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 4, 2002
Commission file number: 000-05083
Saucony, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
---------------------------------------
(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
----------------------------------------
(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 14, 2002, was approximately
$27,645,000 (based on the closing sale prices of the Class A Common Stock and
Class B Common Stock on such date as reported on the Nasdaq National Market).
Shares of Class A Common Stock and Class B Common Stock held by each executive
officer and director of the registrant and by each entity known to the
registrant to beneficially own 10% or more of the outstanding shares of either
the Class A Common Stock or the Class B Common Stock have been excluded in that
such persons may be deemed to be affiliates of the registrant. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
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 14,
2002 was 2,566,747 and 3,520,829, respectively.
Portions of the registrant's Definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders scheduled to be held on May 23, 2002 (the "2002 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after January 4, 2002, are incorporated by reference into
Part III of this Annual Report on Form 10-K. With the exception of the portions
of the 2002 Proxy Statement expressly incorporated into this Annual Report on
Form 10-K by reference, such document shall not be deemed filed as part of this
Annual Report on Form 10-K.
PART I
ITEM 1 - BUSINESS
Overview
We design and market performance-oriented athletic footwear, athletic apparel
and casual leather footwear. Our principal products are:
o technical running, walking 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 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 at our 11 factory outlet stores and outside the United States in 29
countries through 20 distributors located throughout the world. For the fiscal
year ended January 4, 2002, we generated total sales of $132.3 million.
On November 9, 2001, we announced the cessation of manufacturing operations at
our Bangor, Maine facility. Footwear production concluded in mid-January 2002.
During the fourth quarter of fiscal 2001, we determined to close an
underperforming retail store and relocated our Asian sourcing and quality
control function to China, resulting in the closure of our Taiwan office. As a
result of these actions, we incurred non-recurring charges of $2.1 million, $1.3
million after-tax, or $0.21 per share after-tax, in the fourth quarter of fiscal
2001. Additionally, we are phasing out our Hyde Authentics footwear line during
the first half of fiscal 2002.
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 Saucony apparel.
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 11 factory outlet stores.
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 2001 Fiscal 2000 (1) Fiscal 1999 (1)
---------------------- --------------------- --------------------
$ % $ % $ %
- - - - - -
Saucony
Domestic..............$ 86,414 65% $ 126,758 75% $ 116,246 75%
International......... 23,878 18% 19,710 12% 16,814 11%
---------- ------- ---------- ------- ---------- -------
Total.................$ 110,292 83% $ 146,468 87% $ 133,060 86%
---------- ------- ---------- ------- ---------- -------
Other Products
Domestic..............$ 20,070 15% $ 19,035 12% $ 20,148 13%
International......... 1,899 2% 2,294 1% 2,250 1%
---------- ------- ---------- ------- ---------- -------
Total.................$ 21,969 17% $ 21,329 13% $ 22,398 14%
---------- ------- ---------- ------- ---------- -------
Total....................$ 132,261 100% $ 167,797 100% $ 155,458 100%
========== ======= ========== ==== ========== =======
- -----------------
(1) See Note 1 to our Consolidated Financial Statements regarding the adoption
of EITF 00-10.
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 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. 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
$90 per pair, with our top-of-the-line running shoes having suggested domestic
retail prices of up to $130 per pair. During fiscal 2001 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.
During fiscal 2001, we began to incorporate our newest proprietary footwear
technology, Custom Ride Management, into our core technical footwear products.
Custom Ride Management technology allows us to tailor shoes to the individual
characteristics of a runner, including height, weight, foot size and gait
cycles. By doing so, it allows athletes to select a level of cushioning or
stability based on their need or preference. We have incorporated Custom Ride
Management into one running model, scheduled for shipment in the first quarter
of fiscal 2002 and plan to extend this technology to an additional running model
scheduled for shipment in the second quarter of fiscal 2002 and a walking model
in fiscal 2003.
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. During
fiscal 2001, our most popular non-running technical athletic shoe was a woman's
performance walking shoe.
Technical footwear accounted for approximately 61%, 51% and 48% of our fiscal
2001, fiscal 2000 and fiscal 1999 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 are
designed to 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 and have introduced children's models. During fiscal 2001, we
introduced additional Originals products, including contemporary-styled
reintroductions of our technical running shoe models from the early 1980's and
lifestyle footwear designed for the 12 to 25 year old footwear consumer.
Originals accounted for approximately 21%, 35% and 37% of our fiscal 2001,
fiscal 2000 and fiscal 1999 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.
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 enhance
comfort. We frequently add innovations to our Hind product offerings in an
effort to incorporate the latest fabric technology.
Saucony
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 2001 we spent approximately $1.14 million on our product development
programs, compared to approximately $1.08 million in fiscal 2000 and $1.68
million in fiscal 1999. Most of our research and development expenditures relate
to Saucony brand footwear 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, Road
Runner Sports, The Shoe Show, Hibbett Sporting Goods, FootStar and The Finish
Line.
We maintain a corporate sales group that is directly responsible for the sales
activity in our largest 43 accounts. We also sell our footwear and apparel to
retail outlets in the United States through 12 independent manufacturers'
agents, whose organizations employ approximately 42 sales representatives. We
coordinate the efforts of these representatives through our field sales
management group. Our web site (saucony.com) receives thousands of "hits" weekly
from consumers looking for new product information and race and event data, as
well as general Saucony information.
We sell our Saucony products outside the United States in 29 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," "Men's Health," "Outside",
"Shape" and "Cooking Light." We also sponsor sporting events and telecasts to
increase brand awareness and the image of our technical footwear to athletes.
Examples include "Saucony Running and Racing" seen monthly on ESPN and
sponsorship of the Los Angeles Marathon. 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 "ESPN," "Maxim," "Jane", "Teen People" and "Vibe."
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. We 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 8
independent manufacturers' agents, whose organizations employ approximately 35
sales representatives. We market our Spot-bilt line through our Saucony brand
distribution channels and directly to customers through our website at
Spotbilt.com.
Factory Stores
We currently operate 11 factory outlet stores at which we sell our Saucony, Hind
and Spot-bilt products. To avoid competing against full-margin retail outlets
for these products, 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 plan to open clusters of factory
stores in selected regions where we believe the Saucony brand is underdeveloped.
We believe that this approach will strengthen Saucony brand name recognition.
During fiscal 2001, we opened two new factory outlet stores. In January 2002, we
closed one underperforming store.
Suppliers
Prior to December 2001, we assembled a majority of our domestically sold Saucony
technical footwear at our Bangor, Maine manufacturing facility, largely with
components sourced from independent manufacturers located overseas. As a result
of our decision to cease footwear production in Maine, independent overseas
manufacturers produce all of our Saucony products, including our Originals
products, and our Spot-bilt products.
The overseas footwear manufacturers that supply products 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. During fiscal 2001, we closed our
Taiwan office and relocated our sourcing and quality control function to China.
We employ approximately 22 Saucony footwear quality control personnel in China.
Our personnel in China 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.
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
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 2001,
we purchased footwear products from approximately six overseas suppliers. One
such supplier, located in China, accounted for approximately 39% of our total
overseas footwear purchases by dollar volume.
In December 2001, we entered into Manufacturing and Supply Agreements with four
of our overseas footwear suppliers. The agreements which expire one year from
their effective dates and are renewable annually, create a performance
management process and provide for financial penalties should the footwear
suppliers fail to attain the requirements contained in the agreements.
Although we 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 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 most of our 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, but not our Originals 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 in the
event of significant order cancellations.
Backlog
The athletic and casual footwear and athletic apparel industries in which we
compete 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 $42.5 million at January 4,
2002 and $66.4 million at January 5, 2001. We expect that all of our backlog at
January 4, 2002 will be shipped in fiscal 2002, 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 2001, we did not derive more than 10% of our consolidated revenue from
sales to one customer.
Trade Policy
Our practice of sourcing products 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 products from China.
On December 11, 2001, China acceded to the World Trade Organization ("WTO") and
thus now enjoys Permanent Normal Trade Relations with the United States.
Therefore, China receives the same favorable tariff treatment that the United
States extends to its other "normal" trading partners. However, even though it
has joined the WTO, scrutiny of China's trading practices is not likely to
subside. There will be continuing pressure on China to honor its WTO
commitments, particularly those relating to intellectual property protection. If
China does not abide by WTO rules, the United States may come under pressure to
impose sanctions such as duties or quotas on imports from China. If any such
action were to include imports of footwear products from China, it could
significantly add to our cost of goods and could restrict our supply of products
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. 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 compete based on a variety of factors, including price,
product style, durability and quality, product design and technical performance,
brand image and awareness, marketing and promotion and our ability to meet
delivery commitments to retailers. 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 may not be able to register or use
such marks in each foreign country in which we seek registration.
Employees
As of January 4, 2002, we employed approximately 375 people worldwide. Of these
employees, approximately 307 were in the United States and approximately 68 were
in foreign locations. We believe that our employee relations are excellent. We
have never experienced a strike or other work stoppage. Approximately 24
employees in our Peabody, Massachusetts warehouse were represented by a union as
of January 4, 2002. None of our other employees are represented by a union or
are subject to a collective bargaining agreement. The closing of our Bangor,
Maine facility in January 2002 resulted in the termination of 104 employees, of
which 61 were terminated subsequent to January 4, 2002, reducing our worldwide
employment to 314 people.
Executive Officers of the Registrant
Our executive officers are as follows:
Name Age Position
- ---------------------- --- ---------------------------------------
John H. Fisher 54 President, Chief Executive Officer
and Director
Charles A. Gottesman 51 Executive Vice President,
Business Development
and Director
Michael Umana 39 Senior Vice President, Finance,
Chief Operating and Financial Officer
and Treasurer
Wolfgang Schweim 49 President, Saucony International
Michael Jeppesen 42 Senior Vice President, Manufacturing
and Design
Roger P. Deschenes 43 Vice President, Controller and
Chief Accounting Officer
John H. Fisher has served as our Chief Executive Officer since 1991. He was
elected our President and Chief Operating Officer in 1985 after having served as
our Executive Vice President from 1981 to 1985 and as our 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. He is the brother-in-law of
Charles A. Gottesman.
Charles A. Gottesman has served as our Executive Vice President, Business
Development since July 2001. He served as our Executive Vice President and Chief
Operating Officer from 1992 to July 2001, our Executive Vice President, Finance
from 1989 to 1992, our Senior Vice President from 1987 to 1989, our Vice
President from 1985 to 1987, and our Treasurer from 1983 to July 2001. Mr.
Gottesman became a director in 1983. He is the brother-in-law of John H. Fisher.
Michael Umana has served as our Senior Vice President, Finance, Chief Operating
Officer, Chief Financial Officer and Treasurer, since July 2001 after having
served as our Senior Vice President, Finance and Chief Financial Officer since
May 2000. Mr. Umana joined us in October 1999 as our Vice President, Finance and
Chief Financial Officer. From 1997 to October 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.
Wolfgang Schweim became the President of Saucony International in January 1998
after serving as President of our athletic footwear division from 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 and Adidas AG.
Michael Jeppesen joined us in May 2001, as Senior Vice President, Manufacturing
and Design. Mr. Jeppesen was employed as Vice President of Operations of Coach
Leatherware Inc, a manufacturer of leather products, from 1999 to May 2001. From
1996 to 1999, Mr. Jeppesen held various senior management positions at Adidas
AG, including Vice President of European Operations and Vice President - Global
Materials, the most recent being Vice President of European Operations, which he
held from 1997. Mr. Jeppesen was employed as General Manager of Prime Asia, a
footwear manufacturer, from 1994 to 1996.
Roger P. Deschenes has served as our Vice President, Controller and Chief
Accounting Officer since 1997, after having served as our Controller and Chief
Accounting Officer from 1995 to 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.
