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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 December 31, 1999
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
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(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 532-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act:
Class A Common Stock, $.33-1/3 par value
----------------------------------------
(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 stock held by non-affiliates
of the registrant, as of March 10, 2000, was approximately $53,894,220 (based on
the closing prices of the Class A Common Stock and Class B Common Stock on such
date as reported on the Nasdaq National Market).
The number of shares of the registrant's Class A Common Stock, $.33-1/3 par
value, and Class B Common Stock, $.33-1/3 par value, outstanding on March 10,
2000 was 2,618,827 and 3,557,769, respectively.
Portions of the following documents are incorporated by reference in this
Report.
Documents Incorporated by Reference
Document Form 10-K Part
Proxy Statement for Annual Meeting of Stockholders Part III
of the Registrant to be held on May 18, 2000,
to be filed with the Securities and Exchange
Commission.
PART I
ITEM 1 - BUSINESS
OVERVIEW
We design, manufacture and market performance-oriented athletic footwear,
athletic apparel and bicycles. Our principal products are:
o running, walking, cross training and outdoor trail shoes, which we sell under
the Saucony brand name;
o technical running shoe models from the early 1980's, which we reintroduced in
1998, as Saucony "Originals", our "classic" footwear line;
o athletic apparel, which we sell under the Hind brand name;
o high-performance bicycles, bicycle frames and component parts, which we
sell under the Quintana Roo, Merlin and Real Design brand names; and
o shoes for coaches and officials, 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 eight factory outlet stores and outside the United States in 23 countries
through 17 distributors located throughout the world. For the fiscal year ended
December 31, 1999, we generated total sales of $154.1 million.
Saucony(R), Spot-bilt(R), GRID(R), Quintana Roo(R), Merlin(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.
PRODUCTS
Our principal products are Saucony(R) athletic footwear, Hind(R) athletic
apparel, Quintana Roo(R) and Merlin(R) bicycles and bicycle frames, Real
Design(R) bicycle component parts and Spot-bilt(R) shoes for coaches and
officials.
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony product line and our other product lines for the periods and geographic
areas indicated. "Other" consists of the Hind, Quintana Roo, Merlin, Real Design
and Spot-bilt businesses, together with sales of our products at our eight
factory outlets.
Net Sales
(dollars in thousands)
Fiscal 1999 Fiscal 1998 Fiscal 1997
---------------------- --------------------- --------------------
$ % $ % $ %
- - - - - -
Saucony
Domestic..............$ 115,118 75% $ 67,774 64% $ 56,050 60%
International......... 16,780 11% 18,558 18% 22,580 24%
---------- ------- ---------- ------- --------- -------
Total.................$ 131,898 86% $ 86,332 82% $ 78,630 84%
---------- ------- ---------- ------- --------- -------
Other
Domestic..............$ 19,910 13% $ 15,590 15% $ 9,552 10%
International......... 2,250 1% 3,152 3% 5,429 6%
---------- ------- ---------- ------- --------- -------
Total.................$ 22,160 14% $ 18,742 18% $ 14,981 16%
---------- ------- ---------- ------- --------- -------
Total....................$ 154,058 100% $ 105,074 100% $ 93,611 100%
========== ==== ========== ======= ========= =======
FOOTWEAR
SAUCONY
TECHNICAL FOOTWEAR. We sell performance running, walking, cross training and
outdoor trail shoes for athletes under the Saucony brand name, which has been
marketed in the United States for over 30 years. A substantial majority of sales
are in the running shoe category. We have several different product offerings
within each Saucony brand category. These offerings have different designs and
features, resulting in different cushioning, stability, support characteristics
and prices.
We design and market separate lines for men and women within most technical
footwear categories. We currently sell approximately the same percentage of
technical shoes to men and women. In keeping with our emphasis on performance,
we market and sell our technical footwear to athletes who have a high
participation rate in their sport of choice. We address this market through our
"Loyal to the Sport" advertising campaign. We believe that these consumers are
more brand loyal than those who buy athletic footwear for casual use. The
suggested domestic retail prices for most of our technical footwear products are
in the range of $50 to $85 per pair, with our top-of-the-line running shoes
having suggested domestic retail prices of up to $140 per pair.
The Saucony brand is recognized for its technical innovation and performance. As
a result of our application of biomechanical technology in the design process,
we believe that our Saucony footwear has a distinctive "fit and feel" that is
attractive to athletic users. A key element in the design of our shoes is an
anatomically correct toe and heel configuration that provides support and
comfort for the particular activity for which the shoe is designed.
We build a variety of technical features into our shoes. Most of our technical
running and other athletic shoes incorporate our Ground Reaction Inertia Device,
or GRID system, an innovative midsole system that employs molded strings
engineered to create a feeling similar to that of the "sweet spot" of a tennis
racquet. In contrast with conventional athletic shoe midsoles, the GRID system
is designed to react to various stress forces differently, thereby maximizing
shock absorption and minimizing rear foot motion. We have continually improved
the GRID system since it was first introduced in 1991.
We design our Saucony technical cross training, women's walking and outdoor
technical trail shoes with many of the same performance features and "fit and
feel" characteristics as are found in Saucony technical running shoes.
Currently, our most popular non-running technical athletic shoe is a women's
performance walking shoe.
