 2001 as Vice President, Enterprise
Solutions. From 1994 to 2001, Mr. Ward held various consulting positions,
including Senior Consultant and Manager, the most recent being Senior Manager,
which he held from 2000 to 2001, in the Business Consulting Group at Arthur
Andersen LLP, a professional services company. Mr. Ward graduated from Duke
University's Fuqua School of Business in 1994. From 1987 to 1992, Mr. Ward held
various finance and operations positions at General Electric Company and
completed General Electric's Financial Management Program.
ITEM 2 - PROPERTIES
Our general and executive offices and our main distribution facility are located
in Peabody, Massachusetts and are owned by us. This facility consists of
approximately 175,000 square feet, of which 145,000 square feet is warehouse
space.
We also own a facility in Bangor, Maine containing approximately 73,000 square
feet of space, substantially all of which is used for the assembly of our
Saucony running shoes. We also own a warehouse and distribution facility in
Brookfield, Massachusetts containing approximately 109,000 square feet, which
was reactivated in 2000.
We lease approximately 4,000 square feet of office space in Boulder, Colorado.
We lease factory outlet stores with an aggregate of approximately 24,000 square
feet of retail space at nine locations in Massachusetts, Maine and Florida. We
also own a factory outlet store containing approximately 3,000 square feet of
retail space in Bangor, Maine.
ITEM 3 - LEGAL PROCEEDINGS
We are involved in routine litigation incident to our business. We do not
believe that any of these proceedings will have a material adverse effect on our
financial position, operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock and Class B Common Stock trade on the Nasdaq National
Market under the symbols "SCNYA" and "SCNYB," respectively. The following table
sets forth, for the periods indicated, the actual high and low sales prices per
share of the Class A Common Stock and the Class B Common Stock as reported by
the Nasdaq National Market.
Class A Class B
Common Stock Common Stock
High Low High Low
---- --- ---- ---
FISCAL YEAR ENDED JANUARY 5, 2001
First quarter.........................................$ 15-1/2 9 $ 14-7/8 $ 8-5/8
Second quarter........................................ 14 8-7/8 14 8
Third quarter......................................... 11-1/2 9-1/4 11-1/2 8-5/8
Fourth quarter........................................ 11-1/4 8 11-1/8 7-23/64
FISCAL YEAR ENDED DECEMBER 31, 1999
First quarter.........................................$ 9-3/4 $ 5 $ 9 $ 4-5/8
Second quarter........................................ 24-1/8 6-1/2 24-1/2 6-1/4
Third quarter......................................... 26 12 28-1/2 12-5/8
Fourth quarter........................................ 19-3/4 10-3/4 19-3/4 10-3/4
There were 272 and 282 stockholders of record of the Class A Common Stock and
Class B Common Stock, respectively, on March 30, 2001. Only the Class A Common
Stock has voting rights.
We have not paid any cash dividends during the last two fiscal years and do not
anticipate paying any cash dividends in the foreseeable future on the shares of
Class A Common Stock or Class B Common Stock. We currently intend to retain
future earnings to fund the development and growth of our business. Our credit
facility agreement restricts the payment or declaration of any dividend. Each
share of Class B Common Stock is entitled to a regular cash dividend equal to
110% of the regular cash dividend, if any, payable on a share of Class A Common
Stock.
ITEM 6 - SELECTED FINANCIAL DATA
SELECTED INCOME STATEMENT DATA
(in thousands; except per share amounts)
Year Year Year Year Year
Ended Ended Ended Ended Ended
Jan. 5, Dec. 31, Jan. 1, Jan. 2, Jan. 3,
2001 (1) 1999 1999 1998 1997
-------- ---- ---- ---- ----
Revenues...............................................$ 166,362 $154,691 $105,810 $ 93,962 $ 91,879
Operating income (loss) (2)............................ 16,123 18,196 5,741 (1,935) 2,345
Income (loss) from continuing operations............... 8,963 10,319 3,579 (4,032) 1,349
Discontinued operations:
Loss from discontinued operations................... -- -- -- (394) (243)
Gain on disposal of Brookfield business............. -- -- -- 96 --
Net income (loss)...................................... 8,963 10,319 3,579 (4,330) 1,106
Earnings per common share - basic
Income (loss) from continuing operations............$ 1.45 $ 1.64 $ 0.57 $ (0.65) $ 0.22
Loss from discontinued operations................... -- -- -- (0.05) (0.04)
-------- -------- ------- --------- ---------
Net income (loss) per common share - basic.............$ 1.45 $ 1.64 $ 0.57 $ (0.70) $ 0.18
========= ========= ======== ========= ========
Earnings per common share - diluted
Income (loss) from continuing operations............$ 1.41 $ 1.57 $ 0.56 $ (0.65) $ 0.22
Loss from discontinued operations................... -- -- -- (0.05) (0.04)
-------- -------- ------- --------- ---------
Net income (loss) per common share - diluted ..........$ 1.41 $ 1.57 $ 0.56 $ (0.70) $ 0.18
========= ========= ======== ========= ========
Weighted average common shares and
equivalents outstanding for diluted EPS ............ 6,341 6,568 6,373 6,240 6,268
Cash dividends per share of common stock............... -- -- -- -- --
SELECTED BALANCE SHEET DATA
Jan. 5, Dec. 31, Jan. 1, Jan. 2, Jan. 3,
2001 1999 1999 1998 1997
---- ---- ---- ---- ----
Current assets.........................................$ 73,531 $ 66,480 $ 58,963 $ 50,091 $ 57,896
Current liabilities.................................... 15,919 15,403 18,840 13,315 13,963
Working capital........................................ 57,612 51,077 40,123 36,776 43,933
Total assets........................................... 83,285 77,181 69,879 61,316 70,752
Long-term debt and capitalized lease
obligations, net of current portion................. 34 292 559 771 4,893
Stockholders' equity................................... 64,620 58,962 48,250 45,072 49,484
- ---------------------------
(1) See Note 1 to our Consolidated Financial Statements regarding reporting period.
(2) See Note 14 to our Consolidated Financial Statements regarding the sale of our cycling division in
fiscal 2000.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Dollar amounts throughout this Item 7 are in thousands, except per share
amounts.
HIGHLIGHTS
Increase (Decrease)
-------------------
2000 vs. 1999 1999 vs. 1998
------------- -------------
Net sales.............................................$ 11,971 7.8% $ 48,984 46.6%
Gross profit.......................................... 3,329 5.7 21,373 57.1
Selling, general and administrative expenses.......... 2,441 5.9 8,815 27.2
$ Change
--------
2000 vs. 1999 1999 vs. 1998
------------- -------------
Operating income.........................................$ (2,073) $ 12,455
Income before income taxes............................... (2,076) 12,351
Net income............................................... (1,356) 6,740
Percent of Net Sales
--------------------
2000 1999 1998
---- ---- ----
Gross profit..............................................37.4% 38.2% 35.6%
Selling, general and administrative expenses..............26.3 26.8 30.9
Operating income ..........................................9.7 11.8 5.5
Income before income taxes.................................9.3 11.4 5.0
Net income.................................................5.4 6.7 3.4
CONSOLIDATED NET SALES
Fiscal 2000, fiscal 1999 and fiscal 1998 consisted of 53, 52 and 52 weeks,
respectively. Our net sales and results of operations for each of fiscal 2000,
fiscal 1999 and fiscal 1998 are comparable. Net sales increased $11,971, or 8%,
to $166,029 in fiscal 2000 from $154,058 in fiscal 1999. At constant exchange
rates, fiscal 2000 net sales would have been $13,356, or 9%, higher than fiscal
1999. Excluding sales from our former cycling division, the net sales increase
in fiscal 2000 would have been 11% higher than fiscal 1999. Net sales increased
$48,984, or 47%, to $154,058 in fiscal 1999 from $105,074 in fiscal 1998. The
impact of foreign exchange rate changes on net sales was negligible when
comparing fiscal 1999 with fiscal 1998.
On a geographic basis, domestic sales increased $9,076, or 7%, to $144,104 in
fiscal 2000 from $135,028 in fiscal 1999. International sales increased $2,895,
or 15%, to $21,925 in fiscal 2000 from $19,030 in fiscal 1999. At constant
exchange rates, the international sales increase in fiscal 2000 would have been
22%. Domestic sales increased $51,664, or 62%, to $135,028 in fiscal 1999 from
$83,364 in fiscal 1998. International sales decreased $2,680, or 12%, to $19,030
in fiscal 1999 from $21,710 in fiscal 1998. At constant exchange rates, the
international sales decrease in fiscal 1999 would have been 14%.
SAUCONY SEGMENT
2000 1999 1998
---- ---- ----
Net Sales $144,949 (+10%) $131,898 (+53%) $86,332
2000 COMPARED TO 1999
Worldwide net sales of Saucony branded footwear and apparel increased $13,051,
or 10%, to $144,949 in fiscal 2000 from $131,898 in fiscal 1999, due primarily
to an 6% increase in footwear unit volumes and higher domestic and international
wholesale per pair average sell prices. The average domestic wholesale selling
prices per pair of domestic footwear increased 5% in fiscal 2000 versus fiscal
1999, due to an 11% increase in technical footwear unit volumes and a change in
the product mix for technical and Originals footwear to higher priced products
that resulted in higher average sell prices for both categories.
Domestic net sales increased $10,200, or 9%, to $125,318 in fiscal 2000 from
$115,118 in fiscal 1999, due primarily to the 11% increase in technical footwear
unit volumes, a 103% increase in closeout footwear unit volumes and the higher
average wholesale selling prices per pair for both technical and Originals
footwear, partially offset by a 4% decrease in Originals footwear unit volumes
and lower special make-up footwear volume. Sales of closeout footwear accounted
for approximately 5% of domestic Saucony net sales in fiscal 2000 compared to 3%
in fiscal 1999. The Originals footwear accounted for 53% of fiscal 2000 domestic
footwear unit volume versus 58% in fiscal 1999. The unit volume decrease in
Originals footwear is primarily due to a lack of sell-through on the
"new-school" products, which resulted in order cancellations. During the fourth
quarter of fiscal 2000, the order cancellation rate for our Saucony footwear was
higher than our historical average.
International net sales increased $2,851, or 17%, to $19,631 in fiscal 2000 from
$16,780 in fiscal 1999, due primarily to a 23% increase in technical footwear
unit volumes and higher average wholesale per pair sell prices, partially offset
by the negative impact of the stronger U.S. dollar against European currencies.
Footwear unit volumes at our international distributor business, and our
European and Canadian subsidiaries, increased 45% and 11%, respectively, in
fiscal 2000 versus fiscal 1999. The footwear unit volume increase in our
international distributor business is due primarily to our entry into the
Japanese footwear market in 2000, which accounted for approximately 64% of the
international distributor unit volume increase.
1999 COMPARED TO 1998
Worldwide net sales of Saucony branded footwear and apparel increased $45,566,
or 53%, to $131,898 in fiscal 1999 from $86,332 in 1998, primarily due to an 82%
unit volume growth in the footwear category. The average domestic wholesale
selling price per pair of domestic footwear decreased 14% in fiscal 1999 versus
fiscal 1998 due to a higher proportion of more moderately-priced Originals and
special make-up footwear in our domestic product mix and lower average sell
prices for technical footwear.
Domestic net sales increased $47,344, or 70%, to $115,118 in fiscal 1999 from
$67,774 in fiscal 1998. The increase in domestic sales was due primarily to the
continued strong demand for the Originals footwear, which accounted for 58% of
domestic footwear unit volume for the year, and, to a lesser extent, increased
special make-up and technical footwear volume.
International net sales decreased $1,778, or 10%, to $16,780 in fiscal 1999 from
$18,558 in fiscal 1998, due primarily to the discontinuance of operations in
Australia and decreased distributor unit volume, partially offset by increased
direct sales in Canada and Western Europe due to increased unit volume.