Officers are elected on an annual basis and serve at the discretion of the Board
of Directors.
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 145,000 square feet, of which 125,000 square feet is warehouse
space.
We also own a facility in Bangor, Maine containing approximately 73,000 square
feet of space, which we previously had used for the assembly of our domestic
Saucony running shoes. We commenced seeking a buyer for this facility in
February 2002. We also own a facility in Brookfield, Massachusetts containing
approximately 109,000 square feet, which we use for warehousing and
distribution.
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
During the fiscal quarter ended January 4, 2002, there were no matters submitted
to a vote of security holders of Saucony, through the solicitation of proxies or
otherwise.
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 4, 2002
First quarter.........................................$ 10.500 $ 6.313 $ 10.125 $ 5.969
Second quarter........................................ 8.570 5.570 8.590 5.800
Third quarter......................................... 6.620 5.190 6.400 5.030
Fourth quarter........................................ 5.450 4.530 5.600 4.260
Fiscal Year ended January 5, 2001
First quarter.........................................$ 15.500 $ 9.000 $ 14.875 $ 8.625
Second quarter........................................ 14.000 8.875 14.000 8.000
Third quarter......................................... 11.500 9.250 11.500 8.625
Fourth quarter........................................ 11.250 8.000 11.125 7.359
There were 248 and 254 stockholders of record of the Class A Common Stock and
Class B Common Stock, respectively, on March 14, 2002. 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 without
the consent of our lender. 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
The selected consolidated financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
in this Annual Report on Form 10-K.
The selected consolidated financial data set forth below as of January 4, 2002
and January 5, 2001 and for the years ended January 4, 2002, January 5, 2001 and
December 31, 1999 are derived from the audited consolidated financial statements
of Saucony included in this Annual Report on Form 10-K. All other selected
consolidated financial data set forth below is derived from audited financial
statements of Saucony not included in this Annual Report on Form 10-K. Saucony's
historical results are not necessarily indicative of its results of operations
to be expected in the future.
Selected Income Statement Data
(in thousands except per share amounts)
Year Year Year Year Year
Ended Ended Ended Ended Ended
Jan. 4, Jan. 5, Dec. 31, Jan. 1, Jan. 2,
2002 2001 (1) 1999 1999 1998
----- -------- ---- ---- ----
Revenues (2)...........................................$ 132,364 $167,920 $155,887 $105,810 $ 93,962
Operating income (loss) (3), (4)....................... (269) 16,123 18,196 5,741 (1,935)
Income (loss) from continuing operations............... (940) 8,963 10,319 3,579 (4,032)
Discontinued operations:
Loss from discontinued operations................... -- -- -- -- (394)
Gain on disposal of Brookfield business............. -- -- -- -- 96
Net income (loss)...................................... (940) 8,963 10,319 3,579 (4,330)
Earnings per common share - basic
Income (loss) from continuing operations............$ (0.15) $ 1.45 $ 1.64 $ 0.57 $ (0.65)
Loss from discontinued operations................... -- -- -- -- (0.05)
--------- --------- -------- ---------- ---------
Net income (loss) per common share - basic.............$ (0.15) $ 1.45 $ 1.64 $ 0.57 $ (0.70)
========== ========= ======== ======== =========
Earnings per common share - diluted
Income (loss) from continuing operations............$ (0.15) $ 1.41 $ 1.57 $ 0.56 $ (0.65)
Loss from discontinued operations................... -- -- -- -- (0.05)
--------- --------- -------- -------- ---------
Net income (loss) per common share - diluted ..........$ (0.15) $ 1.41 $ 1.57 $ 0.56 $ (0.70)
========== ========= ======== ======== =========
Weighted average common shares and
equivalents outstanding for diluted EPS ............ 6,080 6,341 6,568 6,373 6,240
Cash dividends per share of common stock............... -- -- -- -- --
Selected Balance Sheet Data
Jan. 4, Jan. 5, Dec. 31, Jan. 1, Jan. 2,
2002 2001 1999 1999 1998
---- ---- ---- ---- ----
Current assets.........................................$ 69,538 $ 73,531 $ 66,480 $ 58,963 $ 50,091
Current liabilities.................................... 12,325 15,919 15,403 18,840 13,315
Working capital........................................ 57,213 57,612 51,077 40,123 36,776
Total assets........................................... 78,100 83,285 77,181 69,879 61,316
Long-term debt and capitalized lease
obligations, net of current portion................. -- 34 292 559 771
Stockholders' equity................................... 63,162 64,620 58,962 48,250 45,072
- ---------------------------
(1) See Note 1 to our Consolidated Financial Statements regarding reporting period.
(2) See Note 1 to our Consolidated Financial Statements regarding the adoption of EITF 00-10 in fiscal 2001.
(3) See Note 14 to our Consolidated Financial Statements regarding our Bangor, Maine plant closing and other non-recurring
charges incurred in fiscal 2001.
(4) See Note 13 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results may differ materially from these
estimates. Our significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this Annual Report on
Form 10-K. Critical accounting policies are those policies that are reflective
of significant judgments and uncertainties and potentially result in materially
different results under different assumptions and conditions. Our most critical
accounting policies are as follows:
- - Revenue Recognition - Defective Products Returns and Other Allowances
We recognize revenue from product sales when title passes and all the
rewards and risk of loss have been transferred and all the criteria for
revenue recognition described in SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB 101), as amended by SAB
101A and 101B are met. We must make estimates for defective product returns
and other allowances related to current period product revenue. We record a
provision for defective product returns and other allowances based upon
past experience and the receipt of notification of pending returns. While
the returns have historically been within our expectations and the
provisions established, we cannot guarantee that the product return rate
will remain constant. Any significant increase in the product return rate
and resulting reduction in our net sales could have a material adverse
impact on our results of operations for the period in which the returns
materialize.
- - Accounts Receivable - Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts and therefore must estimate
losses resulting from the inability of our customers to make required
payments. We analyze our accounts receivable, historical bad debt trends,
customer credit worthiness, economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. As noted in Note 17 of the consolidated financial statements, we
have a credit risk concentration, due to the concentration of our domestic
Saucony footwear sales amongst a relatively small customer base. If the
liquidity or financial condition of any of our larger customers were to
deteriorate, resulting in an impairment of their ability to make payments
due us or if payment schedules of our customers are otherwise delayed from
historical trends, additional allowances might be required, which could
materially increase our allowance for doubtful accounts.
- - Inventories
We value our inventory at the lower of the actual cost to purchase or the
current estimated market value. Provision for excess and obsolete
inventory, equal to the difference between the cost of the inventory and
the estimated market value, must be estimated by us. Our provision is based
upon estimated product demand and market conditions. If actual future
demand or market conditions are less favorable than those projected by us,
additional provisions to write-down inventory may be required, which could
materially reduce our amount of current assets.
- - Income Taxes
We estimate our income taxes in each of the jurisdictions that we operate.
This process requires us to estimate our current tax exposure, together
with assessing temporary differences, which result in deferred tax assets
and liabilities. We recognize deferred tax assets and liabilities based on
the difference between the financial statement carrying amounts and the tax
bases of assets and liabilities. We regularly review our deferred tax
assets for recoverability and establish valuation allowances when we
determine that it is more likely than not that the deferred tax assets
resulting from operating losses will not be realized. During fiscal 2001,
we recorded deferred tax valuation allowances of $387.
United States federal tax laws allow companies to defer the recognition of
tax liability on undistributed earnings of foreign subsidiaries that are
indefinitely reinvested in the foreign operation. At January 4, 2002, we
had approximately $3,076 of undistributed earnings of foreign subsidiaries
that are indefinitely reinvested in foreign operations for which we have
not recorded deferred income taxes.
Highlights
Increase (Decrease)
-------------------
2001 vs. 2000 2000 vs. 1999
------------- -------------
Net sales.............................................$ (35,536) (21.2)% $ 12,339 7.9%
Gross profit.......................................... (20,059) (32.3) 3,360 5.7
Selling, general and administrative expenses.......... (3,134) (7.2) 2,466 6.0
$ Change
--------
2001 vs. 2000 2000 vs. 1999
------------- -------------
Operating income.........................................$ (16,392) $ (2,073)
Income before income taxes............................... (15,877) (2,076)
Net income............................................... (9,903) (1,356)
Percent of Net Sales
--------------------
2001 2000 1999
---- ---- ----
Gross profit............................................. 31.9% 37.1% 37.9%
Selling, general and administrative expenses............. 30.6 25.9 26.4
Operating income (loss) ................................. (0.2) 9.6 11.7
Income (loss) before income taxes........................ (0.3) 9.2 11.3
Net income (loss)........................................ (0.7) 5.3 6.6
Consolidated Net Sales
Fiscal 2001, fiscal 2000 and fiscal 1999 consisted of 52, 53 and 52 weeks,
respectively. Our net sales and results of operations for each of fiscal 2001,
fiscal 2000 and fiscal 1999 are comparable. Net sales decreased $35,536, or 21%,
to $132,261 in fiscal 2001 from $167,797 in fiscal 2000. Excluding sales from
our former cycling division, the net sales decrease in fiscal 2001 would have
been 20% lower than fiscal 2000. Net sales increased $12,339, or 8%, to $167,797
in fiscal 2000 from $155,458 in fiscal 1999. Excluding sales from our former
cycling division, the net sales increase in fiscal 2000 would have been 11%
higher than fiscal 1999.
On a geographic basis, domestic sales decreased $39,309, or 27%, to $106,484 in
fiscal 2001 from $145,793 in fiscal 2000. International sales increased $3,773,
or 17%, to $25,777 in fiscal 2001 from $22,004 in fiscal 2000. At constant
exchange rates, the international sales increase in fiscal 2001 would have been
21%. Domestic sales increased $9,399, or 7%, to $145,793 in fiscal 2000 from
$136,394 in fiscal 1999. International sales increased $2,940, or 15%, to
$22,004 in fiscal 2000 from $19,064 in fiscal 1999. At constant exchange rates,
the international sales increase in fiscal 2000 would have been 23%.
Saucony Segment
2001 2000 1999
---- ---- ----
Net Sales $110,292 (-25%) $146,468 (+10%) $133,060
2001 Compared to 2000
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
decreased $36,176, or 25%, to $110,292 in fiscal 2001 from $146,468 in fiscal
2000, due primarily to a 22% decrease in footwear unit volumes and lower
domestic and international wholesale per pair average sell prices. The overall
average domestic wholesale selling prices per pair of domestic footwear
decreased 2% in fiscal 2001 versus fiscal 2000, due to a 33% increase in special
make-up footwear unit volumes and a 34% increase in closeout footwear unit
volumes, both of which sell at prices below our first quality technical footwear
and, a change in the product mix for technical footwear to lower priced
products.
Domestic net sales decreased $40,344, or 32%, to $86,414 in fiscal 2001 from
$126,758 in fiscal 2000, due primarily to a 62% decrease in Originals footwear
unit volumes, a 13% decrease in technical footwear unit volumes, lower average
wholesale per pair selling prices, partially offset by a 34% increase in
closeout footwear unit volumes and a 33% increase in special make-up footwear
unit volumes. The lower average wholesale selling prices per pair is due to
higher unit volumes of closeout footwear and special make-up footwear, both of
which sell at prices below our first quality technical footwear. Sales of
closeout footwear accounted for approximately 12% of domestic Saucony net sales
in fiscal 2001 compared to 5% in fiscal 2000. The Originals footwear accounted
for 29% of fiscal 2001 domestic footwear unit volume versus 53% in fiscal 2000.
The unit volume decrease in Originals footwear is primarily due to a shift in
consumer preference to other product categories, primarily basketball footwear,
which we do not sell. During the second half of fiscal 2001, the order
cancellation rate for our Saucony footwear decreased from the order cancellation
rate in the first half of fiscal 2001 and was comparable with our historical
average.