ORIGINALS LINES. In 1998, we reintroduced a number of our technical running shoe
models from the early 1980's under the name "Originals." These shoes appeal to
younger consumers who do not generally wear them for athletic purposes. We
believe our Originals shoes have benefited from the trend toward "retro"
products in footwear and apparel. We offer these lines in a variety of styles
with over one hundred combinations of colors and materials. The suggested retail
prices for our Originals are in the range of $40 to $80 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 are
expanding the Originals product line to include color variations on our initial
Originals. We also plan to introduce additional Originals products, including
"retro" footwear products, or contemporary-styled reintroductions of our
technical running shoe models from the early 1980's and "new school" footwear
products, or athletic footwear designed for the 12 to 25 year old footwear
consumer. For spring and fall 2000 seasons, we plan to introduce additional
models of "Originals" including Matrix, Jazz Fade Ice, Jazz Pleather and Hornet.
Originals accounted for 37% of fiscal 1999 consolidated net sales.
SPOT-BILT
We sell shoes for coaches and officials under the Spot-bilt brand name through
the same distribution channels for 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 maximize
comfort. In addition, we frequently add innovations to our Hind product
offerings in an effort to incorporate the latest fabric technology. For example,
our fall 2000 cold weather collection features Hind's exclusive Rain Jammer(R)
and Wind Jammer(R) fabrics, which are both flexible, polyurethane membranes that
provide protection against the elements while enabling specific activities.
OTHER BRANDS
We also market athletic apparel under the Saucony label. We target our Saucony
apparel line at the mainstream running consumer. We believe that our Saucony
athletic apparel supports our Saucony athletic footwear products by enhancing
the visibility of the Saucony brand.
We also sell triathlon wet suits under the Quintana Roo brand. Our Quintana Roo
wet suits feature 3Generation, a flexible, buoyant rubber/jersey complex
manufactured for us by Yamamoto Rubber Company.
BICYCLES
QUINTANA ROO
We manufacture and distribute a line of performance bicycles for the triathlete
and road/mountain racing enthusiast under the Quintana Roo brand name. Quintana
Roo bicycles have suggested retail prices ranging from $1,500 to over $3,500.
This line includes:
o triathlon bicycles featuring distinctive 26-inch wheels, steep seat angles and
aerodynamic handlebars that are appropriate for triathlon racing; and
o road bicycles made principally from lightweight aluminum and carbon fiber that
offer advanced design features at competitive prices.
We also offer a line of Quintana Roo bicycle accessories, such as shoes and seat
covers.
MERLIN
We are a leading manufacturer of titanium road and mountain bicycles and bicycle
frames which we sell under the Merlin brand name. Merlin bicycles have suggested
retail prices ranging from $3,000 to over $5,000. All of our Merlin bicycles are
designed for exhilarating performance, exceptional comfort and lifetime
durability. All of our Merlin frames are manufactured in Massachusetts using
materials that are certified through advanced quality control procedures.
REAL DESIGN
We design and market precision bicycle components under the Real Design brand
name. Our Real Design products include chainrings, cogsets, cranksets, x-levers,
hubs and brake shoes. We also offer a selection of bicycle accessories and
apparel that feature our distinctive Real Design logo.
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 also maintain a staff of 16 design and
development specialists in Peabody, Massachusetts and Boulder, Colorado to
undertake continuing product development.
In fiscal 1999 and fiscal 1998, we spent approximately $1.68 million on our
product development programs, compared to $1.44 million in fiscal 1997. Most of
our research and development expenditures relate to Saucony brand products.
SALES AND MARKETING
SAUCONY BRAND
We sell our Saucony footwear products at more than 5,500 retail outlets in the
United States, primarily higher-end, full-margin sporting goods chains,
independent sporting goods stores, athletic footwear specialty stores and
department stores. Retail outlets include Foot Locker/Lady Foot Locker, The
Athlete's Foot, The Sports Authority, Road Runner Sports, Foot Action and Finish
Line.
We maintain a corporate sales team that is directly responsible for the sales
activity in our largest 48 accounts. We also sell our footwear and apparel to
retail outlets in the United States through 13 independent manufacturer agents
whose organizations employ approximately 41 sales representatives. Our web sites
(saucony.com and sock-a-knee.com) receive thousands of "hits" weekly from
consumers looking for new product profiles and race and event data, as well as
general Saucony information.
We sell our Saucony products outside the United States in 23 countries through
17 distributors located throughout the world, including a Canadian subsidiary in
which we hold an 85% ownership interest and our wholly owned subsidiaries
located in the United Kingdom and the Netherlands.
To accommodate our customers' requirements and plan for our own product needs,
we employ a "futures" order program for our Saucony, Hind and bicycle products
under which we take orders well 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.
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 sport-specific magazines such as "Runner's World," "Walking" and
"Triathlete." We also sponsor sporting events and telecasts to drive brand
awareness and image of our technical footwear to athletes. Examples include
"Saucony Running and Racing" seen monthly on ESPN, as well as sponsorship of the
L.A. Marathon and Chase Corporate Challenge race series. To build in-store
presence, we use account-specific and in-store promotions, such as athlete
appearances, special events, gift with purchase programs and discounts for store
employee purchases of our products. For our Originals line, we generally
advertise in "lifestyle" magazines that target 12 to 25 year olds, such as "Teen
People," "Vibe" and "Spin."