OTHER PRODUCTS SEGMENT
2000 1999 1998
---- ---- ----
Net Sales $21,080 (-5%) $22,160 (+18%) $18,742
The Other Products segment consists of our Hind athletic apparel, ten factory
outlet stores, Spot-bilt coaches' and official shoes and casual walking and
workplace footwear, Hyde Authentics casual footwear and sales from our former
cycling division. Each of these businesses represented less than 10% of total
revenues and, in the aggregate, represented 13% of total net sales in fiscal
2000.
2000 COMPARED TO 1999
Worldwide sales of Other Products decreased $1,080, or 5%, to $21,080 in fiscal
2000 from $22,160 in fiscal 1999 due primarily to the elimination of sales
resulting from the cycling division divestiture, partially offset by increased
sales of our Hind brand apparel and increased sales at our factory outlet
stores.
Domestic net sales of Other Products decreased $1,124, or 6%, to $18,786 in
fiscal 2000 from $19,910 in fiscal 1999 due primarily to the elimination of
sales from our former cycling division, which was divested in fiscal 2000,
partially offset by increased unit volume of our Hind apparel brand and
increased sales at our factory outlet division stores due to the net addition of
two factory outlet stores. International net sales of Other Products increased
$44, or 2%, to $2,294 in fiscal 2000 from $2,250 in fiscal 1999, due to
increased Hind apparel sales in Europe.
1999 COMPARED TO 1998
Worldwide sales of Other Products increased $3,418, or 18%, to $22,160 in fiscal
1999 from $18,742 in fiscal 1998 due to increased domestic net sales. Other
Products segment domestic sales increased $4,320, or 28%, to $19,910 in fiscal
1999 from $15,590 in fiscal 1998 due primarily to increased unit volume of our
Hind apparel brand and, to a lesser extent, increased unit volume at our former
cycling division. The sales increase also reflects increased retail sales at our
outlet division due to the addition of two factory outlet stores. International
net sales of Other Products decreased $902, or 29%, to $2,250 in fiscal 1999
from $3,152 in fiscal 1998 due to the discontinuance of operations in Australia.
COSTS AND EXPENSES
Our gross margin in fiscal 2000 decreased 0.8% to 37.4% from 38.2% in fiscal
1999, due primarily to a change in domestic Saucony product mix to higher levels
of closeout sales at comparatively lower margins, domestic pricing pressures,
increased inventory reserves and, to a lesser extent, the negative impact of the
stronger U.S. dollar on our European margins and a change in the Saucony
international sales mix to increased distributor sales. For the 1999 fiscal
year, the gross margin improved 2.6% to 38.2% from 35.6% in fiscal 1998. The
improvement in the fiscal 1999 margin was due to a change in product mix,
purchasing economies, lower levels of product returns and markdowns and lower
levels of closeout product sales.
The SG&A ratio improved 0.5% to 26.3% of net sales in fiscal 2000 from 26.8% in
1999. The improvement in the ratio resulted from the continued management of
advertising, selling and administrative expenses below the rate of sales growth.
In absolute dollars, selling, general and administrative expenses increased to
$43,702 in 2000, or 6%, from $41,261 in fiscal 1999. Increased spending in
fiscal 2000 was attributable to increased television and print media
advertising, increased account-specific advertising and promotion, increased
event sponsorship, increased variable selling expenses, administrative staffing
increases, increased operating expenses associated with the factory outlet
division expansion and increased professional fees, partially offset by reduced
operating expenses resulting from the cycling division divestiture and lower
provisions for doubtful accounts. The higher provision for doubtful accounts in
fiscal 1999 was due primarily to the bankruptcy filing by Just for Feet, Inc.
For the 1999 fiscal year, our SG&A ratio improved 4.1% to 26.8% of net sales
compared to 30.9% in 1998. The improvement in the ratio resulted from the
continued management of advertising, selling and administrative expenses below
the rate of sales growth. In absolute dollars, selling, general and
administrative expenses increased to $41,261 in fiscal 1999, or 27%, from
$32,446 in fiscal 1998. Increased spending in fiscal 1999 was attributable to
increased performance-based incentive compensation, increased staffing, an
increase in the provision for doubtful accounts due primarily to the bankruptcy
filing by Just for Feet, Inc., volume driven advertising and selling expenses
and increased athlete and event sponsorship.
SALE OF CYCLING DIVISION
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 $2,661, inclusive of $1,012 of expenses associated with the transaction and
expenses resulting from our exit of the cycling business, or $1,553 after-tax or
$0.24 per diluted share. As a result of the transaction, a majority of the
cycling division employees were severed and assets used exclusively in the
cycling business were deemed impaired and have been written off. Expenses
associated with the sale and exit of the cycling division are as follows:
Transaction costs................................................$ 358
Costs to exit facility and equipment leases and
other non-cancelable contractual commitments................... 142
Employee severance and termination benefits...................... 210
Writeoff leasehold improvements.................................. 84
Writeoff goodwill and other deferred charges..................... 218
--------
Total............................................................$ 1,012
========
Included in accrued expenses at January 5, 2001 are $144 of costs associated
with the sale and the exit of the cycling business, which we expect will be paid
by the end of the second quarter of fiscal 2001.
Net sales from the cycling division, which are included in our Other Products
segment, represented approximately 1.9%, 4.7% and 6.1% of consolidated net sales
for fiscal years 2000, 1999 and 1998, respectively. The loss on the sale of the
cycling division is included in the income before tax for the Other Products
segment.
INTEREST EXPENSE
Net interest expense totaled $626, $683 and $707 in fiscal years 2000, 1999 and
1998, respectively. Interest expense decreased 8% in fiscal 2000 due to lower
average debt levels and increased interest income, partially offset by higher
interest rates on our domestic borrowings. In fiscal 1999, interest expense
decreased 3% due to lower average debt levels and, to a lesser extent, lower
interest rates compared to fiscal 1998.
INCOME BEFORE TAXES
Segment 2000 1999 1998
------- ---- ---- ----
Saucony....................$ 18,507 $ 18,965 $ 5,497
Other Products............. (2,994) (1,376) (259)
--------- --------- ---------
Consolidated...............$ 15,513 $ 17,589 $ 5,238
========= ========= =========
We evaluate business performance and the performance of key managers based on
profit or loss before income taxes. Income before tax decreased by $2,076 in
fiscal 2000 to $15,513 compared to $17,589 in fiscal 1999, due primarily to the
loss on the sale of the cycling division, which impacted the Other Products
segment, and lower domestic pre-tax income realized by the domestic Saucony
segment due to lower gross margins and higher selling expenses, partially offset
by improved profitability in our Saucony international and Hind apparel
businesses.
Income before tax improved by $12,351 in fiscal 1999 to $17,589 compared to
$5,238 in fiscal 1998, due primarily to the significant increase in pre-tax
income realized by the domestic Saucony segment and profitable Saucony
international operations. The Other Products segment recorded a pre-tax loss of
$1,376 in fiscal 1999 compared to a loss of $259 in fiscal 1998. The
deterioration in the Other Products segment pre-tax income in fiscal 1999 was
due principally to the diminished financial position of Quintana Roo, due in
large part to excess inventories and a high level of administrative overhead.
INCOME TAXES
The provision for income taxes decreased to $6,461 in fiscal 1999 from $7,194 in
fiscal 1999, due primarily to the loss on the sale of the cycling division which
reduced domestic pre-tax income. The effective tax rate increased 0.7% to 41.6%
in fiscal 2000 from 40.9% in fiscal 1999 due to a shift in the composition of
domestic and foreign pre-tax earnings and an increase in deferred valuation
allowances on foreign loss carryforwards that are not expected to be realized.
The provision for income taxes increased to $7,194 in fiscal 1999 from $1,629 in
fiscal 1998, due primarily to an increase in domestic pre-tax income and a
higher marginal domestic tax rate in fiscal 1999. The effective tax rate
increased by 9.8% to 40.9% in fiscal 1999 from 31.1% in fiscal 1998 due to a
shift in the composition of domestic and foreign pre-tax earnings and the higher
marginal domestic tax rate.
NET INCOME
Net income for fiscal 2000 decreased to $8,963, or $1.41 per diluted share,
compared to $10,319, or $1.57 per diluted share, in fiscal 1999. The loss on the
sale of our cycling division reduced net income and diluted earnings per share
by $1,553 and $0.24, respectively, in fiscal 2000. Excluding the effect of the
loss on the sale of our cycling division, our net income in fiscal 2000 would
have been $10,516, or $1.65 per diluted share. Weighted average common shares
and equivalent shares used to calculate diluted earnings per share were 6,341
and 6,568, respectively, in fiscal 2000 and 1999. Fiscal 1999 net income was
$10,319 compared to $3,579 in fiscal 1998. Diluted earnings per share was $1.57
in fiscal 1999 compared to $0.56 per diluted share in fiscal 1998. Weighted
average common shares and equivalent shares used to calculate diluted earnings
per share were 6,568 and 6,373, respectively, in fiscal 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 2000
As of January 5, 2001, our cash and cash equivalents totaled $4,738, an increase
of $1,223 from December 31, 1999. The increase was due primarily to the
generation of $4,100 of cash from operations, the receipt of $1,350 from the
sale of our former cycling division and an increase of $335 in short-term
borrowings, principally under our credit facilities. This increase was partially
offset by cash outlays for capital assets of $1,669, the repurchase of shares of
our common stock of $2,688 and the repayment of long-term debt of $360.
The increase in accounts receivable of $3,074, net of the provision for bad debt
and discounts, was due primarily to increased net sales of our Saucony and other
products in the fourth quarter of fiscal 2000 and an increase in our days sales
outstanding for our accounts receivable. Our days sales outstanding for our
accounts receivable increased to 59 days in fiscal 2000 from 57 days in fiscal
1999, due primarily to the reserve of $1,525 provided for on the receivable due
from Just for Feet, Inc. in fiscal 1999, which reduced the fiscal 1999 days
sales outstanding by 3 days, and, to a lesser extent, the timing of shipments in
the fourth quarter of fiscal 2000. Inventories increased $6,018 in fiscal 2000
due to increased domestic Saucony footwear inventory, increased Hind apparel
inventory and increased inventory at the our factory outlet stores, due to the
net addition of two stores in 2000. The increase in domestic Saucony footwear
inventory resulted from increased order cancellations in the fourth quarter of
2000 for both technical and Originals footwear. We expect that the majority of
the inventory increase that resulted from the fourth quarter order cancellations
will be sold in the first six months of fiscal 2001, though we expect that a
portion of this inventory will be sold at lower than customary margins. Our
inventory turns ratio decreased to 2.8 turns in fiscal 2000 from 2.9 turns in
fiscal 1999. The number of day's sales in inventory remained constant at 135
days for both fiscal 2000 and fiscal 1999.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting our operating cash flows in fiscal
2000 included an increase of $1,210 in accrued letters of credit (due to
increased direct-ship inventory purchases), a decrease of $1,185 in accrued
expenses (due to decreased performance-based compensation accruals and the
payment of expenses resulting from the cycling division divestiture), a decrease
of $412 in accounts payables (due to the timing of inventory purchases) and a
decrease of $889 in income taxes payable (due to domestic tax payments made in
the fourth quarter of 2000).
During fiscal 2000, we repurchased approximately 300,000 shares of our common
stock for a total expenditure of $3,106, $418 of which was financed with
borrowed funds. At January 5, 2001, this borrowing and accrued interest thereon
of $15 are included in notes payable. Since the approval of the stock buyback
program by the Board of Directors in May 1998, we have repurchased a total of
448,000 shares of our common stock for a total of expenditure of $4,231. As of
January 5, 2001, we are authorized to repurchase an additional 302,000 shares
under the stock buyback program. Our ability to repurchase additional shares of
common stock, however, is restricted to a maximum of $4,000 from November 1,
1999 to December 31, 2000, under our credit facility with our primary lender. As
of January 1, 2001, however, no repurchases are permitted under the credit
facility.
FISCAL 1999
As of December 31, 1999, our cash and cash equivalents totaled $3,515, a
decrease of $1,980 from January 1, 1999. The decrease was due primarily to a
decrease of $5,429 in borrowings against our credit facilities, the repayment of
$375 of long-term debt, the repurchase of shares of our common stock of $514 and
$1,661 of cash expended to acquire capital assets. Offsetting this cash outflow
was the generation of $5,505 of cash from operations and the receipt of $503
from the issuance of shares of our common stock.