International net sales increased $4,168, or 21%, to $23,878 in fiscal 2001 from
$19,710 in fiscal 2000, due primarily to a 40% increase in footwear unit
volumes, partially offset by lower average per pair wholesale selling prices and
the negative impact of the stronger U.S. dollar against European currencies.
Footwear unit volumes increased 73% at our international distributor business
and 17% at our European and Canadian subsidiaries, respectively, in fiscal 2001
versus fiscal 2000. The footwear unit volume increase in our international
distributor business is due primarily to the success of our Originals footwear
product in the Japanese footwear market in 2001, which accounted for
approximately 91% of the international distributor unit volume increase, and
increased market penetration in the Pacific Rim.
2000 Compared to 1999
Worldwide net sales of Saucony branded footwear and apparel increased $13,408,
or 10%, to $146,468 in fiscal 2000 from $133,060 in fiscal 1999, due primarily
to a 6% increase in footwear unit volumes and higher domestic and international
wholesale per pair average sell prices. The overall 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 $10,512, or 9%, to $126,758 in fiscal 2000 from
$116,246 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 was 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 $2,896, or 17%, to $19,710 in fiscal 2000 from
$16,814 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 was due primarily to our entry into the
Japanese footwear market in 2000, which accounted for approximately 64% of the
international distributor unit volume increase.
Other Products Segment
2001 2000 1999
---- ---- ----
Net Sales $21,969 (+3%) $21,329 (-5%) $22,398
The Other Products segment consists of our Hind athletic apparel, eleven factory
outlet stores, Spot-bilt coaches' and official shoes and casual walking and
workplace footwear, sales of our Hyde Authentics casual footwear, which will be
discontinued in fiscal 2002, and sales from our former cycling division. Each of
these businesses represented less than 10% of total revenues and, in the
aggregate, represented 17% of total net sales in fiscal 2001.
2001 Compared to 2000
Worldwide sales of Other Products increased $640, or 3%, to $21,969 in fiscal
2001 from $21,329 in fiscal 2000 due primarily to increased sales at our factory
outlet stores, increased Hyde Authentic unit volume and increased sales of our
Hind brand apparel, partially offset by the elimination of sales resulting from
the cycling division divestiture in fiscal 2000.
Domestic net sales of Other Products increased $1,035, or 5%, to $20,070 in
fiscal 2001 from $19,035 in fiscal 2000 due primarily to increased sales at our
factory outlet division, reflecting the net addition of one factory outlet store
and increased sales at stores open for more than one year, increased Hyde
Authentics footwear unit volume, increased unit volume of our Hind apparel
brand, partially offset by the elimination of sales from our former cycling
division, which was divested in fiscal 2000. International net sales of Other
Products decreased $395, or 17%, to $1,899 in fiscal 2000 from $2,294 in fiscal
2000, primarily due to decreased Hind apparel sales in Europe.
2000 Compared to 1999
Worldwide sales of Other Products decreased $1,069, or 5%, to $21,329 in fiscal
2000 from $22,398 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 $1,113, or 6%, to $19,035 in
fiscal 2000 from $20,148 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.
Costs and Expenses
Our gross margin in fiscal 2001 decreased 5.2% to 31.9% from 37.1% in fiscal
2000 due primarily to the significant decline in Saucony domestic sales of first
quality footwear products at full margin. Other factors contributing to the
fiscal 2001 margin decrease were proportionately higher sales of closeout
products, due to our decision to reduce inventory levels and of special make-up
footwear, both of which carry lower margins and, to a lesser extent,
manufacturing inefficiencies, domestic pricing pressures, changes in the
geographic mix of sales and the negative impact of the U.S. dollar on our
European margins.
For the 2000 fiscal year, the gross margin decreased 0.8% to 37.1%, from 37.9%
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.
The SG&A ratio increased 4.7% to 30.6% of net sales in fiscal 2001 from 25.9% in
1999. The increase in the ratio resulted from advertising, selling and
administrative expenses decreasing at a lower rate than the rate of the sales
decrease. In absolute dollars, selling, general and administrative expenses
decreased to $40,407 in 2001, or 7%, from $43,541 in fiscal 2000. Decreased
spending in fiscal 2001 was due primarily to reduced operating expenses
resulting from the cycling division divestiture, decreased television and print
media advertising, decreased account-specific advertising, promotion and event
sponsorship and decreased variable selling expenses and incentive compensation,
offset partially by increased operating expenses associated with the factory
outlet division expansion and higher provisions for doubtful accounts.
The SG&A ratio improved 0.5% to 25.9% of net sales in fiscal 2000 from 26.4% 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
$43,541 in 2000, or 6%, from $41,075 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 in comparison with fiscal 2000 was due primarily to the bankruptcy
filing by Just for Feet, Inc.
Plant Closing and Other Non-Recurring Charges
On November 9, 2001 we announced the cessation of manufacturing and closing of
our Bangor, Maine facility. During the fourth quarter of fiscal 2001, we
relocated our Asian sourcing and quality control office to China, resulting in
the closure of our Taiwan office and negotiated an early termination and exit of
a retail store lease. As a result of these actions, we recorded pre-tax
non-recurring charges of $2,108, or $1,277 after-tax or $0.21 per diluted share
after-tax. The closing of our Bangor, Maine facility in January 2002 resulted in
the termination of 104 employees, of which 61 were terminated subsequent to
January 4, 2002. Assets used by our Bangor, Maine manufacturing facility, the
Taiwan office and our retail store have been written down to fair market value.
Expenses associated with the plant closing and other non-recurring charges are
as follows: Bangor Taiwan Retail Plant Office Store Total
Employee severance and termination benefits.......................$ 1,121 $ 150 $ 4 $ 1,275
Facility and equipment lease exit costs and
other non-cancelable contractual commitments..................... 228 -- 200 428
Writedown of machinery and equipment
to fair market value............................................. 248 25 77 350
Professional fees and other transaction costs..................... 47 -- 8 55
------- ------ ------- --------
Total............................................................$ 1,644 $ 175 $ 289 $ 2,108
======= ====== ======= ========
Included in accrued expenses at January 4, 2002 are $1,461 of costs associated
with the plant closing and other non-recurring charges, the majority of which we
expect will be paid by the end of the first quarter of fiscal 2002. The charge
recorded for the Bangor, Maine plant closing and the Taiwan office closing are
included in income before tax for the Saucony segment, while the retail store
closing is included in income before tax for the Other Products segment.
As of January 4, 2002, our Bangor, Maine real property had a net book value of
$357 and is included on the balance sheet under the caption "Property, plant and
equipment". We commenced marketing the property for sale in February 2002 and
have received market valuations for the property in the range of $875 to $1,250.
Beginning in the first quarter of fiscal 2002, we will reclassify the real
property to current assets as "Held For Sale."
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
$0.24 per diluted share after-tax. As a result of the transaction, a majority of
the cycling division employees were severed and assets used exclusively in the
cycling business were deemed impaired and have been written off. Expenses
associated with the sale and exit of the cycling division are as follows:
Transaction costs............................................$ 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 were paid in fiscal
2001.
Net sales from the cycling division, which are included in our Other Products
segment, represented approximately 1.9% and 4.7% of consolidated net sales for
fiscal years 2000 and 1999, 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 $153, $626 and $683 in fiscal years 2001, 2000 and
1999, respectively. Interest expense decreased 76% in fiscal 2001 due to lower
average debt levels and increased interest income. In fiscal 2000, interest
expense decreased 8% due to lower average debt levels and increased interest
income, partially offset by higher interest rates on our domestic borrowings.
Income (Loss) Before Taxes
Segment 2001 2000 1999
------- ---- ---- ----
Saucony....................$ (296) $ 18,507 $ 18,965
Other Products............. (68) (2,994) (1,376)
----------- ----------- -----------
Consolidated...............$ (364) $ 15,513 $ 17,589
=========== ========== ==========
We evaluate business performance and the performance of key managers based on
profit or loss before income taxes. Income before tax decreased by $15,877 in
fiscal 2001 to a loss of $364 compared to a profit of $15,513 in fiscal 2000,
due primarily to the significant reduction in the domestic Saucony segment due
to lower sales and lower gross margins and, to a lesser extent, non-recurring
charges of $2,108 incurred in connection with the closure of our Bangor, Maine
manufacturing facility, early termination and exit of a retail store outlet and
the closure of our Taiwan office.
Income before tax decreased by $2,076 in fiscal 2000 to $15,513 compared to
$17,859 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 business.
Income Taxes
The provision for income taxes decreased to $475 in fiscal 2001 from $6,461 in
fiscal 2000 due primarily to a decrease in domestic pre-tax income, offset
partially by an increase in deferred valuation allowances on foreign loss
carryforwards that are not expected to be realized and a shift in the
composition of domestic and foreign pre-tax earnings.
The provision for income taxes decreased to $6,461 in fiscal 2000 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.
Net Income (Loss)
The net loss for fiscal 2001 was $940, or $0.15 per diluted share, compared to
net income of $8,963, or $1.41 per diluted share, in fiscal 2000. The plant
closing and other non-recurring charges reduced net income and diluted earnings
per share by $1,277 and $0.21, respectively in fiscal 2001. Excluding the effect
of the non-recurring charges, our net income would have been $337, or $0.05 per
diluted share. Weighted average common shares of 6,080 were used to calculate
diluted earnings per in fiscal 2001, while weighted average common shares and
equivalent shares of 6,341 were used to calculate diluted earnings per share for
fiscal 2000. Equivalent shares were not used in fiscal 2001 to calculate diluted
earnings per share because they were anti-dilutive.
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 $1.66 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.
Liquidity and Capital Resources
Fiscal 2001
As of January 4, 2002, our cash and cash equivalents totaled $22,227, an
increase of $17,489 from January 5, 2001. The increase is due primarily to the
generation of $21,556 of cash from operations, partially offset by cash outlays
for capital assets of $1,326 and the repayment of short-term borrowings under
our credit facilities of $2,474 and the repayment of long-term debt of $226.
The decrease in accounts receivable of $11,827, net of the provision for bad
debt and discounts, was due primarily to decreased net sales of our Saucony and
other products in the fourth quarter of fiscal 2001 and a decrease in our days
sales outstanding for our accounts receivable. Our days sales outstanding for
our accounts receivable decreased to 41 days in fiscal 2001 from 58 days in
fiscal 2000, due primarily to a reduction in payment date sales terms due to
increased sales of special make-up and closeout footwear and increased foreign
distributor volume, of which dating programs are shorter. In addition, the
increased provisions for doubtful accounts reduced days sales outstanding by
approximately two days in fiscal 2001. The provision for bad debts and discounts
increased to $5,767 in fiscal 2001 from $5,525 in fiscal 2000 due to an increase
in the provision for doubtful accounts. Inventories decreased $9,418 in fiscal
2001 due primarily to our decision to reduce domestic Saucony footwear
inventories, which had increased in the fourth quarter of fiscal 2000 due to
increased order cancellations, and lower factory outlet inventories, which had
increased due to the expansion of the factory outlet division. The increase in
domestic Saucony footwear inventory in fiscal 2000 resulted from increased order
cancellations in the fourth quarter of 2000 for both technical and Originals
footwear. The decision to reduce domestic Saucony footwear inventories
negatively impacted fiscal 2001 gross margins. Our inventory turns ratio
decreased to 2.7 turns in fiscal 2001 from 2.9 turns in fiscal 2000. The number
of days sales in inventory decreased to 115 days in fiscal 2001 from 132 days in
fiscal 2000.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting our operating cash flows in fiscal
2001 included a decrease of $3,472 in accrued letters of credit (due to new
inventory supplier payment terms), an increase of $3,484 in accounts payable
(due to a change in inventory purchase terms), a decrease of $2,286 in accrued
expenses (due to decreased performance-based compensation accruals and lower
operating spending levels), and an increase of $344 in income tax payable (due
to the timing of income tax payments).