Most of our advertising and promotional programs for our Saucony brand are
directed toward the ultimate consumer. We also promote the Saucony brand to the
retail trade through attendance at trade shows and similar events and employ a
cooperative advertising program, which is intended to maximize advertising
resources by having our retailers share in the cost of promoting our Saucony
brand in print advertising, while affording our retailers the opportunity to
promote their stores.
OTHER BRANDS
We sell our Hind, Quintana Roo and Merlin products domestically and
internationally at specialty sporting equipment stores. We service Quintana Roo
and Merlin retailers with our corporate sales team and through six independent
manufacturer agents whose organizations employ approximately ten sales
representatives. We sell Real Design products through a select number of dealers
covering regional territories throughout the United States. We market our
Spot-bilt line through our Saucony brand distribution channels and directly to
customers through our E-Commerce web-site at Spotbilt.com. We advertise these
other brands in magazines and through promotions at trade shows and similar
events.
FACTORY STORES
We currently operate eight factory outlet stores at which we sell Saucony, Hind,
Quintana Roo and Spot-bilt products. To avoid competing against the full-margin
retail outlets, we generally limit the items offered at these stores to products
with cosmetic defects, discontinued merchandise and certain slow-moving
products. As part of our growth strategy, we intend to expand our factory stores
to target regions where we believe the Saucony brand is underdeveloped. We plan
to expand by establishing clusters of factory stores, which we believe will
strengthen Saucony brand name recognition. We intend to open approximately four
additional factory stores during fiscal 2000.
MANUFACTURING
We assemble most of our domestically sold Saucony technical footwear at our
manufacturing facility in Bangor, Maine, largely with components sourced from
independent manufacturers located overseas. We believe that assembly at our
Bangor facility enables us to produce and deliver finished technical footwear
more quickly than most of our competitors. Independent overseas manufacturers
produce the balance of our Saucony products, including our Originals lines, and
all of our Spot-bilt products.
The overseas footwear manufacturers that supply products and components to us
are located in Asia, primarily in China, but also in Taiwan and Thailand. 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 quality high standards. We employee approximately 27 Saucony
footwear quality control personnel in Taiwan as well as quality control
specialists at our manufacturing facilities in the United States. Our personnel
in Taiwan regularly visit our footwear manufacturers throughout Asia to monitor,
oversee and improve the quality control and production processes.
We contract with third parties for the manufacture of our Quintana Roo bicycle
products, Real Design bicycle components and Hind apparel. Most of our Quintana
Roo bicycle products and Real Design bicycle components are manufactured in
Taiwan. Most of our Hind apparel is manufactured in the United States. We
manufacture our Merlin bicycle products ourselves at a facility in Cambridge,
Massachusetts and manufacture our Quintana Roo wet suits ourselves at a facility
in San Marcos, California.
SUPPLIERS
Raw materials required for the manufacture of our products, including leather,
rubber, titanium, aluminum, nylon and other fabrics, are generally available in
the country in which our products are manufactured. We and our suppliers have
not experienced any difficulty in satisfying raw material needs to date.
The number of our foreign suppliers and the percentage of products sourced by us
from particular foreign suppliers varies from time to time. During fiscal 1999,
we purchased footwear products from approximately 21 overseas suppliers. One
such supplier, located in China, accounted for approximately 62% of our total
overseas footwear purchases by dollar volume.
Although we have no long-term manufacturing agreements with our overseas
suppliers and compete with other athletic shoe, apparel and bicycle companies,
including companies that are much larger than us, for access to production
facilities, we believe that our relationships with our footwear and other
suppliers are strong. We also believe that we have the ability to develop, over
time, alternative sources in various countries for footwear, footwear components
and other products that we source from our current suppliers. However, in the
event of a supply interruption, our operations could be materially and adversely
affected if a substantial delay occurred in locating and securing alternative
sources of supply.
DISTRIBUTION AND INVENTORY
We distribute our Saucony and Hind products from our owned warehouse in
Massachusetts and a leased warehouse in Canada and The Netherlands, as well as
through third-party operated warehouse facilities located in California and the
United Kingdom. We distribute our Quintana Roo and Real Design products through
our leased warehouse in California and Merlin products through our leased
warehouse in Massachusetts.
We generally maintain an open-stock inventory on most of our products which
permits us to ship to retailers on an "at once" basis in response to orders.
However, we sell our Originals line of footwear only on a "futures" basis with
no planned inventory position. We have adopted this two-pronged inventory
strategy 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.
BACKLOG
Our backlog of unfilled orders was approximately $65.4 million at December 31,
1999 and $55.1 million at January 1, 1999. We expect that all of our backlog at
December 31, 1999 will be shipped in fiscal 2000. While we have not generally
experienced material cancellations of orders, orders may be cancelled by
customers without financial penalty, and backlog does not necessarily represent
actual future shipments.
During 1999, we derived approximately 15% of our consolidated revenue from sales
to one customer, Venator, which operates Foot Locker, Lady Foot Locker, Kids
Foot Locker and Eastbay Running stores.