The increase in accounts receivable of $4,357, net of the provision for bad debt
and discounts (including a reserve of $1,525 provided for on the receivable due
from Just for Feet, Inc.), was due primarily to increased net sales of our
Saucony products in the fourth quarter of fiscal 1999. Our days sales
outstanding for our accounts receivable decreased to 57 days in fiscal 1999 from
68 days in fiscal 1998 due to a reduction in domestic terms offered on sales of
Originals footwear and the reserve provided for on the receivable due from Just
for Feet, Inc. Inventories increased $4,700 in fiscal 1999 due to increased
domestic and international Saucony footwear inventory and increased inventory at
our factory outlet stores, reflecting the addition of two stores in 1999. Our
inventory turns ratio increased to 2.9 turns in fiscal 1999 from 2.5 turns in
fiscal 1998. The number of days sales in inventory decreased 19% to 135 days in
fiscal 1999 from 167 days in fiscal 1998.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting our operating cash flows in fiscal
1999 included an increase of $994 in accrued letters of credit (due to increased
in-transit inventory), an increase of $3,337 in accrued expenses (due to
increased performance-based compensation accruals, increased accruals for
advertising and promotional expenses and increased levels of administrative
spending), a decrease of $1,242 in accounts payables (due to the timing of
inventory purchases) and a decrease of $801 in income taxes payable (due to
domestic tax payments made in the fourth quarter of 1999.)
CREDIT FACILITY
We maintain a revolving credit line of $20,000 for cash borrowings and letters
of credit. We and certain of our subsidiaries have guaranteed our obligations
under the credit facility. Borrowings under the credit facility are not
collateralized. The credit facility contains certain restrictions and financial
covenants with which we are required to comply, whether or not there are any
borrowings outstanding. Under the most restrictive covenant, we were required to
maintain a minimum tangible net worth of $51,431 as of January 5, 2001. The
credit facility is also subject to the bank's periodic review of our operations.
Our ability to declare or pay dividends and repurchase shares of common stock is
restricted under the credit facility. From November 1, 1999 to December 31,
2000, we were authorized under the credit facility to repurchase up to $4,000 in
shares of common stock. As of January 5, 2001 and March 9, 2001, $15,996 and
$11,270, respectively, were available for borrowing under the credit facility.
Several of our foreign subsidiaries maintain credit facilities in the aggregate
principal amount of approximately $3,308. At March 2, 2001 an aggregate of
approximately $1,651 was available for borrowing under the facilities of our
foreign subsidiaries. See Note 9 to the Consolidated Financial Statements.
CAPITAL EXPENDITURES COMMITMENTS
At January 5, 2001, our commitments for capital expenditures were not material.
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 minimal 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. During fiscal 2000 the gross
margins of our European subsidiaries were negatively impacted due to currency
fluctuation. We have entered into forward foreign exchange contracts to minimize
certain transaction currency risks. We believe that our forward foreign currency
contracts function as economic hedges of our cash flows and that our foreign
exchange management program effectively minimizes certain transaction currency
risks.
ACCOUNTING PRONOUNCEMENTS
SFAS 133 AND SFAS 137
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133) (as amended by Statement of Financial
Accounting Standards No. 137, a deferral of the effective date of SFAS 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 affect current earnings and 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 can be
deferred in other comprehensive income, depending on the currency exposure of
the underlying transaction. Our forward currency contracts qualified for hedge
accounting under generally accepted accounting principles prior to SFAS 133;
however, upon adoption of SFAS 133 we have not designated these contracts as
qualifying for hedge accounting as defined by SFAS 133. We believe that these
contracts economically function as effective hedges of the underlying exposures,
but, due to the short term nature of the contracts, we have not elected to
designate these contracts as hedges for accounting purposes.
We adopted SFAS 133 on January 6, 2001. As a result, we recorded an
approximately $15 increase in the fair value of our derivatives as a cumulative
effect of an accounting change on accumulated other comprehensive income. These
amounts will be recognized in earnings when the underlying transactions are
recorded.
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 adopted SAB 101 in
the fourth quarter of fiscal 2000. The initial application of SAB 101 did not
have a material effect on earnings or on our financial position in any of the
periods presented in the Consolidated Financial Statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated by reference in
this annual report on Form 10-K contain forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will," and "would," or similar
words. You should read statements that contain these words carefully because
they discuss future expectations, contain projections of future results of
operations or of financial position or state other "forward-looking"
information. The important factors listed below, as well as any cautionary
language in this annual report on Form 10-K, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations described in these forward-looking statements. You should
be aware that the occurrence of the events described in the risk factors below
and elsewhere in this annual report on Form 10-K could have an adverse effect on
our business, results of operations and financial position.
Any forward-looking statements in this annual report on Form 10-K and the
documents incorporated by reference in this annual report on Form 10-K are not
guarantees of future performance, and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements,
possibly materially. We disclaim any duty to update any forward-looking
statements, all of which are expressly qualified by the statement in this
section.
CERTAIN OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
WE FACE INTENSE COMPETITION
Competition is intense in the markets in which we sell our products. We compete
with a large number of other companies, both domestic and foreign, several of
which have diversified product lines, well-known brands and financial,
distribution and marketing resources substantially greater than ours. The
principal competitors for our Saucony products are Nike, New Balance and Asics.
The principal competitors of our Hind products are Nike, Pearl Izumi and TYR. We
compete based on a variety of factors, including price, quality, product design,
brand image, marketing and promotion and ability to meet delivery commitments to
retailers. A technological breakthrough or marketing or promotional success by
one of our competitors could adversely affect our competitive position. The
intensity of the competition that we face constitutes a significant risk to our
business.
WE DEPEND ON FOREIGN SUPPLIERS
A number of manufacturers located in Asia, primarily in China, supply products
and product components to us. During fiscal 2000, one of our suppliers, located
in China, accounted for approximately 51% of our total footwear purchases by
dollar volume. We are subject to the usual risks of a business involving foreign
suppliers, such as currency fluctuations, government regulation of fund
transfers, export and import duties, administrative trade cases, trade
limitations imposed by the United States or foreign governments and political
and labor instability. There are a number of trade-related and other issues
creating significant friction between the governments of the United States and
China, and the imposition of punitive import duties on certain categories of
Chinese products has been threatened in the past and may be implemented in the
future. In addition, we have no long-term manufacturing agreements with our
foreign suppliers and compete with other athletic shoe and apparel companies,
including companies that are much larger than us, for access to production
facilities.
WE NEED TO ANTICIPATE AND RESPOND TO CONSUMER PREFERENCES AND MERCHANDISE TRENDS
The footwear and apparel industries are subject to rapid changes in consumer
preferences. Demand for our products, particularly our Originals line, may be
adversely affected by changing fashion trends and consumer style preferences. We
believe that our success depends in substantial part on our ability to
anticipate, gauge and respond to changing consumer demands and fashion trends in
a timely manner. In addition, our decisions concerning new product designs often
need to be made several months before we can determine consumer acceptance. As a
result, our failure to anticipate, identify or react appropriately to changes in
styles or features could lead to problems such as excess inventories and higher
markdowns, lower gross margins due to the necessity of providing discounts to
retailers and the inability to sell such products through our own factory outlet
stores.
OUR QUARTERLY RESULTS MAY FLUCTUATE
Our revenues and quarterly operating results may vary significantly depending on
a number of factors, including:
o the timing and shipment of individual orders;
o market acceptance of footwear and other products offered by us;
o changes in our operating expenses;
o personnel changes;
o mix of products sold;
o changes in product pricing;
o general economic conditions; and,
o weather.
In addition, a substantial portion of our revenue is realized during the last
few weeks of each quarter. As a result, any delays in orders or shipments are
more likely to result in revenue not being recognized until the following
quarter, which could adversely impact our results of operations for a particular
quarter.
Our current expense levels are based in part on our expectations of future
revenue. As a result, net income for a given period could be disproportionately
affected by any reduction in revenue. It is possible that in some future quarter
our revenue or operating results will be below the expectations of stock market
securities analysts and investors. If that were to occur, the market price of
our common stock could be materially adversely affected.
OUR REVENUES ARE SUBJECT TO FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
We conduct operations in various international countries, and a portion of our
sales is transacted in local currencies. As a result, our revenues are subject
to foreign exchange rate fluctuations. From time to time, our financial results
have been adversely affected by fluctuations in foreign currency exchange rates.
We enter into forward currency exchange contracts to protect us from the effect
of changes in foreign exchange rates. However, our efforts to reduce currency
exchange losses may not be successful, and currency exchange rates may have an
adverse impact on our future operating results and financial condition.
OUR BUSINESS IS AFFECTED BY SEASONAL CONSUMER BUYING PATTERNS
The footwear and apparel industries are generally characterized by significant
seasonality of sales and results of operations. Sales of our Saucony brand
products have historically been seasonal in nature, with the strongest sales
generally occurring in the first and third quarters. In addition, sales of our
Hind brand products are generally strongest in the third and fourth quarters due
to the popularity of the Hind winter apparel collection. We believe that sales
of our products will continue to follow this seasonal cycle. Therefore, our
results of operations for any one quarter may not necessarily be indicative of
the results that we may achieve for a full fiscal year or any future quarter.
OUR OPERATING RESULTS MAY BE AFFECTED BY ORDER CANCELLATIONS
Customers may cancel orders of our products at any time without financial
penalty. As a result, our backlog does not necessarily represent actual future
shipments. The rate of customer cancellations can vary quarter-to-quarter and
year-to-year. During the fourth quarter of fiscal 2000, the order cancellation
rate for our Saucony footwear was higher than our historical average, due
primarily to the weak retail environment and higher than anticipated
cancellations and the postponement of shipments of orders by one of our major
retail accounts. If the retail market continues to be weak or weakens again in
the future, our customers could cancel further orders of our products, which
could have a material adverse effect on our operating results.
WE ARE SUSCEPTIBLE TO FINANCIAL DIFFICULTIES OF RETAILERS
We sell our products primarily to major retailers, some of whom have experienced
financial difficulties, including bankruptcy. We cannot predict what effect the
future financial condition of such retailers will have on our business. In
particular, we cannot guarantee that our bad debt expenses will not be material
in future periods.
WE NEED EFFECTIVE MARKETING AND ADVERTISING PROGRAMS
Because consumer demand for our products is heavily influenced by brand image,
our business requires substantial investments in marketing and advertising.
Failure of such investments to achieve the desired effect in terms of increased
retailer acceptance or consumer purchase of our products could adversely affect
our financial results. In addition, we believe that our success depends in part
upon our ability to periodically launch new marketing and advertising programs.
If we are unable to successfully design or execute new marketing and
advertising, or if such programs are ineffective, our business will suffer.
WE DEPEND ON CERTAIN KEY CUSTOMERS
During 2000, we derived approximately 14% of our consolidated revenue from sales
to a single major customer, Venator, which operates Foot Locker, Lady Foot
Locker, Kids Foot Locker, Champs and Eastbay Running stores. We anticipate that
our results of operations in any given period will depend to a significant
extent upon sales to major customers. The loss of or a reduction in the level of
sales to one or more major customers could have a material adverse effect on our
business, financial condition and results of operations. Furthermore, if a major
customer were unable or unwilling to proceed with a large order or to pay us for
a large order on a timely basis, our business, financial condition and results
of operations could be materially adversely affected.
CHANGES IN GENERAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT OUR BUSINESS
Our business is sensitive to consumers' spending patterns, which in turn are
subject to prevailing regional and national economic conditions, such as
interest and taxation rates, employment levels and consumer confidence. Adverse
changes in these economic factors may restrict consumer spending, thereby
negatively affecting our growth and profitability.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
exchange rates. Our objective in managing our exposure to interest rates and
foreign currency rate changes is to limit the impact of these changes on cash
flows and earnings and to lower our overall borrowing costs. In order to achieve
these objectives we identify the risks and manage them by adjusting fixed and
variable rate debt positions and selectively hedging foreign currency risks.