During fiscal 2001, we repurchased approximately 19,000 shares of our common
stock for a total expenditure of $132. Since the approval of the stock buyback
program by the Board of Directors in May 1998, we have repurchased a total of
467,000 shares of our common stock for a total of expenditure of $4,364. We
cannot repurchase additional shares of our common stock without the consent of
the primary lender under our credit facility.
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 58 days in fiscal 2000 from 56 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. Our inventory turns ratio
remained constant at 2.9 turns for both fiscal 2000 and fiscal 1999. The number
of days sales in inventory decreased to 132 days in fiscal 2000 from 133 days in
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.
Credit Facility
We maintain a revolving credit line of $15,000 for cash borrowings and letters
of credit. We reduced the amount available for cash borrowings and letters of
credit under the credit facility from $20,000 to $15,000 in February 2002. We
and certain of our subsidiaries have guaranteed our obligations under the credit
facility. The credit facility is unsecured. The credit facility contains certain
restrictions and financial covenants with which we are required to comply,
whether or not there are any borrowings outstanding. The credit facility has
been extended through June 30, 2002. Under the most restrictive covenant, we
were required to maintain a minimum tangible net worth of $50,961 as of January
4, 2002. The credit facility is also subject to the bank's periodic review of
our operations. We may not pay cash dividends and repurchase shares of common
stock without the consent of our primary lender under the credit facility. As of
January 4, 2002 and March 14, 2002, $19,640 and $15,000, respectively, were
available for borrowing under the credit facility.
In February 2002, our primary lender amended the definition of EBIT, earnings
before interest and taxes under the credit facility. The amendment modified the
calculation of minimum interest expense coverage in relation to EBIT to exclude
the non-recurring charges of $2,108 incurred by us in the fourth quarter of
fiscal 2001. The amendment applied with the minimum interest expense coverage
covenant under the credit facility with respect to the fiscal quarters ended
January 4, 2002 and April 5, 2002. We were in compliance with all other
covenants of the credit facility at January 4, 2002.
Several of our foreign subsidiaries maintain credit facilities in the aggregate
principal amount of approximately $3,450. At March 1, 2002 an aggregate of
approximately $3,391 was available for borrowing under the facilities of our
foreign subsidiaries. See Note 8 to the Consolidated Financial Statements.
Capital Expenditures Commitments
At January 4, 2002, our commitments for capital expenditures were not material.
Contractual Obligations
Below is a table which presents our contractual obligations and commitments at
January 4, 2002.
Payments due by year
-------------------------------------------------------------------
2006
Contractual and
Obligations Total 2002 2003 2004 2005 thereafter
----------- ----- ---- ---- ---- ---- ----------
Long-term debt..................................$ -- $ -- $ -- $ -- $ -- $ --
Capital lease obligations....................... 92 92 -- -- -- --
Operating leases................................ 4,949 1,480 1,244 1,071 628 526
Other long-term obligations (1)................. 2,903 1,307 913 183 -- 500
------- ------- -------- -------- ------- --------
Total contractual cash obligations..............$ 7,944 $ 2,879 $ 2,157 $ 1,254 $ 628 $ 1,026
======= ======= ======== ======== ======= ========
- ---------------
(1) Other long-term obligations include athlete and event sponsorship and
employment contracts with two key executives.
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 in the near term. During fiscal 2001 we generated
$21,556 in cash from operating cash flows, due primarily to a decrease in our
accounts receivable and inventories. In 2000, we generated $4,100 in cash from
operating cash flows. As of January 4, 2002, we had $14,742 in accounts
receivable and $28,404 in inventories.
At January 4, 2002, we had no borrowings outstanding under our credit facilities
and had $88 due under capital leases. Our short-term liquidity could potentially
be adversely impacted should demand for our products decline significantly,
which could result in extended payment terms for our customers and the increased
use of price concessions to induce customers to purchase our products. Since
July 31, 2001, the original expiration date of our primary credit facility, our
lender has extended the facility on several occasions. The credit facility is
scheduled to terminate on June 30, 2002. Our ability to fund future operations
could be adversely impacted if we are not able to renew this credit facility
under the current terms and conditions. In addition, although we are currently
in compliance with the effective covenants under the credit facility, if we were
to fall out of compliance with those covenants or the covenants under a renewal
of the facility, the credit facility would not be available to us and our lender
may declare a default under the credit facility.
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 2001 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 141
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141). SFAS
141 addresses financial reporting and accounting for business combinations and
supersedes Accounting Principles Board Opinion No. 16, (APB 16) "Business
Combinations", and Statement of Financial Accounting Standards No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises" (SFAS
38). SFAS 141 requires that business combinations in the scope of this Statement
are to be accounted for using one method, the purchase method. The provisions of
SFAS 141 apply to all business combinations initiated after June 30, 2001 and is
also applicable to all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later. The adoption
of SFAS 141 did not have a material effect on earnings or on our financial
position.
SFAS 142
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
(SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets acquired individually or with a group of
other assets (excluding those acquired in a business combination) at
acquisition. The statement also addresses financial accounting and reporting for
goodwill and other intangibles subsequent to their acquisition. SFAS 142
supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" (APB
17). All of the provisions of SFAS 142 will be applied to goodwill and other
intangible assets effective in the fiscal years beginning after December 15,
2001. Under SFAS 142 goodwill and other indefinite-lived intangibles will no
longer be amortized, but rather will be reviewed for impairment. An impairment
loss will be recognized if the carrying value of an intangible asset is not
recoverable and its carrying value exceeds its fair value. Impairment losses for
goodwill and indefinite-lived intangible assets that arise due to the initial
application of this Statement are to be reported as resulting from a change in
accounting principle. At January 4, 2002, the net book value of goodwill was
$912. Amortization expense amounted to $131 in fiscal 2001 and we would have
been reported amortization expense of $113 in fiscal 2002. We will adopt SFAS in
the first quarter of fiscal 2002 and are assessing the impact of the provisions
of SFAS 142. We do not anticipate that the adoption of SFAS 142 will have a
material impact on earnings or on our financial position.
SFAS 143
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations", (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement cost. SFAS 143 applies to all companies that
incur legal obligations to retire tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We
have not determined the impact on our results of operations or financial
position on the initial adoption of SFAS 143.
SFAS 144
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and supercedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
(SFAS 121), and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", (APB 30) for the disposal of a
segment of a business as previously defined in APB 30. SFAS 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", (ARB
51) to eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. The provisions of SFAS 144 are to be applied
to all long-lived assets, with the exception of goodwill. SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss only if the carry
amount of the long-lived asset is not recoverable from its undiscounted cash
flows and measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. SFAS 144 expands upon the criteria,
beyond that previously specified in SFAS 121 to determine when a long-lived
asset is held for sale and provides guidance on the accounting for long-lived
assets classified as held for sale if the asset is being reclassified as held
and used. The provisions of SFAS 144 are effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years, with
early adoption permitted. The provisions of SFAS 144 generally are to be applied
prospectively. We will adopt SFAS 144 in the first quarter of fiscal 2002 and do
not anticipate that the adoption will have a material impact on earnings or on
our financial position.
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 elsewhere 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 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.
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 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 of our Hind products are Nike, Pearl Izumi
and TYR. We compete based on a variety of factors, including price, product
style, durability and quality, product design and technical performance, brand
image and awareness, marketing and promotion and the 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
to us. During fiscal 2001, one of our suppliers, located in China, accounted for
approximately 39% 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 athletic and casual footwear and athletic apparel industries in which we
compete 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. 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. 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
Approximately 45% of our gross trade receivables balance was represented by 16
customers at January 4, 2002. 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 4, 2002 was
$2,300. We have calculated the effect of a 10% change in interest rates over a
one-month period from January 4, 2002 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.
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
The information required to be reported in this Item was previously reported in
Saucony's Current Report on Form 8-K dated April 11, 2001, filed with the
Securities and Exchange Commission on April 17, 2001.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Executive Officers of the Registrant" in Part I of this Annual Report on
Form 10-K. The information required by Items 401 and 405 of Regulation S-K and
appearing in our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 23, 2002, which will be filed with the Securities
and Exchange Commission not later than 120 days after January 4, 2002, is
incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 23, 2002, which will be filed with the Securities and Exchange Commission
not later than 120 days after January 4, 2002, is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 23, 2002, which will be filed with the Securities and Exchange Commission
not later than 120 days after January 4, 2002, is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND RELATED
STOCKHOLDER MATTERS
The information required by Item 404 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 23, 2002, which will be filed with the Securities and Exchange Commission
not later than 120 days after January 4, 2002, is incorporated herein by
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 - Arthur Andersen LLP
- Report of Independent Accountants - PricewaterhouseCoopers LLP -
Consolidated balance sheets at January 4, 2002 and January 5, 2001
- Consolidated statements of income for the years ended January 4,
2002, January 5, 2001, and December 31, 1999
- Consolidated statements of stockholders' equity for the years
ended January 4, 2002, January 5, 2001 and December 31, 1999
- Consolidated statements of cash flows for the years ended
January 4, 2002, January 5, 2001 and December 31, 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,
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 Annual Report on 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
-------------------
Saucony did not file any Current Reports on Form 8-K during the
fiscal quarter ended January 4, 2002.
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, 2002
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, 2002
- ------------------------- Chief Executive Officer and
John H. Fisher Director
(Principal Executive Officer)
/s/ Charles A. Gottesman Executive Vice President, April 3, 2002
- ------------------------- Business Development and
Charles A. Gottesman Director
/s/ Michael Umana Senior Vice President, April 3, 2002
- ------------------------- Chief Operating and Financial
Michael Umana Officer
(Principal Financial Officer)
/s/ Roger P. Deschenes Vice President, Controller and April 3, 2002
- ------------------------- Chief Accounting Officer
Roger P. Deschenes (Principal Accounting Officer)
/s/ John M. Connors, Jr. Director April 3, 2002
- -------------------------
John M. Connors, Jr.
/s/ Phyllis H. Fisher Director April 3, 2002
- -------------------------
Phyllis H. Fisher
/s/ Jonathan O. Lee Director April 3, 2002
- -------------------------
Jonathan O. Lee
/s/ Robert J. LeFort, Jr. Director April 3, 2002
- -------------------------
Robert J. LeFort, Jr.