TRADE POLICY
Our practice of sourcing products and components overseas, with subsequent
importation into the United States, exposes us to possible product supply
disruptions and increased costs in the event of actions by United States or
foreign government agencies adverse to continued trade or the enactment of
legislation that restricts trade.
As an example, we import significant amounts of our products and components from
China. The United States extends to China non-discriminatory "normal trade
relations" status, formerly known as "most favored nation" status, allowing
China to receive the same tariff treatment that the United States extends to its
other "normal" trading partners. Despite this current policy, Congress could
seek to revoke normal trade relations status for China or condition its renewal
on factors such as China's human rights record or relations with Taiwan. The
cancellation of, or the imposition of conditions upon, China's normal trade
relations status could significantly add to our cost of goods and could restrict
our supply of products and components from that country. The failure of Congress
to extend permanent normal trade relations status to China could also negatively
affect our ability to source products and components from China.
We are unable to predict whether additional United States customs duties, quotas
or other restrictions may be imposed in the future upon the importation of our
products or components. Any such occurrences might adversely affect our sales or
profitability, possibly materially.
COMPETITION
Competition is intense in the markets in which we sell our products. We compete
with a large number of other companies, both domestic and foreign. Several
competitors are large organizations with diversified product lines, well-known
brands and financial 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. The
principal competitors for our Quintana Roo and Merlin products are Cannondale,
Trek and Litespeed. We believe that the key competitive factors for all of our
products are technical performance, styling, durability, product identification
through promotion, brand awareness and price. We believe that we are competitive
in all of these areas.
TRADEMARKS
We use trademarks on nearly all of our products and believe that having
distinctive marks is an important factor in marketing our goods. We have
registered our Saucony(R), Spot-bilt(R), GRID(R), Quintana Roo(R), Merlin(R) and
Hind(R) marks, among others, in the United States. We have also registered some
of these marks in a number of foreign countries. Although we have a foreign
trademark registration program for selected marks, we cannot guarantee that we
will be able to register or use such marks in each foreign country in which we
seek registration.
EMPLOYEES
As of December 31, 1999, we employed approximately 494 people worldwide. Of
these employees, approximately 419 were in the United States and approximately
75 were in foreign locations. We believe that our employee relations are
excellent. We have never experienced a strike or other work stoppage.
Approximately 34 employees in our Massachusetts warehouse were represented by a
union as of December 31, 1999. None of our other employees are represented by a
union or are subject to a collective bargaining agreement.
ITEM 2 - PROPERTIES
Our general and executive offices and our main distribution facility are located
in Peabody, Massachusetts and are owned by us. This facility consists of
approximately 175,000 square feet, of which 145,000 square feet is warehouse
space.
We also own a facility in Bangor, Maine containing approximately 82,000 square
feet of space, substantially all of which is used for the assembly of our
Saucony running shoes. We also own an inactive warehouse in East Brookfield,
Massachusetts containing approximately 109,000 square feet.
We lease approximately 15,000 square feet of manufacturing and office space in
San Marcos, California, 13,600 square feet of manufacturing and office space in
Cambridge, Massachusetts and an additional 4,000 square feet of office space in
Boulder, Colorado.
ITEM 3 - LEGAL PROCEEDINGS
We are involved in routine litigation incident to our business. We do not
believe that any of these proceedings will have a material adverse effect on our
financial position, operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name Age Position
John H. Fisher 52 President, Chief Executive Officer
and Director
Charles A. Gottesman 49 Executive Vice President,
Chief Operating Officer, Treasurer
and Director
Michael Umana 37 Vice President, Finance and
Chief Financial Officer
Arthur E. Rogers, Jr. 37 President, Saucony North America
Wolfgang Schweim 47 President, Saucony International
Kenneth W. Graham 46 Senior Vice President,
Research & Development
Roger P. Deschenes 41 Vice President, Controller and
Chief Accounting Officer
Daniel J. Horgan 44 Vice President, Operations
Andrew M. James 43 Vice President, MIS
John H. Fisher has served as our Chief Executive Officer since 1991. He was
elected President and Chief Operating Officer in 1985 after having served as
Executive Vice President from 1981 to 1985 and as Vice President, Sales from
1979 and 1981. Mr. Fisher is a member of the World Federation of Sporting Goods
Industries, is the former Chairman of the Athletic Footwear Council of the
Sporting Goods Manufacturers Association, and is a member of various civic
associations. Mr. Fisher became a director in 1980.
Charles A. Gottesman has served as our Executive Vice President and Chief
Operating Officer since 1992, and served as Executive Vice President, Finance
from 1989 to 1992, Senior Vice President from 1987 to 1989, Vice President from
1985 to 1987, and Treasurer since 1983. Mr. Gottesman became a director in 1983
and is the brother-in-law of John H. Fisher.
Michael Umana joined us in October 1999 as Vice President, Finance and Chief
Financial Officer. From 1997 to 1999, Mr. Umana served as Vice President and
Chief Financial Officer of the Analytical Instrument Business Unit, at
PerkinElmer, Inc., a high technology manufacturer. Prior to 1997, Mr. Umana held
various auditing and consulting positions, the most recent being Senior Manager,
Business Consulting, at Arthur Andersen LLP, a professional services company
from 1985 to 1997. Mr. Umana is a Certified Public Accountant.