Almost all of our borrowings are based on floating rates, which would increase
interest expense in an environment of rising interest rates. We have a policy of
selectively hedging foreign currency risks, but there are no assurances that
this program will fully insulate us against short-term fluctuations in financial
results.
The fair value of our forward exchange contracts as of January 5, 2001 was
$1,115. We have calculated the effect of a 10% change in interest rates over a
one-month period from January 5, 2001 and also a 10% change in certain foreign
currency rates over the same period and determined the effects to be immaterial.
We do not expect to make any significant changes in our management of foreign
currency or interest rate exposures or in the strategies we employ to manage
such exposures in the foreseeable future. However, our accounting for derivative
transactions will be affected by our adoption of SFAS 133 on January 6, 2001.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to our Consolidated Financial Statements in Item 14 and the
Consolidated Financial Statements, notes and schedules that are filed as part of
this Form 10-K following the signature page and incorporated herein by this
reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Registrant" in Part I herein and the remainder is
contained in the Proxy Statement for our Annual Meeting of Stockholders to be
held on May 24, 2001 (the "2001 Proxy Statement") under the captions "Election
of Directors" and "Section 16(A) Beneficial Ownership Reporting Compliance" and
is incorporated herein by this reference. We expect to file the 2001 Proxy
Statement within 120 days after the close of the fiscal year ended January 5,
2001.
Officers are elected on an annual basis and serve at the discretion of the Board
of Directors.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is contained under the captions
"Compensation of Directors," "Compensation of Executive Officers" and
"Compensation Committee Interlocks and Insider Participation" in the 2001 Proxy
Statement and is incorporated herein by this reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the 2001 Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by this reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the 2001 Proxy Statement
under the captions "Employment Contracts" and "Related Party Transactions" and
is incorporated herein by this reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Consolidated Financial Statements
The following Consolidated Financial Statements of Saucony, Inc. and
its subsidiaries are included in this report immediately following the
signature page:
- Report of Independent Accountants
- Consolidated balance sheets at January 5, 2001 and December 31, 1999
- Consolidated statements of income for the years ended January 5, 2001,
December 31, 1999 and January 1,1999
- Consolidated statements of stockholders' equity for the years ended
January 5, 2001, December 31, 1999 and January 1, 1999
- Consolidated statements of cash flows for the years ended January 5,
2001, December 31, 1999 and January 1, 1999
- Notes to the Consolidated Financial Statements
2. Index to Consolidated Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included
in the Consolidated Financial Statements or notes thereto.
Separate financial statements of the Company have been omitted
since it is primarily an operating company and its subsidiaries
included in the Consolidated Financial Statements do not have a
minority equity interest or indebtedness to any person other than
the Company in an amount which exceeds 5% of the total assets as
shown by the Consolidated Financial Statements as filed herein.
3. Index to Exhibits
The exhibits filed as part of this Form 10-K are listed on the
Exhibit Index immediately preceding such exhibits, which Exhibit
Index is incorporated herein by this reference.
(b) 1. Reports on Form 8-K
-------------------
No Current Reports on Form 8-K were filed in the fourth quarter of
fiscal 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SAUCONY, INC.
--------------------------------------------
(Registrant)
By: /s/ John H. Fisher
--------------------------------------------
John H. Fisher
President and Chief Executive Officer
Date: April 3, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME CAPACITY DATE
---- --------- ----
/s/ John H. Fisher President, April 3, 2001
John H. Fisher Chief Executive Officer and
Director
(Principal Executive Officer)
/s/ Charles A. Gottesman Executive Vice President, April 3, 2001
Charles A. Gottesman Chief Operating Officer and
Director
/s/ Michael Umana Senior Vice President, Finance and April 3, 2001
Michael Umana Chief Financial Officer
(Principal Financial Officer)
/s/ Roger P. Deschenes Vice President, Controller and April 3, 2001
Roger P. Deschenes Chief Accounting Officer
(Principal Accounting Officer)
/s/ John J. Neuhauser Director April 3, 2001
John J. Neuhauser
/s/ Robert J. LeFort, Jr. Director April 3, 2001
Robert J. LeFort, Jr.
/s/ John M. Connors, Jr. Director April 3, 2001
John M. Connors, Jr.
/s/ Phyllis H. Fisher Director April 3, 2001
Phyllis H. Fisher
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
Saucony, Inc.
In our opinion, the accompanying consolidated financial statements
listed in the index appearing under Item 14(a)(1) present fairly, in all
material respects, the financial position of Saucony, Inc. and its subsidiaries
at January 5, 2001 and December 31, 1999 and the results of their operations and
their cash flows for each of the three years in the period ended January 5,
2001, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2001
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands, except share amounts)
January 5, December 31,
2001 1999
---- ----
Current assets:
Cash and cash equivalents.........................................................$ 4,738 $ 3,515
Accounts receivable, net of allowance for doubtful accounts
and discounts (2000, $2,047;1999, $3,534)....................................... 26,706 23,968
Inventories ...................................................................... 38,404 35,270
Deferred income taxes............................................................. 1,366 2,140
Prepaid expenses and other current assets......................................... 2,317 1,587
---------- ---------
Total current assets............................................................ 73,531 66,480
---------- ---------
Property, plant and equipment, net of accumulated depreciation and amortization........ 7,581 8,279
---------- ---------
Other assets:
Goodwill, net of accumulated amortization (2000, $420; 1999, $352)................ 1,043 1,327
Deferred charges, net of accumulated amortization (2000, $1,366; 1999, $1,569).... 294 271
Marketable securities............................................................. 343 307
Deferred income taxes............................................................. 266 99
Other............................................................................. 227 418
---------- ---------
Total other assets.............................................................. 2,173 2,422
---------- ---------
Total assets...........................................................................$ 83,285 $ 77,181
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Letters of credit payable...........................................................$ 3,481 $ 2,282
Notes payable....................................................................... 2,596 1,928
Current portion of long-term debt and capital lease obligations..................... 204 375
Accounts payable.................................................................... 3,173 3,615
Accrued expenses.................................................................... 6,465 7,203
---------- ----------
Total current liabilities......................................................... 15,919 15,403
---------- ----------
Long-term obligations:
Long-term debt, net of current portion............................................ -- 20
Capital lease obligations, net of current portion .................................. 34 272
Deferred income taxes............................................................... 2,140 2,045
Other long-term obligations......................................................... 187 171
---------- ----------
Total long-term obligations....................................................... 2,361 2,508
---------- ----------
Commitments and contingencies.......................................................... -- --
Minority interest in consolidated subsidiaries......................................... 385 308
---------- ----------
Stockholders' equity:
Preferred stock, $1.00 par; authorized 500,000 shares; none issued.................. -- --
Common stock:
Class A, $.333 par; authorized 20,000,000 shares
(issued 2000, 2,711,127 and 1999, 2,711,127)...................................... 904 904
Class B, $.333 par; authorized 20,000,000 shares
(issued 2000, 4,019,469 and 1999, 3,955,309)...................................... 1,340 1,318
Additional paid-in capital.......................................................... 17,112 16,815
Retained earnings................................................................... 51,642 42,679
Accumulated other comprehensive income.............................................. (792) (564)
----------- -----------
70,206 61,152
---------- ----------
Less:
Common stock held in treasury, at cost (2000, 646,500 shares; 1999, 346,900 shares). (5,285) (2,179)
Notes receivable.................................................................... (296) --
Unearned compensation............................................................. (5) (11)
----------- -----------
64,620 58,962
---------- ----------
Total liabilities and stockholders' equity.............................................$ 83,285 $ 77,181
========== ==========
See Notes to Consolidated Financial Statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 5, 2001, DECEMBER 31, 1999 AND JANUARY 1, 1999
(in thousands, except share amounts)
2000 1999 1998
---- ---- ----
(53 Weeks)
Net sales................................................................$ 166,029 $ 154,058 $ 105,074
Other revenue............................................................ 333 633 736
---------- ---------- ----------
Total revenue............................................................ 166,362 154,691 105,810
---------- ---------- ----------
Costs and expenses:
Cost of sales......................................................... 103,876 95,234 67,623
Selling expenses...................................................... 25,602 22,511 17,507
General and administrative expenses................................... 18,100 18,750 14,939
Loss on disposition of cycling division............................... 2,661 -- --
---------- ---------- ----------
Total costs and expenses............................................ 150,239 136,495 100,069
---------- ---------- ----------
Operating income......................................................... 16,123 18,196 5,741
Non-operating income (expense):
Interest, net......................................................... (626) (683) (707)
Foreign currency gains (losses)....................................... (28) (88) 124
Other................................................................. 44 164 80
---------- ---------- ----------
Income before income taxes and minority interest......................... 15,513 17,589 5,238
Provision for income taxes............................................... 6,461 7,194 1,629
Minority interest in income of consolidated subsidiaries................. 89 76 30
---------- ---------- ----------
Net income...............................................................$ 8,963 $ 10,319 $ 3,579
========== ========== ==========
Per share amounts:
Net income per common share - basic......................................$ 1.45 $ 1.64 $ 0.57
========== ========== ==========
Net income per common share - diluted....................................$ 1.41 $ 1.57 $ 0.56
========== ========== ==========
Weighted average common shares and
equivalents outstanding for diluted EPS............................... 6,341 6,568 6,373
========== ========== ==========
See Notes to Consolidated Financial Statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 5, 2001, DECEMBER 31, 1999 AND JANUARY 1, 1999
(in thousands, except share amounts)
Additional
Common Stock Paid-in Retained Treasury Stock
Class A Class B Capital Earnings Shares Amount
------- ------- ---------- -------- ------ ------
Balance, January 2, 1998.............................$ 902 $ 1,248 $ 15,652 $28,781 198,400 $(1,054)
Issuance of common stock, stock options exercised ... -- 28 269 -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Repurchase of common stock, at cost.................. -- -- -- -- 107,000 (611)
Net income........................................... -- -- -- 3,579 -- --
Foreign currency translation adjustments............. -- -- -- -- -- --
------ ------- -------- ------- ------ ------
Balance, January 1, 1999.............................$ 902 $ 1,276 $ 15,921 $32,360 305,400 $(1,665)
Issuance of common stock, stock options exercised.... 2 42 459 -- -- --
Issuance of non-qualified stock options.............. -- -- 113 -- -- --
Tax benefit of non-qualified stock options........... -- -- 322 -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Repurchase of common stock, at cost.................. -- -- -- -- 41,500 (514)
Net income........................................... -- -- -- 10,319 -- --
Foreign currency translation adjustments............. -- -- -- -- -- --
------ ------- -------- ------- ------ ------
Balance, December 31, 1999...........................$ 904 $ 1,318 $ 16,815 $42,679 346,900 $(2,179)
Issuance of common stock, stock options exercised.... -- 22 297 -- -- --
Interest income on notes receivable.................. -- -- -- -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Repurchase of common stock, at cost.................. -- -- -- -- 299,600 (3,106)
Net income........................................... -- -- -- 8,963 -- --
Foreign currency translation adjustments............. -- -- -- -- -- --
------ ------- -------- ------- ------ ------
Balance, January 5, 2001.............................$ 904 $ 1,340 $ 17,112 $51,642 646,500 $(5,285)
====== ======= ======== ======= ======= ========
See Notes to Consolidated Financial Statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
FOR THE YEARS ENDED JANUARY 5, 2001, DECEMBER 31, 1999 AND JANUARY 1, 1999
(in thousands, except share amounts)
Accumulated
Other Total
Note Unearned Comprehensive Stockholders'
Receivable Compensation Income Equity
---------- ------------ ------------- ------------
Balance, January 2, 1998.................................... -- $ (40) $ (417) $ 45,072
Issuance of common stock, stock options exercised........... -- -- -- 297
Amortization of unearned compensation....................... -- 24 -- 24
Repurchase of common stock, at cost......................... -- -- -- (611)
Net income.................................................. -- -- -- 3,579
Foreign currency translation adjustments.................... -- -- (111) (111)
--------- ------- -------- ----------
Balance, January 1, 1999.................................... -- $ (16) $ (528) $ 48,250