/s/ John J. Neuhauser Director April 3, 2002
- -------------------------
John J. Neuhauser
Report of Independent Public Accountants
To the Board of Directors of Saucony, Inc.:
We have audited the accompanying consolidated balance sheet of Saucony, Inc. (a
Massachusetts corporation) and subsidiaries as of January 4, 2002, and the
related consolidated statement of income, stockholders' equity and cash flow for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saucony, Inc. and
subsidiaries as of January 4, 2002, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Boston, Massachusetts
February 14, 2002
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 the results of their operations and their cash flows for each of the two
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
AS OF JANUARY 4, 2002 AND JANUARY 5, 2001
ASSETS
(in thousands, except share and per share amounts)
January 4, January 5,
2002 2001
---- ----
Current assets:
Cash and cash equivalents...........................................................$ 22,227 $ 4,738
Accounts receivable, net of allowance for doubtful accounts
and discounts (2001, $2,457; 2000, $2,047)....................................... 14,742 26,706
Inventories ........................................................................ 28,404 38,404
Deferred income taxes............................................................... 2,098 1,366
Prepaid expenses and other current assets........................................... 2,067 2,317
---------- ---------
Total current assets.............................................................. 69,538 73,531
---------- ---------
Property, plant and equipment, net of accumulated depreciation and amortization........ 6,989 7,581
---------- ---------
Other assets:
Goodwill, net of accumulated amortization (2001, $551; 2000, $420).................. 912 1,043
Deferred charges, net of accumulated amortization (2001, $1,249; 2000, $1,366)...... 217 294
Marketable securities............................................................... 296 343
Deferred income taxes............................................................... -- 266
Other............................................................................... 148 227
---------- ---------
Total other assets................................................................$ 1,573 $ 2,173
---------- ---------
Total assets...........................................................................$ 78,100 $ 83,285
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................$ 6,635 $ 3,173
Accrued expenses.................................................................... 5,602 6,465
Current portion of long-term debt and capital lease obligations..................... 88 204
Letters of credit payable........................................................... -- 3,481
Notes payable....................................................................... -- 2,596
---------- ----------
Total current liabilities......................................................... 12,325 15,919
---------- ----------
Long-term obligations:
Capital lease obligations, net of current portion................................... -- 34
Deferred income taxes............................................................... 1,949 2,140
Other long-term obligations......................................................... 204 187
---------- ----------
Total long-term obligations....................................................... 2,153 2,361
---------- ----------
Commitments and contingencies:
Minority interest in consolidated subsidiaries......................................... 460 385
---------- ----------
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 2001, 2,711,127 and 2000, 2,711,127).................................... 904 904
Class B, $.333 par; authorized 20,000,000 shares
(issued 2001, 4,037,399 and 2000, 4,019,469).................................... 1,346 1,340
Additional paid-in capital.......................................................... 17,398 17,112
Retained earnings................................................................... 50,702 51,642
Accumulated other comprehensive loss................................................ (1,301) (792)
----------- -----------
69,049 70,206
---------- ----------
Less:
Common stock held in treasury, at cost (2001, 665,976; 2000, 646,500)............... (5,417) (5,285)
Notes receivable.................................................................... (303) (296)
Unearned compensation............................................................. (167) (5)
----------- -----------
63,162 64,620
---------- ----------
Total liabilities and stockholders' equity.............................................$ 78,100 $ 83,285
========== ==========
The accompanying notes are an integral part of these consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 4, 2002, JANUARY 5, 2001 AND DECEMBER 31, 1999
(in thousands, except share and per share amounts)
2001 2000 1999
---- ---- ----
(53 Weeks)
Net sales................................................................$ 132,261 $ 167,797 $ 155,458
Other revenue............................................................ 103 123 429
---------- ---------- ----------
Total revenue............................................................ 132,364 167,920 155,887
---------- ---------- ----------
Costs and expenses:
Cost of sales......................................................... 90,118 105,595 96,616
Selling expenses...................................................... 21,910 25,503 22,388
General and administrative expenses................................... 18,497 18,038 18,687
Plant closing and other non-recurring charges......................... 2,108 -- --
Loss on disposition of cycling division............................... -- 2,661 --
---------- ---------- ----------
Total costs and expenses............................................ 132,633 151,797 137,691
---------- ---------- ----------
Operating income (loss).................................................. (269) 16,123 18,196
Non-operating income (expense):
Interest, net......................................................... (153) (626) (683)
Foreign currency losses............................................... (46) (28) (88)
Other................................................................. 104 44 164
---------- ---------- ----------
Income (loss) before income taxes and minority interest.................. (364) 15,513 17,589
Provision for income taxes............................................... 475 6,461 7,194
Minority interest in income of consolidated subsidiaries................. 101 89 76
---------- ---------- ----------
Net income (loss)........................................................$ (940) $ 8,963 $ 10,319
=========== ========== ==========
Per share amounts:
Earnings (loss) per common share - basic..............................$ (0.15) $ 1.45 $ 1.64
=========== ========== ==========
Earnings (loss) per common share - diluted............................$ (0.15) $ 1.41 $ 1.57
=========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 4, 2002, JANUARY 5, 2001 AND DECEMBER 31, 1999
(in thousands, except share amounts)
Additional
Common Stock Paid-in Retained Treasury Stock
Class A Class B Capital Earnings Shares Amount
------- ------- --------- -------- ------ ------
Balance, January 1, 1999.............................$ 902 $ 1,276 $ 15,921 $32,360 305,400 $(1,665)
Issuance of 132,604 shares of common stock upon
exercise of stock options........................ 2 42 459 -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Tax benefit related to stock options................. -- -- 353 -- -- --
Issuance of non-qualified stock options.............. -- -- 82 -- -- --
Repurchase of 41,500 shares of common stock, at cost. -- -- -- -- 41,500 (514)
Net income........................................... -- -- -- 10,319 -- --
Foreign currency translation adjustments, net of
tax expense of $5................................. -- -- -- -- -- --
------ ------- -------- ------- ------ ------
Balance, December 31, 1999...........................$ 904 $ 1,318 $ 16,815 $42,679 346,900 $(2,179)
Issuance of 64,160 shares of common stock upon
exercise of stock options......................... -- 22 297 -- -- --
Interest income on notes receivable.................. -- -- -- -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Repurchase of 299,600 shares of common stock, at cost -- -- -- -- 299,600 (3,106)
Net income........................................... -- -- -- 8,963 -- --
Foreign currency translation adjustments, net of
tax benefit of $167 .............................. -- -- -- -- -- --
------ ------- -------- ------- ------ ------
Balance, January 5, 2001.............................$ 904 $ 1,340 $ 17,112 $51,642 646,500 $(5,285)
====== ======= ======== ======= ======= ========
Issuance of 17,930 shares of common stock upon
exercise of stock options......................... -- 6 78 -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Issuance of non-qualified stock options.............. -- -- 3 -- -- --
Issuance of stock warrants........................... -- -- 197 -- -- --
Tax benefit related to stock options................. -- -- 8 -- -- --
Repurchase of 19,476 shares of common stock, at cost. -- -- -- -- 19,476 (132)
Interest income on note receivable................... -- -- -- -- -- --
Payment of interest income on note receivable........ -- -- -- -- -- --
Net loss............................................. -- -- -- (940) -- --
Foreign currency translation adjustments, net of
tax benefit of $175............................... -- -- -- -- -- --
------ ------- -------- ------- ------ ------
Balance, January 4, 2002.............................$ 904 $ 1,346 $ 17,398 $50,702 665,976 $(5,417)
====== ======= ======== ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
FOR THE YEARS ENDED JANUARY 4, 2002, JANUARY 5, 2001 AND DECEMBER 31, 1999
(in thousands, except share amounts)
Accumulated
Other Total
Note Unearned Comprehensive Stockholders' Comprehensive
Receivable Compensation Income Equity Income (Loss)
---------- ------------ ------ ------ -------------
Balance, January 1, 1999...........................$ -- $ (16) $ (528) $48,250 $ --
Issuance of 132,604 shares of common stock upon
exercise of stock options...................... -- -- -- 503 --
Amortization of unearned compensation.............. -- 5 -- 5 --
Tax benefit related to stock options............... -- -- -- 353 --
Issuance of non-qualified stock options............ -- -- -- 82 --
Repurchase of 41,500 shares of common stock, at cost -- -- -- (514) --
Net income......................................... -- -- -- 10,319 10,319
Foreign currency translation adjustments, net of
tax expense of $5............................... -- -- (36) (36) (36)
------- ------- -------- -------- ---------
Balance, December 31, 1999.........................$ -- $ (11) $ (564) $58,962 $ 10,283
========
Issuance of 64,160 shares of common stock upon
exercise of stock options....................... (276) -- -- 43 --
Interest income on note receivable................. (20) -- -- (20) --
Amortization of unearned compensation.............. -- 6 -- 6 --
Repurchase of 299,600 shares of common stock, at cost -- -- -- (3,106) --
Net income......................................... -- -- -- 8,963 8,963
Foreign currency translation adjustments, net of
tax benefit of $167............................. -- -- (228) (228) (228)
------- ------- -------- -------- ---------
Balance, January 5, 2001...........................$ (296) $ (5) $ (792) $64,620 $ 8,735
========
Issuance of 17,930 shares of common stock upon
exercise of stock options....................... -- -- -- 84 --
Amortization of unearned compensation.............. -- 38 -- 38 --
Issuance of non-qualified stock options............ -- (3) -- -- --
Issuance of stock warrants......................... -- (197) -- -- --
Tax benefit related to stock options............... -- -- -- 8 --
Repurchase of 19,476 shares of common stock, at cost -- -- -- (132) --
Interest income on note receivable................. (18) -- -- (18) --
Payment of interest income on note receivable...... 11 -- -- 11 --
Net loss........................................... -- -- -- (940) (940)
Foreign currency translation adjustments, net of
tax benefit of $175............................. -- -- (509) (509) (509)
------- ------- -------- -------- ---------
Balance, January 4, 2002...........................$ (303) $ (167) $(1,301) $63,162 $ (1,449)
======== ======== ======== ======= =========
The accompanying notes are an integral part of these consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 4, 2002, JANUARY 5, 2001 AND DECEMBER 31, 1999
(in thousands)
2001 2000 1999
---- ---- ----
(53 Weeks)
Cash flows from operating activities:
Net income (loss).......................................................$ (940) $ 8,963 $ 10,319
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Plant closing and other non-recurring charges......................... 1,725 -- --
Loss on disposition of cycling division............................... -- 2,661 --
Depreciation and amortization......................................... 1,969 1,958 1,862
Provision for bad debt and discounts.................................. 5,767 5,525 7,151
Deferred income tax provision (benefit)............................... (656) 678 (99)
Compensation from stock grants and options............................ 38 6 82
Minority interest in income of consolidated subsidiaries.............. 101 89 76
Other................................................................. 12 (12) 45
Changes in operating assets and liabilities, net of effects of dispositions and
foreign currency adjustments:
Decrease (increase) in assets:
Accounts receivable.................................................... 6,060 (8,599) (11,508)
Inventories............................................................. 9,418 (6,018) (4,700)
Prepaid expenses and other current assets............................... (8) 125 (42)
Increase (decrease) in liabilities:
Letters of credit payable............................................... (3,472) 1,210 994
Accounts payable........................................................ 3,484 (412) (1,242)
Accrued expenses........................................................ (2,286) (1,185) 3,337
Income taxes............................................................ 344 (889) (770)
--------- ---------- ---------
Total adjustments.......................................................... 22,496 (4,863) (4,814)
--------- ---------- ---------
Net cash provided by operating activities.................................. 21,556 4,100 5,505
--------- --------- --------
Cash flows from investing activities:
Proceeds from the sale of cycling division.............................. -- 1,350 --
Purchases of property, plant and equipment.............................. (1,326) (1,669) (1,661)
Change in deferred charges, deposits and other.......................... 62 (30) (8)
Marketable securities - realized (gain) loss............................ 47 (36) (127)
Proceeds from the sale of equipment..................................... 1 -- 3
--------- --------- --------
Net cash used by investing activities...................................... (1,216) (385) (1,793)
---------- ---------- ---------
Cash flows from financing activities:
Net short-term borrowings (payments).................................... (2,474) 335 (5,429)
Repayment of long-term debt and capital lease obligations............... (226) (360) (375)
Common stock repurchased................................................ (132) (2,688) (514)
Issuances of common stock, stock option exercises....................... 84 43 503
--------- --------- ---------
Net cash used by financing activities...................................... (2,748) (2,670) (5,815)
Effect of exchange rate changes on cash and cash equivalents............... (103) 178 123
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents....................... 17,489 1,223 (1,980)
Cash and cash equivalents at beginning of period........................... 4,738 3,515 5,495
--------- --------- ---------
Cash and cash equivalents at end of period.................................$ 22,227 $ 4,738 $ 3,515
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended January 4, 2002, January 5, 2001 and December 31, 1999
(in thousands, except share amounts)
1. Summary of Significant Accounting Policies:
Business Activity
The Company is an importer 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 2001, 2000 and 1999 represent the fiscal
years ended January 4, 2002, January 5, 2001 and December 31, 1999,
respectively. There were 52 weeks in fiscal 2001, 53 weeks in fiscal year
2000 and 52 weeks in fiscal 1999. In management's opinion, the Consolidated
Financial Statements for 2001, 2000 and 1999 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. During fiscal 2001, one of the Company's suppliers,
located in China, accounted for approximately 39% of the Company's
total footwear purchases by dollar volume;
|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| The Company is dependent upon certain key customers. During fiscal
2000 and fiscal 1999, the Company had one customer that accounted for
approximately 14% and 15% of gross sales, respectively. During fiscal
2001, the Company did not have a customer that accounted for more than
10% of gross sales;
|X| Changes in general economic conditions may adversely affect the
Company's business.