Arthur E. Rogers, Jr. became the President of Saucony North America in January
1998. Mr. Rogers re-joined us as Senior Director of Global Marketing in 1994,
having previously served as Brand Manager from 1990 to 1992. From 1992 to 1994,
Mr. Rogers held various sales and marketing positions at Converse Shoe, Inc., an
athletic shoe company. From 1994 to 1997, Mr. Rogers served as Vice President of
North American Sales and Worldwide Marketing. Prior to joining us, Mr. Rogers
held various sales and marketing positions at Proctor & Gamble, Inc., a
diversified consumer products company.
Wolfgang Schweim became the President of Saucony International in January 1998
after serving as President of our athletic footwear division from June 1994 to
January 1998. From 1993 to 1994, Mr. Schweim served as Managing Director for
Saucony Europe. From 1989 to 1993, Mr. Schweim was the German Managing Director
and Marketing Sales Manager for Europe at Asics, an athletic shoe manufacturer.
Prior to 1989, Mr. Schweim worked in sales and marketing positions with various
shoe manufacturers, including Nike International, Le Coq Sportif and Adidas AG.
Kenneth W. Graham became our Senior Vice President of Research and Development
in January 1998 after serving as Senior Vice President of Research and
Development/Manufacturing since 1996. Mr. Graham previously served as our Vice
President of Research and Development/Manufacturing from 1991 to 1994. Mr.
Graham joined us in 1984. Prior to joining us, Mr. Graham worked for seven years
with New Balance Athletic Shoe, Inc.
Roger P. Deschenes has served as Vice President, Controller and Chief Accounting
Officer since August 1997, after having served as Controller and Chief
Accounting Officer from October 1995 to August 1997. Mr. Deschenes joined us in
1990 as Corporate Accounting Manager. He was employed at Allen-Bradley Company,
a subsidiary of Rockwell International, Corp., from 1987 to 1990 as Financial
and Cost Reporting Supervisor. Mr. Deschenes is a Certified Management
Accountant.
Daniel J. Horgan became Vice President of Operations in September 1995 after
serving as Senior Director of Operations from September 1994 to September 1995.
Mr. Horgan joined us in 1982 as Manager of Import and Export Operations, served
as Product Procurement and Distribution Manager from 1985 to 1988, Manager of
Production from 1988 to 1992, and Director of International Trade from 1992 to
1994.
Andrew M. James joined us in February 1984. He served as Accounting Manager from
1984 to 1988; Assistant Controller from 1989 to 1993; Senior Director of
Information Systems from 1994 to 1997; and became Vice President, MIS in 1997.
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 DECEMBER 31, 1999
First quarter..........................................$ 9-3/4 $ 5 $ 9 $ 4-5/8
Second quarter......................................... 24-1/8 6-1/2 24-1/2 6-1/4
Third quarter.......................................... 26 12 28-1/2 12-5/8
Fourth quarter......................................... 19-3/4 10-3/4 19-3/4 10-3/4
FISCAL YEAR ENDED JANUARY 1, 1999
First quarter..........................................$ 5 $ 3-3/4 $ 5 $ 3-7/8
Second quarter......................................... 7-3/4 4-3/8 6-1/8 4-5/16
Third quarter.......................................... 8 4-3/4 8-1/2 4-1/4
Fourth quarter......................................... 7-1/2 3-5/8 6-7/8 4
There were 295 and 281 stockholders of record of the Class A Common Stock and
Class B Common Stock, respectively, on March 10, 2000. Only the Class A Common
Stock has voting rights.
We 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 its business. Our
credit facility agreement restricts the payment or declaration of any dividend.
Each share of Class B Common Stock is entitled to a regular cash dividend equal
to 110% of the regular cash dividend, if any, payable on a share of Class A
Common Stock.
ITEM 6 - SELECTED FINANCIAL DATA
SELECTED INCOME STATEMENT DATA
(in thousands; except per share amounts)
Year Year Year Year Year
Ended Ended Ended Ended Ended
Dec. 31, Jan. 1, Jan. 2, Jan. 3, Jan. 5,
1999 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues............................................... $154,691 $105,810 $ 93,962 $ 91,879 $ 78,840
Operating income (loss)................................ 18,196 5,741 (1,935) 2,345 491
Income (loss) from continuing operations............... 10,319 3,579 (4,032) 1,349 522
Discontinued operations: (2)
Income (loss) from discontinued operations.......... -- -- (394) (243) 863
Gain on disposal of Brookfield business............. -- -- 96 -- --
Net income (loss)...................................... 10,319 3,579 (4,330) 1,106 1,385
Earnings per common share - basic
Income (loss) from continuing operations............ $ 1.64 $ 0.57 $ 0.65) $ 0.22 $ 0.08
Income (loss) from discontinued operations.......... 0.00 0.00 (0.05) (0.04) 0.14
-------- -------- --------- --------- -------
Net income (loss) per common share - basic............. $ 1.64 $ 0.57 $ (0.70) $ 0.18 $ 0.22
======== ======== ========= ========= =======
Earnings per common share - diluted
Income (loss) from continuing operations............ $ 1.57 $ 0.56 $ (0.65) $ 0.22 $ 0.08
Income (loss) from discontinued operations.......... 0.00 0.00 (0.05) (0.04) 0.14
-------- --------- --------- -------- -------
Net income (loss) per common share - diluted .......... $ 1.57 $ 0.56 $ (0.70) $ 0.18 $ 0.22
======== ========= ========= ======== =======
Weighted average common shares and
equivalents outstanding ............................ 6,568 6,373 6,240 6,268 6,244
Cash dividends per share of common stock............... -- -- -- -- --
SELECTED BALANCE SHEET DATA
Dec. 31, Jan. 1, Jan. 2, Jan. 3, Jan. 5,
1999 1999 1998 1997 1996
---- ---- ---- ---- ----
Current assets(1)...................................... $ 66,480 $ 58,963 $ 50,091 $ 57,896 $ 58,984
Current liabilities.................................... 15,403 18,840 13,315 13,963 14,728
Working capital........................................ 51,077 40,123 36,776 43,933 44,256
Total assets........................................... 77,181 69,879 61,316 70,752 69,265
Long-term debt and capitalized lease
obligations, net of current portion................. 292 559 771 4,893 4,205
Stockholders' equity................................... 58,962 48,250 45,072 49,484 48,160
- ---------------------------
(1) Certain marketable securities have been reclassified from current assets to
long-term assets to conform with the 1999 financial statement presentation.