Issuance of common stock, stock options exercised........... -- -- -- 503
Issuance of non-qualified stock options .................... -- -- -- 113
Tax benefit of non-qualified stock options.................. -- -- -- 322
Amortization of unearned compensation....................... -- 5 -- 5
Repurchase of common stock, at cost......................... -- -- -- (514)
Net income.................................................. -- -- -- 10,319
Foreign currency translation adjustments.................... -- -- (36) (36)
--------- ------- -------- ----------
Balance, December 31, 1999.................................. -- $ (11) $ (564) $ 58,962
Issuance of common stock, stock options exercised........... (276) -- -- 43
Interest income on notes receivable......................... (20) -- -- (20)
Amortization of unearned compensation....................... -- 6 -- 6
Repurchase of common stock, at cost......................... -- -- -- (3,106)
Net income.................................................. -- -- -- 8,963
Foreign currency translation adjustments.................... -- -- (228) (228)
--------- ------- -------- ----------
Balance, January 5, 2001....................................$ (296) $ (5) $ (792) $ 64,620
========== ======== ======== =========
See Notes to Consolidated Financial Statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 5, 2001, DECEMBER 31, 1999 AND JANUARY 1, 1999
(in thousands)
2000 1999 1998
---- ---- ----
(53 Weeks)
Cash flows from operating activities:
Net income..............................................................$ 8,963 $ 10,319 $ 3,579
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Loss on disposition of cycling division............................... 2,661 -- --
Depreciation and amortization......................................... 1,958 1,862 1,836
Provision for bad debt and discounts.................................. 5,525 7,151 4,908
Deferred income tax provision (benefit)............................... 678 (99) 461
Compensation from stock grants and options............................ -- 113 --
Minority interest in income (loss) of consolidated subsidiaries....... 89 76 30
Other................................................................. (6) 45 (17)
Changes in operating assets and liabilities, net of effects of
acquisitions, dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Accounts and notes receivable........................................... (8,599) (11,508) (5,718)
Inventories............................................................. (6,018) (4,700) (7,002)
Prepaid expenses and other current assets............................... 125 (42) 176
Increase (decrease) in liabilities:
Letters of credit payable............................................... 1,210 994 1,589
Accounts payable........................................................ (412) (1,242) 714
Accrued expenses........................................................ (1,185) 3,337 977
Income taxes............................................................ (889) (801) 944
---------- ---------- --------
Total adjustments.......................................................... (4,863) (4,814) (1,102)
---------- ---------- ---------
Net cash provided by operating activities.................................. 4,100 5,505 2,477
--------- --------- --------
Cash flows from investing activities:
Proceeds from the sale of cycling division.............................. 1,350 -- --
Purchases of property, plant and equipment.............................. (1,669) (1,661) (1,257)
Proceeds from the sale of equipment..................................... -- 3 72
Change in deferred charges, deposits and other.......................... (30) (8) 92
Marketable securities - realized and unrealized (gain) loss............. (36) (127) (31)
Payments for business acquisitions...................................... -- -- (863)
--------- --------- ---------
Net cash used by investing activities...................................... (385) (1,793) (1,987)
---------- ---------- ---------
Cash flows from financing activities:
Net short-term borrowings (payments).................................... 335 (5,429) 3,426
Repayment of long-term debt and capital lease obligations............... (360) (375) (2,364)
Common stock repurchased................................................ (2,688) (514) (611)
Issuances of common stock, stock option exercises....................... 43 503 297
--------- --------- ---------
Net cash provided (used) by financing activities........................... (2,670) (5,815) 748
Effect of exchange rate changes on cash and cash equivalents............... 178 123 (175)
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents....................... 1,223 (1,980) 1,063
Cash and cash equivalents at beginning of period........................... 3,515 5,495 4,432
--------- --------- ---------
Cash and cash equivalents at end of period.................................$ 4,738 $ 3,515 $ 5,495
========= ========= =========
See Notes to Consolidated Financial Statements
SAUCONY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended January 5, 2001, December 31, 1999 and
January 1, 1999
(in thousands, except share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
The Company is an importer and manufacturer of a broad line of
high-performance athletic footwear, athletic apparel and high-quality
casual leather footwear. The Company markets its products principally to
domestic and international retailers and distributors.
REPORTING PERIOD
The Company's fiscal year ends on the first Friday falling on or after
December 31, resulting in fiscal years of 52 or 53 weeks. The
Consolidated Financial Statements and notes for 2000, 1999 and 1998
represent the fiscal years ended January 5, 2001, December 31, 1999 and
January 1, 1999, respectively. There were 53 weeks in fiscal year 2000.
In management's opinion, the Consolidated Financial Statements for 2000,
1999 and 1998 are comparable.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Saucony,
Inc. and all of its majority-owned subsidiaries, domestic and foreign.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
RISKS AND UNCERTAINTIES
Competition is intense in the markets in which the Company sells its
products. The Company competes with a large number of other companies,
both domestic and foreign, several of which have diversified product
lines, well-known brands and financial, distribution and marketing
resources substantially greater than the Company's. Other risks and
uncertainties which could have a material adverse effect on the Company's
financial condition and results of operations are:
|X| The Company is substantially dependent upon foreign manufacturers to
supply products and product components. During fiscal 2000, one of
the Company's suppliers, located in China, accounted for
approximately 51% of the Company's total footwear purchases by dollar
volume;
|X| The Company is dependent upon certain key customers. During fiscal
2000, fiscal 1999 and fiscal 1998, the Company had one customer that
accounted for approximately 14%, 15% and 13% of gross sales,
respectively;
|X| The footwear and apparel industries in which the Company competes are
subject to rapid changes in consumer preferences and are affected by
seasonal consumer buying patterns;
|X| The Company's revenues and quarterly operating results may fluctuate;
|X| The Company's revenues are subject to foreign currency exchange
fluctuation;
|X| The Company's operating results may be affected by order cancellations;
|X| The Company is susceptible to the financial difficulties of retailers;
|X| The Company's marketing and advertising programs need to be effective;
|X| Changes in general economic conditions may adversely affect the Company's
business.
See Note 18 for additional disclosure of risks and uncertainties.
REVENUE RECOGNITION
Sales, net of discounts and estimated returns and allowances, and related
costs of sales are recognized when title and all the rewards and risks of
loss have been transferred to the buyer and all the criteria for revenue
recognition are met. Provisions for returns and allowances are determined
on the basis of past experience and other factors.
CASH AND CASH EQUIVALENTS
Cash equivalents include all short-term deposits with an original
maturity of three months or less.
INVENTORIES
Inventories are stated at lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and equipment, including significant improvements to
existing facilities, are at the lower of cost or estimated carrying
values. The assets are depreciated over their estimated useful lives or
lease terms, if shorter, using the straight-line method. The estimated
useful lives of the assets are: 33 years for buildings and improvements
and 3 to 15 years for machinery and equipment. Major renewals and
betterments are capitalized. Maintenance, repairs and minor property
renewals are expensed as incurred. The cost and related accumulated
depreciation of all property, plant and equipment retired or otherwise
disposed of are removed from the accounts. Any gain or loss resulting
from the retirement or disposition of property, plant and equipment is
included in other non-operating income.
INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities are categorized as trading
securities which are reported at fair value, with changes in fair value
recorded in consolidated net income. The marketable securities are
included in other assets, because the Company intends to hold these
investments until certain deferred compensation payments are due.
DEFERRED CHARGES AND GOODWILL
Deferred charges consist primarily of acquired trademarks. Trademarks are
amortized over five years; goodwill, representing the excess of the
purchase price over the estimated fair value of the net assets of the
acquired business, is being amortized over the period of expected benefit
of 15 years.
INCOME TAXES
The provision for income taxes is calculated according to Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." Under SFAS 109, income taxes are provided for the amount of taxes
payable or refundable in the current year and for the expected future tax
consequences of events that have been recognized in the financial
statements or tax returns. As a result of recognition and measurement
differences between tax laws and financial accounting standards,
temporary differences arise between the amount of taxable income and
pretax financial income for a year and the tax bases of assets or
liabilities and their reported amount in the financial statements. The
deferred tax assets and liabilities reported as of January 5, 2001 and
December 31, 1999 reflect the estimated future tax effects attributable
to temporary differences and carryforwards based on the provisions of
enacted tax law.
EARNINGS PER SHARE
Earnings per common share is calculated in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128).
Basic earnings per share excludes the dilutive effect of options and
warrants. Diluted earnings per share includes the dilutive effect of
options and warrants.
STOCK-BASED COMPENSATION
The Company grants stock options to officers, key employees, directors,
consultants and advisors with the exercise price determined by the
Compensation Committee of the Board of Directors. The Company accounts
for stock option grants in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which defines
stock compensation as the excess of the quoted market price of the
Company's stock at the date of the grant over the exercise price an
employee is required to pay.
On April 3, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving
Stock Compensation" (FIN 44), 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 non-compensatory plan and provides guidance on the
accounting consequences of modifications to the terms of previously
issued fixed stock options or awards. The Company adopted FIN 44 in
fiscal 2000, the initial application of which did not have a material
effect on earnings or on the Company's financial position. As prescribed
under SFAS 123, "Accounting for Stock-Based Compensation," the Company
has disclosed in Notes 11 and 12 the pro forma effects on net income and
earnings per share of determining stock-based compensation expense based
upon the fair value of the stock options granted subsequent to December
31, 1994.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) (as amended by Statement
of Financial Accounting Standards No. 137, a deferral of the effective
date of SFAS 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 affect current
earnings and 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 can be deferred in
other comprehensive income, depending on the currency exposure of the
underlying transaction.
From time to time, the Company enters into forward foreign currency
exchange contracts to hedge certain foreign currency denominated
payables. Gains and losses on forward exchange contracts that qualify as
hedges have been recognized in consolidated net income along with an
offsetting adjustment against the basis of the underlying hedged item.
The Company's forward currency contracts qualified for hedge accounting
under generally accepted accounting principles prior to SFAS 133;
however, upon adoption of SFAS 133, the Company has not designated these
contracts as qualifying for hedge accounting as defined by SFAS 133. The
Company believes that these contracts economically function as effective
hedges of the underlying exposures, but, due to the short term nature of
the contracts, the Company has not elected to designate these contracts
as hedges for accounting purposes.
The Company adopted SFAS 133 on January 6, 2001. As a result, the Company
recorded an approximately $15 increase in the fair value of its
derivatives as a cumulative effect of an accounting change on accumulated
other comprehensive income. These amounts will be recognized in earnings
when the underlying transactions are recorded.
ADVERTISING AND PROMOTION
Advertising and promotion costs, including print media production costs,
are expensed as incurred, with the exception of co-operative advertising,
which is accrued and the advertising costs expensed in the period of
revenue recognition. Advertising and promotion expense amounted to
$12,904, $10,065 and $7,912 for 2000, 1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Expenditures for research and development of products are expensed as
incurred. Research and development expenses amounted to approximately
$1,083, $1,676 and $1,681 for 2000, 1999 and 1998, respectively.
RELATED PARTY TRANSACTIONS
At January 5, 2001, the Company held notes of $169 and $127,
respectively, from two officers of the Company who are also principal
shareholders of the Company's Class A Common Stock. The notes, which are
included as a component of stockholders' equity, are due on March 17,
2002, are not collateralized and bear interest at 9.0% per annum.
Interest income from the two notes amounted to $20 for 2000 and is
included in notes receivable as of January 5, 2001.
2. MARKETABLE SECURITIES:
---------------------
As of January 5, 2001, the Company's holdings in marketable securities
consisted primarily of equity securities which are classified as trading
securities.
The cost of the securities held at January 5, 2001, and December 31, 1999
was $218 and $133, respectively. As of January 5, 2001 and December 31,
1999, the market value of such securities was $343 and $307,
respectively.