Revenue Recognition
Sales, net of discounts and estimated returns and allowances, and related
costs of sales are recognized upon shipment when title and all the rewards
and risks of loss have been transferred to the buyer, there are no
uncertainties regarding acceptance, there exists persuasive evidence of an
arrangement, the sales price is fixed or determinable and collection of the
related accounts receivable is probable. Provisions for returns and
allowances are determined on the basis of past experience and the receipt
of notification of pending returns.
Cash and Cash Equivalents
Cash equivalents include all short-term deposits with an original maturity
of three months or less.
Accounts Receivable
The Company's allowance for doubtful accounts is based upon an analysis of
its accounts receivable, historical bad debt trends, customer credit
worthiness, economic trends and changes in the customer payment terms. As
noted in Note 17 of the consolidated financial statements, the Company is
subject to a credit risk concentration, due to the concentration of our
domestic Saucony footwear sales amongst a relatively small customer base.
Inventories
Inventories include materials, labor and overhead and are stated at lower
of cost or market. Cost is determined using the first-in, first-out (FIFO)
method. The Company's provision for excess and obsolete inventories, equal
to the difference between the cost of the inventories and the market value,
is based upon estimated product demand and market conditions.
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 beyond one
year.
Deferred Charges and Goodwill
Deferred charges consist primarily of acquired software licenses and
trademarks. Software licenses and 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, historically has
been 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 4, 2002 and January 5, 2001 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.
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 financial statements of the Company's foreign subsidiaries are measured
using the current rate method. Under the current rate method, assets and
liabilities of these subsidiaries are translated at exchange rates as of
the balance sheet date. Revenues and expenses are translated at average
rates of exchange in effect during the year. The resulting cumulative
translation adjustments have been recorded as a separate component of
stockholders' equity. Foreign currency transaction losses are included in
Other Comprehensive Income. Net losses from foreign currency translation
amounted to $509, $228 and $36 for 2001, 2000 and 1999, respectively.
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," (APB 25) as interpreted
by Financial Accounting Standards Board Interpretation No. 44 "Accounting
for Certain Transactions Involving Stock Compensation" (FIN 44). APB 25
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. 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.
As prescribed under SFAS 123, "Accounting for Stock-Based Compensation,"
the Company has disclosed in Note 11 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). SFAS 133 defines the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. SFAS 133
requires that 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. The adoption of SFAS 133 on January 6, 2001, did not
have a material impact on the Company's results of operations or financial
position.
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 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. Gains or losses
on forward contracts which do not qualify for special hedge accounting are
recorded in current earnings in other non-operating income or expense.
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 $10,885,
$12,904 and $10,065 for 2001, 2000 and 1999, respectively.
Research and Development Expenses
Expenditures for research and development of products are expensed as
incurred. Research and development expenses amounted to approximately
$1,135, $1,083 and $1,676 for 2001, 2000 and 1999, respectively.
Related Party Transactions
At January 4, 2002, the Company held notes of $179 and $124, 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, were due and were repaid on March 17,
2002, are full recourse notes and bear interest at 9.0% per annum. Interest
income from the two notes amounted to $18 for 2001 and $20 for 2000 and is
included in the notes receivable as of January 4, 2002 and January 5, 2001.
Prior Year Statement Reclassification
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees
and Costs." This consensus requires that all amounts billed to a customer
in a sales transaction related to shipping and handling, if any, represent
revenue and should be classified as revenue. Net sales and costs related to
shipping and handling reported by the Company in the prior year, have been
reclassified to conform to the requirements of EITF 00-10.
Certain items in prior years' consolidated financial statements have been
reclassified to conform with current year presentation.
Recent Accounting Pronouncements
SFAS 141
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141).
SFAS 141 addresses financial reporting and accounting for business
combinations and supersedes Accounting Principles Board Opinion No. 16,
(APB 16) "Business Combinations", and Statement of Financial Accounting
Standards No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises" (SFAS 38). SFAS 141 requires that business combinations in the
scope of this Statement are to be accounted for using one method, the
purchase method. The provisions of SFAS 141 apply to all business
combinations initiated after June 30, 2001 and are also applicable to all
business combinations accounted for by the purchase method for which the
date of acquisition is July 1, 2001, or later. The adoption of SFAS 141 did
not have a material effect on earnings or on the Company's financial
position.
SFAS 142
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets", (SFAS 142). SFAS 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets acquired individually or
with a group of other assets (excluding those acquired in a business
combination) at acquisition. The statement also addresses financial
accounting and reporting for goodwill and other intangibles subsequent to
their acquisition. SFAS 142 supersedes Accounting Principles Board Opinion
No. 17, "Intangible Assets" (APB 17). All of the provisions of SFAS 142
will be applied to goodwill and other intangible assets effective in the
fiscal years beginning after December 15, 2001. Under SFAS 142 goodwill and
other indefinite-lived intangibles will no longer be amortized, but rather
will be reviewed for impairment. An impairment loss will be recognized if
the carrying value of an intangible asset is not recoverable and its
carrying value exceeds its fair value. Impairment losses for goodwill and
indefinite-lived intangible assets that arise due to the initial
application of this Statement are to be reported as resulting from a change
in accounting principle. The Company will adopt SFAS 142 in the first
quarter of fiscal 2002 and is currently assessing the impact of the
provisions of SFAS 142. At January 4, 2002, the net book value of goodwill
was $912. Amortization expense amounted to $131 in fiscal 2001 and we would
have recorded amortization expense of $113 in fiscal 2002. The Company does
not anticipate that the adoption of SFAS 142 will have a material impact on
earnings or on the Company's financial position.
SFAS 143
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations", (SFAS 143). SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement cost. SFAS 143
applies to all companies that incur legal obligations to retire tangible
long-lived assets that result from the acquisition, construction,
development or normal operation of a long-lived asset. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. The Company has
not determined the impact of adopting SFAS 143 on its results of operations
or financial position.
SFAS 144
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets, and supercedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", (SFAS 121), and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", (APB 30) for the disposal of a segment of a business as
previously defined in APB 30. SFAS 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" (ARB 51) to eliminate
the exception to consolidation for a subsidiary for which control is likely
to be temporary. The provisions of SFAS 144 are to be applied to all
long-lived assets, with the exception of goodwill. SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss only if the
carrying amount of the long-lived asset is not recoverable from its
undiscounted cash flows and measure an impairment loss as the difference
between the carrying amount and the fair value of the asset. SFAS 144
expands upon the criteria, beyond that previously specified in SFAS 121 to
determine when a long-lived asset is held for sale and provides guidance on
the accounting for long-lived assets classified as held for sale if the
asset is being reclassified as held and used. The provisions of SFAS 144
are effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early adoption permitted.
The provisions of SFAS 144 generally are to be applied prospectively. The
Company will adopt SFAS 144 in the first quarter of fiscal 2002 and does
not anticipate that the adoption will have a material impact on earnings or
on the Company's financial position.
2. Marketable Securities:
As of January 4, 2002, 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 4, 2002, and January 5, 2001 was
$204 and $218, respectively. As of January 4, 2002 and January 5, 2001, the
market value of such securities was $296 and $343, respectively.
Included in the determination of net income for the years ended January 4,
2002, January 5, 2001 and December 31, 1999 were: 2001, net realized
losses of $15 and unrealized losses of $32; 2000, net realized gains of $86
and unrealized losses of $50; and 1999, net realized gains of $1 and net
unrealized gains of $127, respectively.
3. Inventories:
Inventories at January 4, 2002 and January 5, 2001 consisted of the
following:
2001 2000
---- ----
Finished goods...........................$ 25,466 $ 31,529
Raw materials and supplies............... 1,501 6,048
Work-in-process.......................... 1,437 827
--------- ----------
Total....................................$ 28,404 $ 38,404
========= ==========
4. Property, Plant and Equipment:
Major classes of property, plant and equipment at January 4, 2002 and
January 5, 2001 were as follows:
2001 2000
Land and improvements......................$ 598 $ 598
Buildings and improvements................. 6,270 6,165
Machinery and equipment.................... 11,523 10,832
Capitalized leases......................... 1,696 1,666
Leasehold improvements..................... 793 533
--------- ----------
$ 20,880 $ 19,794
Less accumulated depreciation
and amortization........................... 13,891 12,213
--------- ----------
Total......................................$ 6,989 $ 7,581
========= ==========
Accumulated amortization of leased property was $1,473 and $1,331 at
January 4, 2002 and January 5, 2001, respectively.
5. Accrued Expenses:
Accrued expenses at January 4, 2002 and January 5, 2001 consisted of the
following:
2001 2000
---- ----
Payroll and bonuses...........................$ 1,223 $ 2,460
Plant closing and other non-recurring
charges..................................... 1,461 --
Sales commissions............................. 289 508
Selling and advertising....................... 130 287
Other......................................... 2,499 3,210
-------- ---------
Total.........................................$ 5,602 $ 6,465
======== =========
6. Capital Lease Obligations:
The following is a schedule of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as
of January 4, 2002:
2002.......................................................$ 91
---------
Total minimum lease payments............................... 91
Less amounts representing interest......................... 3
---------
Present value of minimum lease payments.................... 88
Less current portion....................................... 88
---------
Long-term portion..........................................$ --
=========
7. 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
$175, $211 and $121 for 2001, 2000 and 1999, 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 $19, $18 and $31 for 2001, 2000 and
1999, respectively.
At the 2001 Annual Meeting of Stockholders held on May 24, 2001, the
stockholders approved the Company's 2001 Employee Stock Purchase Plan (The
"Employee Stock Purchase Plan"), adopted by the Company's Board of
Directors on April 6, 2001. An aggregate of 250,000 shares of Class B
Common Stock, $0.33-1/3 par value per share of Saucony, Inc., have been
reserved by the Company and may be issued under the Employee Stock Purchase
Plan. The plan provides employees of the Company and its designated
subsidiaries with an opportunity to purchase common stock of the Company
through accumulated payroll deductions, at a price per share equal to 85%
of the fair market value of a share of common stock on the enrollment date
or on the exercise date, whichever is lower. The plan qualifies as an
"Employee Stock Purchase Plan" under Section 423 of the Internal Revenue
Code and its provisions are construed so as to extend and limit
participation in a manner consistent with the requirements of that section
of the code.
All employees who meet minimum age and service requirements are eligible to
participate in the 2001 Employee Stock Purchase Plan. Employee payroll
deductions associated with the 2001 Employee Stock Purchase Plan began in
September 2001. As of January 4, 2002, employee payroll deductions of $18
have been made in accordance with the plan. There were no purchases of
common stock made under the plan as of January 4, 2002.
8. 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 2001,
2000 and 1999 were $1,720, $1,261 and $903, respectively. Future minimum
equipment and rental payments are as follows: 2002, $1,480; 2003, $1,244;
2004, $1,071; 2005, $628; 2006 and thereafter, $526.
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 credit facility was further amended in 2002
and reduced to $15,000, terminating on June 30, 2002. 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.