(2) See Note 14 of the Notes to Consolidated Financial Statements regarding
discontinued operations.
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 shares
amounts.
HIGHLIGHTS
Percent Change Increase (Decrease)
----------------------------------
1999 vs. 1998 1998 vs. 1997
------------- -------------
Net sales............................................... 46.6% 12.2%
Gross profit............................................ 57.1 24.4
Selling, general and administrative expenses............ 27.2 7.8
$ Change
Operating income.......................................$ 12,455 $ 7,676
Income before income taxes............................. 12,351 9,038
Net income............................................. 6,740 7,909
Percent of Net Sales
--------------------
1999 1998 1997
---- ---- ----
Gross profit..............................................38.2% 35.6% 32.2%
Selling, general and administrative expenses..............26.8 30.9 32.2
Operating income (loss)...................................11.8 5.5 (2.1)
Income (loss) before income taxes.........................11.4 5.0 (4.1)
Net income.............................................. 6.7 3.4 (4.6)
CONSOLIDATED NET SALES
Net sales increased 47% to $154,058 in fiscal 1999 from $105,074 in fiscal 1998.
The impact of foreign exchange rate changes on sales was negligible. Net sales
increased 12% to $105,074 in 1998 from $93,611 in fiscal 1997. At constant
exchange rates, fiscal 1998 net sales would have been $2,317, or 15%, higher
than fiscal 1997.
On a geographic basis, domestic sales increased $51,664, or 62%, to $135,028 in
fiscal 1999 from $83,364 in fiscal 1998. International sales decreased $2,681,
or 12%, to $19,030 in fiscal 1999 from $21,710 in fiscal 1998. Domestic sales in
fiscal 1998 increased $17,762, or 27%, to $83,364 from $65,602 in fiscal 1997.
International sales decreased $6,299, or 22%, to $21,710 in fiscal 1998 from
$28,009 in fiscal 1997. At constant exchange rates, the international sales
decrease in 1999 would have been 14%.
SAUCONY BRAND SEGMENT
1999 1998 1997
---- ---- ----
Net Sales $131,898 (+53%) $86,332 (+10%) $78,630
Worldwide net sales of Saucony branded footwear and apparel increased 53% to
$131,898 in fiscal 1999 from $86,332 in fiscal 1998 primarily due to an 82% unit
volume growth in the footwear category. The average domestic wholesale selling
price per pair of domestic footwear decreased 14% in fiscal 1999 versus fiscal
1998 due to a higher proportion of more moderately-priced Originals and special
make-up footwear in our domestic product mix.
Domestic net sales increased 70% to $115,118 in fiscal 1999 from $67,774 in
fiscal 1998. Domestic sales increased primarily due to the continued strong
demand for the Originals footwear which accounted for 58% of domestic footwear
unit volume for the year and, to a lesser extent, increased special make-up and
technical footwear volume.
International net sales decreased 10% to $16,780 in fiscal 1999 from $18,558 in
fiscal 1998 due primarily due to the cessation of Australian operations and
decreased distributor unit volume, partially offset by increased direct sales by
us in Canada and Western Europe due to increased unit volume in these two
geographic areas.
Worldwide net sales of Saucony branded footwear and apparel increased 10% to
$86,332 in fiscal 1998 from $78,630 in fiscal 1997 primarily due to 12% unit
volume growth in the footwear category. The average domestic wholesale selling
price per pair of technical footwear increased 4% versus fiscal 1997, but a
higher proportion of more moderately-priced Jazz Originals in our domestic
product mix contributed to an 8% decline in overall selling prices compared to
1997.
Domestic net sales increased 21% to $67,774 in fiscal 1998 from $56,050 in
fiscal 1997. Domestic sales benefited from the introduction of Jazz Originals in
the second quarter of fiscal 1998, which accounted for 21% of domestic footwear
unit volume for the year.