Included in the determination of net income for the years ended January
5, 2001, December 31, 1999 and January 1, 1999 were: 2000, net realized
gains of $86 and unrealized losses of $50; 1999, net realized gains of $1
and net unrealized gains of $127; and 1998, net realized losses of $3 and
net unrealized gains of $35.
3. INVENTORIES:
Inventories at January 5, 2001 and December 31, 1999 consisted of the
following:
2000 1999
---- ----
Finished goods..........................$ 31,529 $ 30,067
Work-in-process......................... 827 920
Raw materials and supplies.............. 6,048 4,283
-------- --------
Total...................................$ 38,404 $ 35,270
======== ========
4. PROPERTY, PLANT AND EQUIPMENT:
-----------------------------
Major classes of property, plant and equipment at January 5, 2001 and
December 31, 1999 were as follows:
2000 1999
---- ----
Land and improvements....................$ 598 $ 484
Buildings and improvements............... 6,165 6,186
Machinery and equipment.................. 10,832 10,513
Capitalized leases....................... 1,666 1,666
Leasehold improvements................... 533 418
--------- ----------
19,794 19,267
Less accumulated depreciation
and amortization......................... 12,213 10,988
--------- ----------
Total....................................$ 7,581 $ 8,279
========= ==========
Accumulated amortization of leased property was $1,331 and $1,133 at
January 5, 2001 and December 31, 1999, respectively.
5. ACCRUED EXPENSES:
Accrued expenses at January 5, 2001 and December 31, 1999 consisted of
the following:
2000 1999
---- ----
Payroll and bonuses......................$ 2,460 $ 2,734
Sales commissions........................ 508 282
Selling and advertising.................. 287 567
Other.................................... 3,210 3,620
-------- ---------
Total....................................$ 6,465 $ 7,203
======== =========
6. LONG-TERM DEBT:
The Company had two notes with monthly installments of $0.6 and $0.7,
respectively as of December 31, 1999. In fiscal 2000, the notes were paid
in full. The notes had interest rates ranging from 3.9% to 10.0%. As of
December 31, 1999, the outstanding balance was $31. The current portion
of the long-term debt was $11 as of December 31, 1999. The Company had no
long-term debt as of January 5, 2001.
7. CAPITAL LEASE OBLIGATIONS:
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments as of January 5, 2001:
2001.......................................................$ 219
2002....................................................... 25
2003....................................................... 6
---------
Total minimum lease payments............................... 250
Less amounts representing interest......................... 12
---------
Present value of minimum lease payments.................... 238
Less current portion....................................... 204
---------
Long-term portion..........................................$ 34
=========
8. EMPLOYEE RETIREMENT PLANS:
The Company has maintained a qualified retirement savings plan ("401(k)
Plan") since 1991. All United States employees of the Company who meet
the minimum age and service requirements are eligible to participate in
the 401(k) Plan, as amended. The Company may make discretionary
contributions to the 401(k) Plan equal to a certain percentage of the
participating employees' contributions, subject to the limitations
imposed by the 401(k) Plan and the Internal Revenue Code. The Company's
contributions amounted to $211, $121 and $72 for 2000, 1999 and 1998,
respectively.
In 1995, the Company established a deferred compensation program ("DCP")
to provide key executives and highly compensated employees with
supplemental retirement benefits. Eligibility is determined by the
Company's Board of Directors. The DCP is not qualified under Section 401
of the Internal Revenue Code. The Company may make discretionary
contributions to the DCP equal to a certain percentage of the
participants' contributions. The Company's contributions amounted to $18,
$31 and $14 for 2000, 1999 and 1998, respectively.
9. COMMITMENTS AND CONTINGENCIES:
-----------------------------
OPERATING LEASE COMMITMENTS
The Company is obligated under various operating leases for equipment and
rental space through 2010. Total equipment and rental expenses for 2000,
1999 and 1998 were $1,261, $903 and $959, respectively. Future minimum
equipment and rental payments are as follows: 2001, $1,127; 2002, $940;
2003, $791; 2004, $711; and thereafter, $862.
SHORT-TERM BORROWING ARRANGEMENTS
On August 31, 1998, the Company entered into a revolving credit agreement
under the terms of which a bank committed a maximum credit line of
$15,000 to the Company for cash borrowings and letters of credit. The
credit facility was amended and increased on March 12, 1999 to $20,000
and was increased on May 23, 2000 to $30,000 for the period from May 1,
2000 through September 30, 2000. The facility terminates on July 31,
2001. The Company expects to negotiate and extend the facility, or a
similar facility, under comparable terms and conditions. Borrowings under
the facility bear interest at either the bank's prime rate of interest,
less 1.0%, or at the LIBO rate, plus 1.5%. In addition, the Company pays
a quarterly commitment fee of 0.375% on the average daily unused credit
line. The credit facility contains restrictions and financial covenants
including: restrictions on additional indebtedness, restrictions on the
declaration or payment of dividends and the repurchase of common stock, a
minimum tangible net worth, as defined, restrictions on annual capital
expenditures, a minimum current ratio, as defined, a minimum leverage
ratio and a minimum interest coverage, as defined. The credit facility is
subject to the bank's periodic review of the Company's operations.
The Company was in compliance with such covenants at January 5, 2001. At
January 5, 2001, there were no borrowings outstanding under the facility
and there were letters of credit outstanding of $4,004.
On March 25, 1998, the Company's primary lender and several of the
Company's foreign subsidiaries entered into demand lines of credit letter
agreements to provide working capital resources. Demand lines of credit
were made available as follows: Saucony Sports BV, Dutch Guilders
3,500,000 and Saucony UK, Inc., British Pounds 800,000. The lines of
credit are not committed facilities, therefore, the availability of
advances under the lines of credit are at the sole discretion of the
bank. At January 5, 2001, aggregate borrowings under the demand lines of
credit amounted to $2,163.
Saucony Canada, Inc. maintains a credit facility with a Canadian lender.
The agreement provides Saucony Canada with a credit line of Canadian
Dollars 1,000,000 for cash borrowings and letters of credit. At January
5, 2001, there were no borrowings or letters of credit outstanding under
this credit facility.
EMPLOYMENT AGREEMENTS
During fiscal 2000, the Company entered into employment agreements with
two key executives. The employment agreements provide for minimum
aggregate annual base salaries of $925 in fiscal 2000, consumer price
index adjustments, life insurance coverage, cash bonuses calculated as a
percentage of the Company's consolidated pre-tax income and other
perquisites commonly found in such agreements. The employment agreements
expire in August 2003, but are subject to extension. The Company has
included an aggregate bonus expense to the key executives of $853 in its
general and administrative expenses for fiscal 2001 and in accrued
expenses at January 5, 2001.
LITIGATION
The Company is involved in various routine litigation incident to its
business. Many of these proceedings are covered in whole or in part by
insurance. In management's opinion, none of these proceedings is expected
to have a material adverse effect on the Company's financial position,
operations or cash flows (irrespective of any potential insurance
recovery).
10. COMMON STOCK:
------------
The Company has two classes of Common Stock. The Class A Common Stock has
voting rights. The Class B Common Stock is non-voting, except with
respect to amendments to the Company's Articles of Organization that
alter or change the powers, preferences or special rights of the Class B
Common Stock so as to affect them adversely and as otherwise required by
law. The Class B Common Stock has certain features, including a "Class B
Protection" feature and a premium equal to 110% of the cash dividend
payable on Class A Common Stock, if any, which are intended to minimize
the economic reasons for the Class A Common Stock to trade at a premium
compared to the Class B Common Stock. The other terms of the Class A
Common Stock and Class B Common Stock, including rights with respect to
special cash dividends, stock dividends, stock splits, consideration
payable in a merger or consolidation and distributions upon liquidation,
generally are the same.
As of January 5, 2001, December 31, 1999 and January 1, 1999, the number
of shares of Class A Common Stock and Class B Common Stock outstanding
were as follows:
Class A Class B
Common Common
Stock Stock
Shares outstanding at January 2, 1998....... 2,703,227 3,548,087
Shares issued............................... 800 83,318
Shares repurchased.......................... (25,000) (82,000)
------------ ------------
Shares outstanding at January 1, 1999....... 2,679,027 3,549,405
Shares issued............................... 4,100 128,504
Shares repurchased.......................... (15,000) (26,500)
------------ ------------
Shares outstanding at December 31, 1999..... 2,668,127 3,651,409
------------ ------------
Shares issued............................... -- 64,160
Shares repurchased.......................... (98,000) (201,600)
------------ ------------
Shares outstanding at January 5, 2001....... 2,570,127 3,513,969
=========== ===========
11. STOCK OPTIONS:
-------------
Under the Company's 1993 Equity Incentive Plan (the "Equity Incentive
Plan") the Company may grant incentive stock options and restricted stock
awards to officers, key employees and Directors of the Company. Outside
consultants and advisors to the Company are eligible to receive
non-statutory stock options and awards of restricted stock.
The Equity Incentive Plan is administered by the Compensation Committee
of the Board of Directors, which, at its sole discretion, grants options
to purchase shares of Common Stock and makes awards of restricted stock.
The purchase price per share of Common Stock shall be determined by the
Board of Directors, provided, however, that in the case of incentive
stock options, the purchase price may not be less than 100% of the fair
market value of such stock at the time of grant of the option. The terms
of option agreements are established by the Board of Directors, except in
the case of incentive stock options, the term of which may not exceed ten
years. The vesting schedule is subject to the discretion of the Board of
Directors.
Restricted stock awards granted under the Equity Incentive Plan entitle
recipients to purchase shares of the Company's Common Stock subject to
restrictions concerning the sale, transfer and other disposition of the
shares issued until such shares are vested. The Board of Directors
determines the purchase price, which may be less than the fair market
value of the Common Stock, and the vesting schedule for such awards.
At January 5, 2001, a total of 1,900,000 shares, in the aggregate, of
Class A Common Stock and Class B Common Stock have been reserved by the
Company and may be issued under the Plan.
The Director Stock Option Plan provides for the automatic grant to
non-employee directors of non-statutory stock options upon specified
occasions. A total of 100,000 shares of Class B Common Stock have been
reserved for issuance under the plan. The option purchase price per share
equals the fair market value of Class B Common Stock on the date of the
grant. The options are exercisable at any time, in whole or in part,
prior to the fifth anniversary of the date of the grant. No further
options may be granted under the Director Stock Option Plan, which
expired in 1998. The remaining 62,000 shares reserved under the Plan are
no longer available for grant.
The following table summarizes the awards available for grant under the
Company's 1993 Equity Incentive Plan and the Director Stock Option Plan
for the three-year reporting period ended January 5, 2001:
Shares
Shares available at January 2, 1998...................... 683,854
Awards granted........................................... (18,750)
Options expired.......................................... 26,666
Director Stock Option Plan expiration.................... (62,000)
----------
Shares available at January 1, 1999...................... 629,770
Awards granted........................................... (346,575)
Options expired or cancelled............................. 56,265
---------
Shares available at December 31, 1999.................... 339,460
Additional shares reserved............................... 750,000
Awards granted........................................... (239,847)
Options expired or cancelled............................. 21,300
---------
Shares available at January 5, 2001...................... 870,913
=========
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to
measure stock-based compensation expense using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," as further interpreted by FIN 44.
Accordingly, compensation cost for stock options and restricted stock
awards is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the exercise price an
employee must pay to acquire the stock.
The Company amortizes stock-based compensation arising from the issuance
of restricted stock warrants and below market options, is being amortized
to expense over the vesting period of the stock grant or option term and
amounted to $6, $5 and $24 for 2000, 1999 and 1998, respectively.