In February 2002, the Company's primary lender amended the definition of
EBIT, earnings before interest and taxes, under the credit facility. The
amendment modified the calculation of minimum interest expense coverage in
relation to EBIT, to exclude the non-recurring charges of $2,108 incurred
by the Company in the fourth quarter of fiscal 2001. The amendment applied
solely to the Company's compliance with the minimum interest expense
coverage covenant under the credit facility with respect to the fiscal
quarters ended January 4, 2002 and April 5, 2002. The Company is in
compliance with all other covenants of the credit facility at January 4,
2002 taking into consideration the amendment to the definition of EBIT.
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 4, 2002,
there were no borrowings under the demand lines of credit.
Saucony Canada, Inc. maintains a credit facility with a Canadian lender.
The agreement provides Saucony Canada with a credit line of Canadian
Dollars 1,500,000 for cash borrowings and letters of credit. At January 4,
2002, there were no borrowings or letters of credit outstanding under this
credit outstanding under this credit facility.
Employment Agreements
During fiscal 2001, the Company entered into employment agreements with two
key executives. The employment agreements provide for minimum aggregate
annual base salaries of $925, annual 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 are scheduled to expire in
August 2003, but extend automatically for additional one-year terms
beginning upon such scheduled expiration unless prior notice is given by
the Company or the employee. The Company has included an aggregate bonus
expense to the key executives of $0, $853 and $1,402 in general and
administrative expenses for fiscal 2001, fiscal 2000 and fiscal 1999,
respectively. Included in accrued expenses at January 4, 2002 and January
5, 2001, are accrued bonus expense of $0 and $852, respectively.
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).
9. 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 feature pursuant to which the Class B Common Stock is
entitled to receive cash dividends equal to 110% of the cash dividends
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 4, 2002, January 5, 2001 and December 31, 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 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
Shares issued............................... -- 17,930
Shares repurchased.......................... (3,380) (16,096)
------------ ------------
Shares outstanding at January 4, 2002....... 2,566,747 3,515,803
=========== ===========
10. Stock Options and Stock Purchase Warrants:
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 4, 2002, 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 for the three-year reporting period
ended January 4, 2002:
Shares
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
Awards granted............................................. (284,801)
Options expired or cancelled............................... 72,465
-----------
Shares available at January 4, 2002........................ 658,577
===========
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 over the vesting period
of the stock grant or option term. Amortization of stock-based compensation
amounted to $7, $6 and $5 for 2001, 2000 and 1999, respectively.
The following table summarizes the Company's stock option activity as of
December 31, 1999, January 5, 2001 and January 4, 2002:
Weighted
Average
Exercise Option
Shares Price Price Range
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
Granted....................................... 284,801 $ 6.64 $ 4.50 - $ 10.50
Exercised..................................... (17,930) $ 4.67 $ 4.00 - $ 5.13
Forfeited..................................... (65,465) $ 7.63 $ 4.13 - $ 14.63
Expired....................................... (7,000) $ 4.19 $ 4.00 - $ 4.44
-----------
Outstanding at January 4, 2002..................... 833,083 $ 8.89 $ 4.00 - $ 19.88
==========
Options exercisable for shares of the Company's Class A and Class B Common
Stock as of December 31, 1999, January 5, 2001 and January 4, 2002 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
December 31, 1999.............. -- 203,220 203,220 -- $ 5.88
January 5, 2001................ -- 232,090 232,090 -- $ 7.89
January 4, 2002................ -- 396,209 396,209 -- $ 8.81
The following table summarizes information about stock options outstanding
at January 4, 2002:
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted
Shares Average Weighted Shares Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices 01/04/02 Life (Years) Price 01/04/02 Price
$ 4.00 - $ 4.88 71,180 0.88 $ 4.48 55,730 $ 4.49
$ 5.00 - $ 5.76 185,520 3.92 $ 5.40 90,988 $ 5.23
$ 6.00 - $ 7.06 198,945 9.21 $ 6.71 76,140 $ 6.25
$ 7.28 - $ 8.06 26,000 4.17 $ 7.69 -- $ --
$ 9.88 - $ 10.50 2,500 3.66 $ 10.21 500 $ 10.21
$ 11.00 - $ 11.38 149,100 6.82 $ 11.26 80,433 $ 11.27
$ 12.13 - $ 13.44 93,838 3.08 $ 12.46 19,768 $ 12.46
$ 14.25 - $ 14.69 44,750 2.79 $ 14.68 37,483 $ 14.69
$ 16.16 - $ 17.75 60,250 2.80 $ 16.53 34,767 $ 16.42
$ 19.88 1,000 2.58 $ 19.88 400 $ 19.88
---------- ---------
833,083 396,209
========== =========
On March 12, 2001, the Company issued common stock purchase warrants to
purchase, in the aggregate, 50,250 shares of the Company's Class B Common
Stock at a per share price of $7.00 to five of our footwear factories. The
stock purchase warrant grant was approved by the Company's Board of
Directors on February 27, 2001. The warrants were issued for no cash
consideration; but rather as an incentive to the recipients of the warrants
to satisfy specific performance criteria which support the Company's
financial and operating goals. The warrants vest in five equal annual
installments, commencing on March 12, 2002 and expire on March 12, 2006.
The right to exercise the warrants is subject to the satisfaction of
specific performance criteria by the recipients. Fair value at date of
grant for the warrants was $3.93 per warrant. Amortization of stock-based
compensation resulting from the stock purchase warrant grant over the
vesting period of the warrant term amounted to $31 for 2001 and is recorded
as a component of cost of goods sold. The warrants were not included in the
computation of earnings per share since they were anti-dilutive.
11. Earnings Per Share
The following table sets forth the computation of basic earnings per common
share and diluted earnings per common share:
2001 2000 1999
---------------------- ---------------------- ----------------------
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
Net income (loss) available for
common shares and
assumed conversions...............$ (940) $ (940) $ 8,963 $ 8,963 $ 10,319 $ 10,319
========= ========= ======= ======= ======== ========
Weighted-average common shares and
equivalents outstanding:
Weighted-average shares
outstanding...................... 6,080 6,080 6,192 6,192 6,292 6,292
Effect of dilutive securities:
Stock options.................... -- -- -- 149 -- 276
-------- -------- ------- ------- -------- --------
6,080 6,080 6,192 6,341 6,292 6,568
======== ======== ======= ======= ======== ========
Earnings per share:
Net income (loss).................$ (.15) $ (.15) $ 1.45 $ 1.41 $ 1.64 $ 1.57
========= ========= ======= ======= ======= ========
Options to purchase 833,000 and 375,000 shares of common stock were
outstanding at January 4, 2002 and January 5, 2001, respectively, but were
not included in the computations of EPS since the options were
anti-dilutive.
The weighted average fair value at date of grant for options granted in
2001, 2000 and 1999 was $3.57, $6.45 and $4.91 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 2001, 2000 and 1999, respectively:
risk-free interest rates of 5.0%, 6.5% and 5.5%; dividend yields of 0%, 0%
and 0%; volatility factors of the expected market price of the Company's
common stock of 71.9%, 70.0% and 62.3%; and a weighted-average expected
life of the options of 3.4, 3.7 and 3.5 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 2001, 2000 and 1999, consistent with the provisions
of SFAS 123, the Company's net income (loss) and net income (loss) per
share would have been reduced to the pro forma amounts indicated below:
2001 2000 1999
---------------------- --------------------- ----------------------
Basic Diluted Basic Diluted Basic Diluted
--------- --------- -------- -------- -------- ---------
Net income (loss):
As reported $ (940) $ (940) $ 8,963 $ 8,963 $ 10,319 $ 10,319
Compensation expense for
stock, net of tax (746) (746) (535) (535) (304) (304)
---------- ---------- -------- -------- --------- ---------
Pro forma net income (loss) $ (1,686) $ (1,686) $ 8,428 $ 8,428 $ 10,015 $ 10,015
========== ========== ======= ======= ======== ========
Pro forma earnings per share:
As reported $ (0.15) $ (0.15) $ 1.45 $ 1.41 $ 1.64 $ 1.57
Compensation expense for
stock, net of tax (0.12) (0.12) (0.09) (0.08) (0.05) (0.05)
---------- ---------- -------- -------- -------- --------
Pro forma net income (loss)
per share $ (0.27) $ (0.27) $ 1.36 $ 1.33 $ 1.59 $ 1.52
========== ========== ======= ======= ======= =======
12. 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:
2001 2000 1999
---- ---- ----
Pre-tax income (loss):
United States..............$ (1,261) $ 14,660 $ 15,864
Foreign.................... 897 853 1,725
---------- ---------- ---------
Total......................$ (364) $ 15,513 $ 17,589
=========== ========== =========
The provision for income taxes consists of the following:
2001 2000 1999
---- ---- ----
Current:
Federal....................$ 426 $ 4,129 $ 5,349
State...................... 165 1,129 1,511
Foreign.................... 540 525 421
--------- ---------- ---------
1,131 5,783 7,281
--------- ---------- ---------
Deferred:
Federal.................... (828) 523 (139)
State...................... (176) 132 (47)
Foreign.................... (39) (62) 466
---------- ----------- ---------
(1,043) 593 280
---------- ---------- ---------
Change in valuation allowance.... 387 85 (367)
--------- ---------- ----------
Total......................$ 475 $ 6,461 $ 7,194
========= ========== =========
The net deferred tax asset or liability reported on the consolidated
balance sheet consists of the following items as of January 4, 2002 and
January 5, 2001:
2001 2000
---- ----
Net current deferred tax assets:
Allowance for doubtful accounts and discounts........$ 785 $ 522
Inventory allowances and tax costing adjustments..... 287 193
Deferred compensation................................ 549 404
Other accrued expenses............................... 514 297
Unrealized gain on marketable securities............. (37) (50)
-------- --------
Total.............................................$ 2,098 $ 1,366
------- -------
Net long-term deferred tax assets:
Foreign loss carryforwards...........................$ 570 $ 449
Valuation allowance.................................. (570) (183)
-------- --------
Total.............................................$ 0 $ 266
------- -------
Net long-term deferred tax liabilities:
Property, plant and equipment........................$ 739 $ 939
Investment in limited partnership.................... 1,210 1,201
------- -------
Total.............................................$ 1,949 $ 2,140
------- -------
Net deferred tax asset (liability)..................$ 149 $ (508)
======= ========
The foreign loss carryforwards relate to operating losses of approximately
$1,564, which may be carried forward indefinitely. At January 4, 2002, the
Company has determined that it is more likely than not that all 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 $3,076 at
January 4, 2002.
A reconciliation of the expected tax computed at the U.S. statutory federal
income tax rate to the total provision for income taxes follows:
2001 2000 1999
---- ---- ----
Expected tax at 34%..................................................$ (124) $ 5,275 $ 5,980
U.S. federal income tax surcharge.................................... -- -- 50
State income tax, net of federal benefit............................. (7) 833 967
Non-deductible expenses and tax-exempt income........................ 40 100 294
International tax rate differences................................... 124 174 291
Detriment (benefit) of valuation allowance relating
to foreign losses.................................................. 387 85 (367)
Low-income housing tax credits....................................... (5) (6) (21)
Adjustment of prior years' estimated tax liabilities................. 60 -- --
-------- --------- --------
Provision for income taxes...........................................$ 475 $ 6,461 $ 7,194
======== ========= ========
13. 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 were paid
in fiscal 2001.
Net sales from the cycling division, which are included in our Other
Products segment, represented approximately 1.9% and 4.7% of consolidated
net sales for fiscal years 2000 and 1999, respectively. The loss on the
sale of the cycling division is included in the income before tax for the
Other Products segment.