International net sales decreased 18% to $18,558 in fiscal 1998 from $22,580 in
fiscal 1997 primarily due to the cessation of Australian operations in July 1998
and reduced distributor unit volumes, partially offset by higher direct sales by
us in Canada and Western Europe.
OTHER PRODUCTS SEGMENT
1999 1998 1997
---- ---- ----
Net Sales $22,160 (+18%) $18,742 (+25%) $14,981
The Other Products segment consists of our Hind athletic apparel, Quintana Roo
and Merlin bicycles and frames, Real Design bicycle components and Quintana Roo
wetsuits, Spot-bilt coaches shoes and eight factory outlet stores. Each of these
businesses represented less than 10% of our revenues and, in the aggregate,
represented 14% of our net sales in fiscal 1999.
Worldwide sales of Other Products increased 18% to $22,160 in fiscal 1999 from
$18,742 in fiscal 1998 due to increased domestic net sales. Other Products
segment domestic sales increased 28% to $19,910 in fiscal 1999 from $15,590 in
fiscal 1998 due primarily to increased unit volume for our Hind apparel brand
and, to a lesser extent, increased unit volume in both bicycles and related
products. This sales increase also reflects increased retail sales at our outlet
division due to the addition of two factory outlet stores. International net
sales of Other Products decreased 29% to $2,250 in fiscal 1999 from $3,152 in
fiscal 1998 due to the cessation of operations in Australia.
Worldwide sales of Other Products increased 25% to $18,742 in fiscal 1998 from
$14,981 in fiscal 1997 due to increased domestic net sales. Other Products
segment domestic sales increased 63% in fiscal 1998 to $15,590 from $9,552 in
fiscal 1997, reflecting significantly higher revenues in both bicycles and
related products as well as higher sales of our Hind apparel brand. The increase
in net sales in fiscal 1998 also reflected the acquisition of the Merlin bicycle
business in February 1998 and of the Real Design business in August 1998.
International net sales of Other Products decreased 42% to $3,152 in fiscal 1998
from $5,429 in fiscal 1997 due to the cessation of Australian operations in July
1998.
COSTS AND EXPENSES
For the 1999 fiscal year, the gross margin improved 2.6% to 38.2% from 35.6% in
fiscal 1998. The improvement in the fiscal 1999 margin was due to a change in
product mix, purchasing economies, lower levels of product returns and markdowns
and lower levels of closeout product sales. For the 1998 fiscal year, the gross
margin improved 3.4% to 35.6% from 32.2% in fiscal 1997 due to the favorable
impact of reduced levels of close-out goods and other product markdowns in
fiscal 1998. Gross margins in fiscal 1997 were negatively impacted by declines
in gross margin realized by our Australian subsidiary on close-out sales during
the fourth quarter of fiscal 1997, in addition to the Australian inventory
write-down of $1,340 taken in the fourth quarter of fiscal 1997.
Our SG&A expense ratio improved to 26.8% of net sales in fiscal 1999 from 30.9%
in fiscal 1998. The improvement in the ratio resulted from our continued
management of advertising, selling and administrative expenses below the rate of
sales growth. In absolute dollars, selling, general and administrative expenses
increased to $41,261 in fiscal 1999, or 27%, from $32,446 in fiscal 1998.
Increased spending in fiscal 1999 was attributable to increased
performance-based incentive compensation, increased staffing, an increase in the
provision for doubtful accounts due primarily to the bankruptcy filing by Just
for Feet, Inc., increased volume driven advertising and selling expenses and
increased athlete and event sponsorship.
For the 1998 fiscal year, the SG&A expense ratio improved 1.3% to 30.9% of net
sales versus 32.2% in fiscal 1997. The improvement in the ratio resulted from
cost management on selling and administrative expenses below the rate of sales
growth and reduced spending on advertising and promotions. In absolute dollars,
selling, general and administrative expenses increased 8% to $32,446 in fiscal
1998 from $30,110 in fiscal 1997. Increased spending in fiscal 1998 was due to
increased variable selling expenses, increased staffing and incentive
compensation, increased professional fees, as well as increased selling and
administrative expenses associated with the Hind apparel brand and the Quintana
Roo and Merlin businesses.
No non-recurring charges were recorded in either fiscal 1999 or fiscal 1998. In
fiscal 1997, we recorded a non-recurring charge of $850 ($508 after-tax, or
$0.08 per diluted share) to recognize the impairment of an inactive distribution
facility.
Also, in fiscal 1997, we wrote down the assets of our Australian subsidiary to
their net realizable values. This resulted in our recording a non-recurring
pre-tax charge of $2,766 (or $0.44 per share). Inventory, accounts receivable
and other assets were written down by $1,340, $858 and $568, respectively. The
inventory write-down was included in cost of sales. In addition we also recorded
a deferred tax valuation allowance of $999 ($0.16 per diluted share) relating to
the loss carryforwards of our Australian subsidiary, which are not expected to
be realized.
Net interest expense totaled $683 and $707 in fiscal years 1999 and 1998,
respectively. Interest expense decreased 3% in fiscal 1999 due to lower average
debt levels and, to a lesser extent, lower interest rates compared to fiscal
1998. In fiscal 1998, net interest expense decreased 13% to $707 from $817 in
fiscal 1997 due to lower average debt levels, due primarily to the paydown of
our senior debt, and to a lesser extent, lower interest rates compared to 1997.