The following table summarizes the Company's stock option activity as of
January 1, 1999, December 31, 1999 and January 5, 2001:
Weighted
Average
Exercise Option
Shares Price Price Range
-------- ---------- --------------------
Outstanding at January 2, 1998..................... 426,618 $ 4.32 $ 2.00 - $ 12.25
Granted....................................... 18,750 $ 5.05 $ 4.44 - $ 6.50
Exercised..................................... (84,118) $ 3.52 $ 2.25 - $ 5.00
Forfeited..................................... (3,266) $ 3.27 $ 2.50 - $ 5.00
Expired....................................... (23,400) $ 8.46 $ 3.69 - $ 12.25
-----------
Outstanding at January 1, 1999..................... 334,584 $ 4.28 $ 2.00 - $ 6.50
Granted....................................... 346,575 $ 9.81 $ 4.13 - $ 22.63
Exercised..................................... (132,604) $ 3.79 $ 2.00 - $ 6.50
Forfeited..................................... (42,265) $ 8.00 $ 4.44 - $ 23.63
Expired....................................... (4,000) $ 5.75 $ 5.75
Cancelled..................................... (14,000) $ 5.13 $ 4.75 - $ 5.63
-----------
Outstanding at December 31, 1999................... 488,290 $ 7.99 $ 4.00 - $ 23.63
Granted....................................... 239,847 $ 11.75 $ 9.88 - $ 14.25
Exercised..................................... (64,160) $ 4.73 $ 4.00 - $ 6.50
Forfeited..................................... (25,300) $ 12.91 $ 4.88 - $ 23.63
-----------
Outstanding at January 5, 2001..................... 638,677 $ 9.59 $ 4.00 - $ 19.88
========== ======= ======= ========
Options exercisable for shares of the Company's Class A and Class B
Common Stock as of January 1, 1999, December 31, 1999 and January 5, 2001
are as follows:
Options Exercisable
-----------------------------------------------------------------------
Weighted Average
Exercise Price
Class A Class B Class A Class B
Common Common Common Common
Stock Stock Total Stock Stock
----- ----- ----- ----- -----
January 1, 1999................ 4,100 224,054 228,154 $ 2.27 $ 4.22
December 31, 1999.............. -- 203,220 203,220 -- $ 5.88
January 5, 2001................ -- 232,090 232,090 -- $ 7.89
The following table summarizes information about stock options outstanding
at January 5, 2001:
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted
Shares Average Weighted Shares Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices 01/05/01 Life (Years) Price 01/05/01 Price
--------------- -------- ------------ -------- ----------- ---------
$ 4.00 - $ 4.88 109,390 1.69 $ 4.43 75,570 $ 4.42
$ 5.00 - $ 5.64 152,540 2.78 $ 5.25 76,020 $ 5.20
$ 6.00 - $ 7.00 1,900 2.84 $ 6.47 750 $ 6.30
$ 9.88 - $ 10.38 2,750 4.51 $ 10.18 -- $ --
$ 11.00 - $ 11.38 155,500 7.64 $ 11.26 30,000 $ 11.25
$ 12.13 - $ 13.44 109,847 3.75 $ 12.42 1,200 $ 12.59
$ 14.25 - $ 14.69 45,500 3.78 $ 14.68 30,967 $ 14.69
$ 16.16 - $ 17.75 60,250 3.80 $ 16.53 17,383 $ 16.42
$ 19.88 1,000 3.58 $ 19.88 200 $ 19.88
-------- --------
638,677 232,090
======== ========
12. EARNINGS PER SHARE
The following table sets forth the computation of basic earnings per
common share and diluted earnings per common share:
2000 1999 1998
---------------------- ---------------------- ----------------------
Earnings Earnings Earnings Earnings Earnings Earnings
per per per per per per
Common Common Common Common Common Common
Share - Share - Share - Share - Share - Share -
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
Net income available for
common shares and
assumed conversions...............$ 8,963 $ 8,963 $10,319 $10,319 $ 3,579 $ 3,579
======== ======== ======= ======= ======== ========
Weighted-average common shares and equivalents outstanding:
Weighted-average shares
outstanding...................... 6,192 6,192 6,292 6,292 6,242 6,242
Effect of dilutive securities:
Stock options.................... -- 149 -- 276 -- 131
-------- -------- ------- ------- -------- --------
6,192 6,341 6,292 6,568 6,242 6,373
======== ======== ======= ======= ======== ========
Earnings per share:
Net income........................$ 1.45 $ 1.41 $ 1.64 $ 1.57 $ 0.57 $ 0.56
======== ======== ======= ======= ======= ========
Options to purchase 375,000 and 112,000 shares of common stock were
outstanding at January 5, 2001 and December 31, 1999, but were not
included in the computations of EPS since the options were anti-dilutive.
There were no anti-dilutive options outstanding at January 1, 1999.
The weighted average fair value at date of grant for options granted in
2000, 1999 and 1998 was $6.45, $4.91 and $2.30 per option, respectively.
The weighted-average fair value of these options at the date of grant was
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 2000, 1999 and 1998, respectively:
risk-free interest rates of 6.5%, 5.5% and 5.6%; dividend yields of 0%,
0% and 0%; volatility factors of the expected market price of the
Company's common stock of 70.0%, 62.3% and 42.9%; and a weighted-average
expected life of the options of 3.7, 3.5 and 5.0 years.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for
stock option awards in 2000, 1999 and 1998, consistent with the
provisions of SFAS 123, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
2000 1999 1998
---------------------- --------------------- ----------------------
Earnings Earnings Earnings Earnings Earnings Earnings
per per per per per per
Common Common Common Common Common Common
Share - Share - Share - Share - Share - Share -
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
Net income:
As reported $ 8,963 $ 8,963 $10,319 $10,319 $ 3,579 $ 3,579
Compensation expense for
stock, net of tax (535) (535) (304) (304) (81) (81)
---------- ---------- -------- -------- --------- ---------
Pro forma net income $ 8,428 $ 8,428 $10,015 $10,015 3,498 3,498
========= ========= ======= ======= ======== ========
Pro forma earnings per share:
As reported $ 1.45 $ 1.41 $ 1.64 $ 1.57 $ 0.57 $ 0.56
Compensation expense for
stock, net of tax (0.09) (0.08) (0.05) (0.05) (0.01) (0.01)
---------- ---------- -------- -------- -------- --------
Pro forma net income per share $ 1.36 $ 1.33 $ 1.59 $ 1.52 $ 0.56 $ 0.55
========== ========== ======== ======== ======== =========
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes
in the subjective assumptions can materially affect the fair value
estimate, management believes the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
13. INCOME TAXES:
The provision for income taxes was based on pre-tax income (loss) from
operations before minority interest which was subject to taxation by the
following jurisdictions:
2000 1999 1998
---- ---- ----
Pre-tax income:
United States...........$ 14,660 $ 15,864 $ 3,870
Foreign................. 853 1,725 1,368
--------- --------- --------
Total...................$ 15,513 $ 17,589 $ 5,238
========= ========= ========
The provision (credit) for income taxes consists of the following:
2000 1999 1998
---- ---- ----
Current:
Federal...............$ 4,129 $ 5,349 $ 830
State................. 1,129 1,511 234
Foreign............... 525 421 104
--------- --------- ---------
5,783 7,281 1,168
--------- --------- ---------
Deferred:
Federal............... 523 (139) 239
State................. 132 (47) 90
Foreign............... (62) 466 (36)
---------- --------- ----------
593 280 293
---------- --------- ---------
Change in valuation
allowance.............. 85 (367) 168
---------- ----------- ---------
Total.................$ 6,461 $ 7,194 $ 1,629
========== ========== =========
The net deferred tax asset or liability reported on the consolidated
balance sheet consist of the following items as of January 5, 2001 and
December 31, 1999:
2000 1999
---- ----
Net current deferred tax assets:
Allowance for doubtful accounts and discounts.........$ 522 $ 1,207
Inventory allowances and tax costing adjustments...... 193 338
Deferred compensation................................. 404 330
Other accrued expenses................................ 297 103
Unrealized gain on marketable securities.............. (50) (70)
Foreign loss carryforwards............................ -- 232
------- --------
Total..............................................$ 1,366 $ 2,140
------- --------
Net long-term deferred tax assets:
Foreign loss carryforwards............................$ 449 $ 197
Valuation allowance................................... (183) (98)
-------- --------
Total..............................................$ 266 $ 99
-------- --------
Net long-term deferred tax liabilities:
Property, plant and equipment ....................... $ 939 $ 868
Investment in limited partnership................... 1,201 1,177
-------- --------
Total............................................ $ 2,140 $ 2,045
-------- --------
Net deferred tax asset (liability).................... $ (508) $ 194
========= ========
The foreign loss carryforwards relate to operating losses of
approximately $1,224, which may be carried forward indefinitely. At
January 5, 2001, the Company has determined that it is more likely than
not that $183 of the deferred tax assets resulting from foreign operating
losses will not be realized.
The Company has not recorded deferred income taxes on the undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in
foreign operations. These earnings amounted to approximately $2,505 at
January 5, 2001.
A reconciliation from the U.S. statutory federal income tax rate to the
effective income tax rate on pre-tax income from operations before
minority interest follows:
2000 1999 1998
---- ---- ----
U.S. federal income tax rate...............................................34.0% 34.3% 34.0%
State income tax, net of federal benefit....................................5.4 5.5 4.8
Non-deductible expenses and tax-exempt income...............................0.6 1.7 0.4
International tax rate differences..........................................1.1 1.6 (7.6)
Detriment (benefit) of valuation allowance relating
to foreign losses.........................................................0.5 (2.1) 3.2
Low-income housing tax credits..............................................0.0 (0.1) (0.7)
Adjustment of prior years' estimated tax liabilities...................... 0.0 0.0 (3.0)
----- ----- ------
Effective income tax rate................................................. 41.6% 40.9% 31.1%
====== ====== ======
14. SALE OF CYCLING DIVISION:
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 $2,661, inclusive
of $1,012 of expenses associated with the transaction and resulting from
the exit of the cycling business, or $1,553 after-tax or $0.24 per
diluted share. As a result of the transaction, a majority of the cycling
division employees were severed and certain long-lived assets used
exclusively in the cycling business were deemed impaired. Expenses
associated with the sale and exit of the cycling division are as follows:
Transaction costs.............................................$ 358
Costs to exit facility and equipment leases and other
non-cancelable contractual commitments...................... 142
Employee severance and termination benefits................... 210
Writeoff leasehold improvements............................... 84
Writeoff goodwill and other deferred charges.................. 218
--------
Total.........................................................$ 1,012
========
Included in accrued expenses at January 5, 2001 are $144 of costs
associated with the sale and exit of the cycling business, which the
Company expects will be paid by the end of the second quarter of fiscal
2001.
The non-recurring charge affected the United States and Other Products
segment.
15. GEOGRAPHIC SEGMENT DATA:
-----------------------
The following table summarizes the Company's operations by geographic
area for the years ended January 5, 2001, December 31, 1999 and January
1, 1999 and identifiable assets as of January 5, 2001, December 31, 1999
and January 1, 1999.
2000 1999 1998
---- ---- ----
REVENUES:
United States...................................................$ 144,265 $ 135,410 $ 83,617
International................................................... 22,097 19,281 22,193
----------- ----------- -----------
$ 166,362 $ 154,691 $ 105,810
=========== =========== ===========
INTERNATIONAL REVENUES:
United States - sales to foreign distributors................... 5,119 3,560 $ 4,086
Foreign subsidiaries............................................ 16,978 15,721 18,107
----------- ----------- -----------
$ 22,097 $ 19,281 $ 22,193
=========== =========== ===========
INTER-AREA REVENUES:
United States...................................................$ 870 $ 828 $ 629
International................................................... 9,299 8,442 9,286
----------- ----------- -----------
$ 10,169 $ 9,270 $ 9,915
=========== =========== ===========
TOTAL REVENUES:
United States...................................................$ 145,135 $ 136,238 $ 84,246
International................................................... 31,396 27,723 31,479
Less: Inter-area eliminations.................................. (10,169) (9,270) (9,915)
------------ ------------ ------------
$ 166,362 $ 154,691 $ 105,810
=========== =========== ===========
OPERATING INCOME:
United States...................................................$ 13,855 $ 16,815 $ 6,902
International................................................... 2,412 1,469 (1,117)
Less: Inter-area eliminations.................................. (144) (88) (44)
------------ ------------ ------------
$ 16,123 $ 18,196 $ 5,741
=========== =========== ===========
IDENTIFIABLE ASSETS:
United States...................................................$ 78,130 $ 79,288 $ 72,677
International................................................... 13,465 13,078 14,171
Less: Inter-area eliminations.................................. (8,310) (15,185) (16,969)
------------ ------------ ------------
$ 83,285 $ 77,181 $ 69,879
=========== =========== ===========
Revenues are classified based on customer location. Other revenue
consists primarily of royalty income and freight and handling income on
product shipments. Inter-area revenues consist primarily of inventory
shipments to the Company's international subsidiaries. These inter-area
sales are generally priced to recover cost plus an appropriate mark-up
for profit and are eliminated in the determination of consolidated net
sales. Operating income consists of revenue, less cost of sales, selling
expenses, general and administrative expenses and the loss on the sale of
the cycling division.