14. Plant Closing and Other Non-Recurring Charges:
On November 9, 2001, the Company announced the cessation of manufacturing
and closing of the Bangor, Maine facility. During the fourth quarter of
fiscal 2001, the Company relocated the Asian sourcing and quality control
office to China, resulting in the closure of the Taiwan office. In
addition, in the fourth quarter of 2001, the Company negotiated an early
termination and exit of a retail store lease. As a result of these actions,
the Company recorded pre-tax non-recurring charges of $2,108, or $1,277
after-tax or $0.21 per share after-tax. The closing of the Bangor, Maine
facility in January 2002 resulted in the termination of 101 employees, of
which 61 were terminated subsequent to January 4, 2002. Assets used
extensively by the Bangor, Maine manufacturing facility, the Taiwan office
and the retail store have been written down to fair market value. Expenses
associated with the plant closing and other non-recurring charges are as
follows:
Bangor Taiwan Retail
Plant Office Store Total
------- ------ ------ -----
Employee severance and termination benefits.....................$ 1,121 $ 150 $ 4 $ 1,275
Facility and equipment lease exit costs and
other non-cancelable contractual commitments.................. 228 -- 200 428
Writedown of machinery and equipment
to fair market value.......................................... 248 25 77 350
Professional fees and other transaction costs................... 47 -- 8 55
------- ------ ------- --------
Total.........................................................$ 1,644 $ 175 $ 289 $ 2,108
======= ====== ======= ========
Included in accrued expenses at January 4, 2002 are $1,461 of costs
associated with the plant closing and other non-recurring charges, the
majority of which the Company expects will be paid by the end of the first
quarter of fiscal 2002. The charge recorded for the Bangor, Maine plant
closing and the Taiwan office closing are included in income before tax for
the Saucony segment, while the retail store closing is included in income
before tax for the Other Products segment.
As of January 4, 2002, our Bangor, Maine real property had a net book value
of $357 and is included on the balance sheet under the caption "Property,
plant and equipment". The Company commenced marketing the property in
February 2002 and has received market valuations for the property in the
range of $875 to $1,250. Beginning in the first quarter of fiscal 2002, the
Company will reclassify the real property to current assets as "Held For
Sale."
15. Geographic Segment Data:
The following table summarizes the Company's operations by geographic area
for the years ended January 4, 2002, January 5, 2001 and December 31, 1999
and identifiable assets as of January 4, 2002, January 5, 2001 and December
31, 1999:
2001 2000 1999
---- ---- ----
Revenues:
United States................$ 106,450 $ 145,744 $ 136,572
Canada....................... 8,464 7,194 6,279
Other international.......... 17,450 14,982 13,036
----------- ----------- -----------
$ 132,364 $ 167,920 $ 155,887
=========== =========== ===========
International revenues:
United States - sales to
foreign distributors........ 8,164 5,119 3,560
Canada........................ 8,464 7,194 6,279
Other international........... 9,286 9,863 9,476
---------- ----------- -----------
$ 25,914 $ 22,176 $ 19,315
========== =========== ===========
Inter-area revenues:
United States.................$ 1,228 $ 870 $ 828
Canada........................ 5,363 4,222 3,639
Other international........... 4,211 5,077 4,803
---------- ----------- -----------
$ 10,802 $ 10,169 $ 9,270
========== =========== ===========
Total revenues:
United States.................$ 107,678 $ 146,614 $ 137,400
Canada........................ 13,827 11,416 9,918
Other international........... 21,661 20,059 17,839
Less: Inter-area eliminations. (10,802) (10,169) (9,270)
------------ ------------ ----------
$ 132,364 $ 167,920 $ 155,887
=========== =========== ==========
Operating income (loss):
United States.................$ (2,565) $ 13,855 $ 16,815
Canada........................ 1,304 1,080 879
Other international........... 1,151 1,332 590
Less: Inter-area eliminations. (159) (144) (88)
------------ ------------ ----------
$ (269) $ 16,123 $ 18,196
============ =========== ==========
Identifiable assets:
United States..................$ 78,942 $ 78,130 $ 79,288
Canada......................... 5,222 4,119 5,452
Other international............ 7,403 9,346 7,626
Less: Inter-area eliminations. (13,467) (8,310) (15,185)
----------- ----------- ---------
$ 78,100 $ 83,285 $ 77,181
=========== =========== ==========
Revenues are classified based on customer location. Other revenue consists
primarily of royalty income. 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 and cost of sales. Operating income consists of revenue, less
cost of sales, selling expenses, general and administrative expenses, plant
closing and other non-recurring charges, 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 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 4, 2002, January 5, 2001 and December
31, 1999 and identifiable assets as of January 4, 2002, January 5, 2001 and
December 31, 1999:
2001 2000 1999
---- ---- ----
Revenues:
Saucony............................................$ 110,393 $ 146,596 $ 133,262
Other Products..................................... 21,971 21,324 22,625
---------- --------- ----------
$ 132,364 $ 167,920 $ 155,887
========== ========= ==========
Pre-tax income (loss):
Saucony............................................$ (296) $ 18,507 $ 18,965
Other Products..................................... (68) (2,994) (1,376)
----------- ---------- -----------
Total segment pre-tax income (loss)................ (364) 15,513 17,589
Provision for income taxes......................... 475 6,461 7,194
Minority interest.................................. 101 89 76
---------- --------- ----------
Net income (loss).....................................$ (940) $ 8,963 $ 10,319
=========== ========= ==========
Assets:
Saucony............................................$ 62,488 $ 68,268 $ 61,584
Other Products..................................... 15,612 15,017 15,597
---------- --------- ----------
$ 78,100 $ 83,285 $ 77,181
========== ========= ==========
Depreciation and amortization:
Saucony............................................$ 1,668 $ 1,701 $ 1,516
Other Products..................................... 301 257 346
---------- --------- ----------
$ 1,969 $ 1,958 $ 1,862
========== ========= ==========
Interest, net:
Saucony............................................$ 104 $ 285 $ 228
Other Products..................................... 49 341 455
---------- --------- ----------
$ 153 $ 626 $ 683
========== ========= ==========
Components of interest, net
Interest expense...................................$ 213 $ 695 $ 729
Interest income.................................... 60 69 46
---------- --------- ----------
Interest, net....................................$ 153 $ 626 $ 683
========== ========= ==========
17. 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 45% of the
Company's gross trade receivables balance was represented by 16 customers
at January 4, 2002, which exposes the Company to a concentration of credit
risk.
18. Financial Instruments:
The carrying value of cash, cash equivalents, receivables, and liabilities
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 foreign exchange rates as of
January 4, 2002. At January 4, 2002 and January 5, 2001, the notional value
of the Company's foreign currency exchange contracts to purchase U.S.
dollars was $2,300 and $1,100, respectively. At January 4, 2002, the
notional value of the Company's foreign currency exchange contracts to buy
and sell Euros was $100 Euros and $96 Euros, respectively; and also to buy
$25 British Pounds Sterling. There were no outstanding foreign currency
exchange contracts involving Euros or British Pounds Sterling at January 5,
2001. Consistent with the provisions of SFAS 133, all derivatives must be
recognized on the balance sheet at their then fair value and adjustments to
the fair value of derivatives that are not hedges must be recognized
currently in earnings when they occur.
The Company believes that these contracts economically function as
effective hedges of the underlying exposures but, the foreign currency
contracts do not meet the specific criteria as defined in SFAS 133 thus
requiring the Company to record all changes in the fair value in earnings
in the period of the change. The Company recorded a charge of $35 against
fiscal 2001 earnings to record the loss on certain foreign currency
contracts. At January 4, 2002 and January 5, 2001, estimated fair value of
the Company's non-derivative financial instruments approximated the
carrying value.
19. Quarterly Information:
(Unaudited)
2001 Quarter 1 Quarter 2 Quarter 3 Quarter 4(1)
---- --------- --------- --------- ------------
Net sales.........................................$ 43,693 $ 35,491 $ 31,488 $ 21,589
Gross profit...................................... 13,699 11,853 10,307 6,284
Net income........................................ 1,346 176 362 (2,824)
Earnings per share:
Basic........................................... 0.22 0.03 0.06 (0.46)
Diluted......................................... 0.22 0.03 0.06 (0.46)
2000 Quarter 1 Quarter 2(2) Quarter 3 Quarter 4(3)
---- --------- ------------ --------- ------------
Net sales.........................................$ 46,848 $ 43,979 $ 45,269 $ 31,701
Gross profit...................................... 17,445 16,814 17,340 10,603
Net income........................................ 3,208 1,373 3,780 602
Earnings per share:
Basic........................................... 0.51 0.22 0.61 0.09
Diluted......................................... 0.50 0.22 0.60 0.09
--------------
(1) The Company closed its Bangor, Maine manufacturing facility,
terminated and exited a retail store lease, closed its Taiwan
office and incurred other reorganization related expenses. See
Note 14 for further information relating to these transactions
(2) The Company sold substantially all of the assets and business of
its cycling division during the second quarter of fiscal 2000. See
Note 13 for further information relating to this transaction.
(3) 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 2001 and 2000.
20. Supplemental Cash Flow Disclosure
The following table summarizes additional disclosure of cash flow
information for the years ended January 4, 2002, January 5, 2001 and
December 31, 1999:
2001 2000 1999
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds.................................$ 857 $ 6,695 $ 8,090
========= ========= =========
Interest.....................................................$ 205 $ 605 $ 688
========= ========= =========
Non-cash Investing and Financing Activities:
Property purchased under capital leases......................$ 102 $ -- $ 160
========= ========= =========
Plant closing and other related charges..........................$ 2,108 -- --
Cash received................................................ 3 -- --
Severance and other payments................................. (386) -- --
---------- --------- ---------
$ 1,725 -- --
Non-cash portion:
Accrued expenses.............................................$ 1,461 -- --
Property, plant and equipment................................ 264 -- --
--------- --------- ---------
$ 1,725 -- --
========= ========= =========
Report of Independent Public Accountants
On Schedules
To Saucony, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the accompanying consolidated financial statements of Saucony,
Inc. for the year ended January 4, 2002 included in this Form 10-K and have
issued our report thereon dated February 14, 2002.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. The schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 14, 2002
SAUCONY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 4, 2002, January 5, 2001 and
December 31, 1999
(dollars in thousands)
Additions
Balance charged to Deductions Balance
beginning costs and from end
of year expenses reserve of year
------- -------- ------- -------
Year ended January 4, 2002:
Allowance for doubtful accounts and discounts...................$ 2,047 $ 5,767 $ 5,357 $ 2,457
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
Exhibit Index
Exhibit
Number Description
3.1 Restated Articles of Organization, as amended, of the Registrant
are incorporated herein by reference to Exhibits 3.1 and 3.2 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 is
incorporated herein by reference to Exhibit 10.3 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 5,
2001. *
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 Letter Amendment dated July 31, 2001 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
July 6, 2001. *
10.6 Letter Amendment dated September 24, 2001 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
October 5, 2001. *
10.7 Letter Amendment dated October 19, 2001 to the Credit Agreement
is incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
October 5, 2001. *
10.8 Letter Amendment dated November 23, 2001 to the Credit Agreement.
10.9 Letter Amendment dated December 26, 2001 to the Credit Agreement.
10.10** 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. *
10.11** 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. *
10.12** 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. *
10.13** VP Bonus Plan is incorporated herein by reference to Exhibit 10.19
to the Form S-2. *
10.14** 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. *
10.15** 2001 Employee Stock Purchase Plan is incorporated herein by
reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-65974). *
10.16** 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. *
10.17** 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. *
10.18** 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. *
10.19** 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. *
10.20** Severance Agreement as of January 31, 2002 by and between the
Registrant and Arthur E. Rogers.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
99.1 Letter regarding confirmation of Arthur Andersen LLP representations.
- --------------------
* 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.