16. OPERATING SEGMENT DATA:
The Company's operating segments are organized based on the nature of
products. The operating segments of the Company are as follows:
SAUCONY SEGMENT
Performance running, walking, cross training and outdoor trail footwear
and multi-sport and triathlon athletic apparel sold under the Saucony
brand name.
OTHER PRODUCTS SEGMENT
The Other Products segment aggregates several product lines, none of
which individually meets the criteria as defined in SFAS 131 for a
reportable segment. Included in Other Products are: Hind multi-sport
athletic apparel; Spot-bilt coaches, official, leather walking and
workplace footwear; Hyde Authentics casual footwear; the Company's retail
factory outlet stores; and the Company's former cycling division.
The following table summarizes the results of the Company's operating
segments for the years ended January 5, 2001, December 31, 1999 and
January 1, 1999 and identifiable assets as of January 5, 2001, December
31, 1999 and January 1, 1999:
2000 1999 1998
---- ---- ----
REVENUES:
Saucony............................................$ 145,301 $ 132,275 $ 86,651
Other Products..................................... 21,061 22,416 19,159
---------- --------- ----------
$ 166,362 $ 154,691 $ 105,810
========== ========= ==========
PRE-TAX INCOME:
Saucony............................................$ 18,507 $ 18,965 $ 5,497
Other Products..................................... (2,994) (1,376) (259)
----------- ---------- -----------
Total segment pre-tax income....................... 15,513 17,589 5,238
Provision for income taxes......................... 6,461 7,194 1,629
Minority interest.................................. 89 76 30
---------- --------- ----------
NET INCOME............................................$ 8,963 $ 10,319 $ 3,579
========== ========= ==========
ASSETS:
Saucony............................................$ 68,268 $ 61,584 $ 53,906
Other Products..................................... 15,017 15,597 15,973
---------- --------- ----------
$ 83,285 $ 77,181 $ 69,879
========== ========= ==========
DEPRECIATION AND AMORTIZATION:
Saucony............................................$ 1,701 $ 1,516 $ 1,606
Other Products..................................... 257 346 230
---------- --------- ----------
$ 1,958 $ 1,862 $ 1,836
========== ========= ==========
INTEREST, NET:
Saucony............................................$ 285 $ 228 $ 252
Other Products..................................... 341 455 455
---------- --------- ----------
$ 626 $ 683 $ 707
========== ========= ==========
COMPONENTS OF INTEREST, NET
Interest expense...................................$ 695 $ 729 $ 733
Interest income.................................... 69 46 26
---------- --------- ----------
Interest, net....................................$ 626 $ 683 $ 707
========== ========= ==========
17. ACQUISITIONS:
MERLIN AND REAL DESIGN
During fiscal 1998, the Company and Quintana Roo, Inc., a wholly-owned
subsidiary of the Company, acquired substantially all of the assets of
Merlin Materials, Inc., and Real Product Design, Inc.for $644 and $240 in
cash, respectively. The acquisitions were accounted for as purchases. See
Note 14 relating to the sale of the cycling division.
18. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to credit
risk consist primarily of cash, cash equivalents and trade receivables.
The Company maintains cash and cash equivalents with various major
financial institutions. Cash equivalents include investments in
commercial paper of companies with high credit ratings, investments in
money market securities and securities backed by the U.S. Government. At
times such amounts may exceed the F.D.I.C. limits. The Company limits the
amount of credit exposure with any one financial institution and believes
that no significant concentration of credit risk exists with respect to
cash investments.
Trade receivables subject the Company to the potential for credit risk
with customers in the retail and distributor sectors. To reduce credit
risk, the Company performs ongoing evaluations of its customers'
financial condition but does not generally require collateral.
Approximately 46% of the Company's gross trade receivables balance was
represented by 17 customers at January 5, 2001, which exposes the Company
to a concentration of credit risk.
19. FINANCIAL INSTRUMENTS:
The carrying value of cash, cash equivalents, receivables, long-term debt
and other notes payable approximates fair value. The Company believes
similar terms for current long-term debt and other notes payable would be
attainable. The fair value of marketable securities is estimated based
upon quoted market prices for these securities. The Company enters into
forward currency exchange contracts to hedge intercompany liabilities
denominated in currencies other than the functional currency. The fair
value of the Company's foreign currency exchange contracts is estimated
based on current foreign exchange rates. At January 5, 2001 and December
31, 1999, the notional value of the Company's foreign currency exchange
contracts to purchase U.S. dollars was $1,100 and $750, respectively.
Gains and losses on forward exchange contracts are deferred and offset
against foreign currency exchange gains and losses on the underlying
hedged item. At January 5, 2001 and December 31, 1999, estimated fair
value of the Company's non-derivative financial instruments approximated
the carrying value.
20. COMPREHENSIVE INCOME:
As defined in Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), comprehensive income
encompasses net income and other components of comprehensive income that
are excluded from net income under U.S. generally accepted accounting
principles, comprising items previously reported directly in
stockholders' equity. SFAS 130 limits the excluded components to the
following: foreign currency translation adjustments, minimum pension
liability adjustments and unrealized gains and losses on certain
investments in debt and equity investments classified as
available-for-sale securities.
The following table sets forth comprehensive income for the years ended
January 5, 2001, December 31, 1999, and January 1, 1999:
2000 1999 1998
---- ---- ----
Net income...............................................$ 8,963 $ 10,319 $ 3,579
Other comprehensive income (loss):
Foreign currency translation adjustments...............$ (228) $ (36) $ (111)
Income tax expense (benefit) related to
other comprehensive income (loss).................... (96) (30) (32)
Reclassification adjustment, net of tax................ -- 57 27
--------- --------- ---------
Other comprehensive income (loss), net
of tax.................................................$ (132) $ 51 $ (52)
---------- --------- ----------
Comprehensive income.....................................$ 8,831 $ 10,370 $ 3,527
========= ========= =========
21. QUARTERLY INFORMATION:
(Unaudited)
2000 Quarter 1 Quarter 2 (1) Quarter 3 Quarter 4 (2)
---- --------- ------------- --------- -------------
Net sales.........................................$ 46,416 $ 43,439 $ 44,790 $ 31,384
Gross profit...................................... 17,346 16,803 17,335 10,669
Net income........................................ 3,208 1,373 3,780 602
Earnings per share:
Basic........................................... 0.51 0.22 0.61 0.10
Diluted......................................... 0.50 0.22 0.60 0.10
1999 Quarter 1 Quarter 2 Quarter 3 Quarter 4
---- --------- --------- --------- ---------
Net sales.........................................$ 42,406 $ 37,706 $ 43,454 $ 30,492
Gross profit...................................... 15,421 14,137 17,371 11,895
Net income........................................ 3,333 2,257 3,094 1,635
Earnings per share:
Basic........................................... 0.54 0.36 0.49 0.26
Diluted......................................... 0.52 0.34 0.47 0.25
--------------
(1) The Company sold substantially all of the assets and business of
its cycling division during the second quarter of fiscal 2000. See
Note 14 for further information relating to the sale of the
cycling division.
(2) The fourth quarter of fiscal 2000 consisted of 14 weeks.
Earnings per share amounts for each quarter are required to be computed
independently and, as a result, their sum may not equal the total
earnings per share amounts for fiscal 2000 and 1999.
22. SUPPLEMENTAL CASH FLOW DISCLOSURE
During 2000, the Company purchased 38,500 shares of its common stock,
with borrowed funds, for $418. At January 5, 2001 the borrowing and
accrued interest thereon of $15 are included in notes payable. Also
during 2000, the Company received notes from two officers of the Company,
aggregating $276, in conjunction with the exercise of options to purchase
shares of the Company's Class B Common Stock. The notes are included as a
component of stockholders' equity, are due on March 17, 2002, are not
collateralized and bear interest at 9.0% per annum. At January 5, 2001,
the notes amounted to $296 and included $20 of interest income recognized
in 2000.
The following table summarizes additional disclosure of cash flow
information for the years ended January 5, 2001, December 31, 1999 and
January 1, 1999:
2000 1999 1998
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds.................................$ 6,695 $ 8,090 $ 257
========= ========= =========
Interest.....................................................$ 605 $ 688 $ 657
========= ========= =========
Non-cash Investing and Financing Activities:
Property purchased under capital leases...................... -- $ 160 $ 141
========= ========= =========
SAUCONY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 5, 2001, December 31, 1999 and
January 1, 1999
(dollars in thousands)
Additions
Balance charged to Deductions Balance
beginning costs and from end
of year expenses reserve of year
------- -------- ------- -------
Year ended January 5, 2001:
Allowance for doubtful accounts and discounts...................$ 3,534 $ 5,525 $ 7,012 $ 2,047
Year ended December 31, 1999:
Allowance for doubtful accounts and discounts...................$ 1,880 $ 7,151 $ 5,497 $ 3,534
Year ended January 1, 1999:
Allowance for doubtful accounts and discounts...................$ 2,032 $ 4,908 $ 5,060 $ 1,880
EXHIBIT INDEX
Exhibit
Number Description
3.1 Restated Articles of Organization, as amended, of the Registrant are
incorporated herein by reference to the Registrant's current report on
Form 8-K dated May 21, 1998. *
3.2 By-Laws, as amended, of the Registrant are incorporated herein by
reference to Exhibit 3.3 to the Registrant's Registration Statement on
Form S-2, as amended (File No. 33-61040) (the "Form S-2"). *
10.1 Revolving Credit Agreement between the Registrant and State Street
Bank and Trust Company, dated August 31, 1998 (the "Credit
Agreement"), is incorporated herein by reference to Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended October 2, 1998. *
10.2 First Amendment dated March 12, 1999 to the Credit Agreement is
incorporated herein by reference to Exhibit 10.2 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 1, 1999.
*
10.3 Second Amendment dated April 20, 1999 to the Credit Agreement.
10.4 Third Amendment dated May 23, 2000 to the Credit Agreement is
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2000. *
10.5** 1993 Equity Incentive Plan, as amended, is incorporated herein by
reference to Exhibit 10.8 to the Registrant's Annual Report on Form
10-K for the fiscal year ended January 2, 1998. *
10.6** Amendment No. 3 to 1993 Equity Incentive Plan, as amended, is
incorporated herein by reference to Exhibit 10.5 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999. *
10.7** Amendment No. 4 to 1993 Equity Incentive Plan, as amended, is
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2000. *
10.8** VP Bonus Plan is incorporated herein by reference to Exhibit 10.19
to the Form S-2. *
10.9** 1993 Director Option Plan is incorporated herein by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 2, 1993. *
10.10** Employment Agreement dated as of August 17, 2000, by and between
the Registrant and John H. Fisher, is incorporated herein by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 29, 2000. *
10.11** Executive Retention Agreement dated as of August 17, 2000, by and
between the Registrant and John H. Fisher, is incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 29, 2000. *
10.12** Employment Agreement dated as of August 17, 2000, by and between
the Registrant and Charles A. Gottesman, is incorporated herein by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 29, 2000. *
10.13** Executive Retention Agreement dated as of August 17, 2000, by and
between the Registrant and Charles A. Gottesman, is incorporated
herein by reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 29, 2000. *
21 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
- --------------------
* Incorporated herein by reference.
** Management contract or compensatory plan or arrangement filed
herewith in response to Item 14(a)(3) of the instructions to Form 10-K.