INCOME BEFORE TAXES
Segment 1999 1998 1997
------- ---- ---- ----
Saucony Brand $ 18,965 $ 5,497 $ (2,946)
Other Products (1,376) (259) (854)
---------- --------- ----------
Consolidated $ 17,589 $ 5,238 $ (3,800)
========= ======== ==========
Income before tax improved by $12,351 in fiscal 1999 to $17,589 compared to
$5,238 in fiscal 1998, due primarily to the significant increase in pre-tax
income realized by the domestic Saucony Brand Segment and achieving profitable
international operations. The Other Products Segment recorded a pre-tax loss of
$1,376 in fiscal 1999 compared to a loss of $259 in fiscal 1998. The
deterioration in the Other Products Segment pre-tax income in fiscal 1999 was
due principally to losses incurred at Quintana Roo, due in large part to
inventory writedowns and a high level of administrative overhead.
Income before taxes was $5,238 in fiscal 1998, or $9,038 higher, than the loss
of $3,800 incurred in 1997. This improvement reflected higher income in the
domestic Saucony Brand Segment and significantly reduced losses compared to
fiscal 1997 related to the cessation of the our Australian operations. The Other
Products Segment recorded a loss before taxes of $259 in 1998 versus a loss of
$854 in 1997. The reduction in this loss reflected lower losses by our
Australian subsidiary and lower Hind related losses in fiscal 1998 compared to
fiscal 1997.
INCOME TAXES
The provision for income taxes increased to $7,194 in fiscal 1999 from $1,629 in
fiscal 1998, due primarily to an increase in domestic pre-tax income and a
higher marginal domestic tax rate in fiscal 1999. The effective tax rate
increased by 9.8% to 40.9% in fiscal 1999 from 31.1% in fiscal 1998 due to a
shift in the composition of domestic and foreign pre-tax earnings and the higher
marginal domestic tax rate.
In fiscal 1998, the provision for income taxes increased to $1,629 from $355 in
fiscal 1997, due primarily to an increase in domestic pre-tax income over fiscal
1997. The effective tax rate increased by 21.8% to 31.1% in fiscal 1998 from
9.3% in fiscal 1997 due primarily to a shift in the composition of foreign and
domestic pre-tax profits and losses.
NET INCOME
Net income for fiscal 1999 was $10,319, or $1.57 per diluted share, compared to
$3,579, or $0.56 per diluted share, in fiscal 1998. Weighted average common
shares and equivalent shares used to calculate diluted earnings per share were
6,568 and 6,373, respectively, in fiscal 1999 and 1998. Fiscal 1998 net income
was $3,579 compared to a net loss of $4,330 in fiscal 1997. Diluted earnings per
share was $0.56 compared to a loss of $0.70 per diluted share in fiscal 1997.
Weighted average common shares and equivalent shares used to calculate diluted
earnings per share were 6,373 and 6,240, respectively, in fiscal 1998 and fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 1999
As of December 31, 1999, our cash and cash equivalents totaled $3,515, a
decrease of $1,980 from January 1, 1999. The decrease was due primarily to a
decrease of $5,429 in borrowings against our credit facilities, the repayment of
$375 of long-term debt, the repurchase of shares of the our Common Stock of $514
and $1,661 of cash expended to acquire capital assets. Offsetting this cash
outflow was the generation of $5,494 of cash from operations and the receipt of
$503 from the issuance of shares of our Common Stock.
The increase in accounts receivable of $4,368, net of the provision for bad debt
and discounts (including a reserve of $1,525 provided for a receivable due from
Just for Feet, Inc.), is due primarily to increased net sales of our Saucony
products in the fourth quarter of fiscal 1999. Our days sales outstanding for
our accounts receivable decreased to 57 days in fiscal 1999 from 68 days in
fiscal 1998 due to a reduction in domestic terms offered on sales of Originals
footwear and the reserve provided for the receivable due from Just for Feet,
Inc. Inventories increased $4,700 in fiscal 1999 due to increased domestic and
international Saucony footwear inventory and increased inventory at our factory
outlet stores, reflecting the addition of two stores in 1999. Our inventory
turns ratio increased to 2.9 turns in fiscal 1999 from 2.5 turns in fiscal 1998.
The number of days sales in inventory decreased 19% to 135 days in fiscal 1999
from 167 days in fiscal 1998.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting our operating cash flows in fiscal
1999 included an increase of $994 in accrued letters of credit (due to increased
in-transit inventory), an increase of $3,337 in accrued expenses (due to
increased performance-based compensation accruals, increased accruals for
advertising and promotional expenses and increased levels of administrative
spending), a decrease of $1,242 in accounts payables (due to the timing of
inventory purchases) and a decrease of $801 in accrued income taxes payable due
to domestic tax payments made in the fourth quarter of 1999.
FISCAL 1998
As of January 1, 1999, our cash and cash equivalents totaled $5,495, an increase
of $1,063 from January 2, 1998. The increase was due primarily to net cash from
operating activities of $2,477 and increased borrowings against our domestic
credit facility, offset by $1,257 of capital expenditures and cash outlays for
the acquisition of substantially all of the net assets of Merlin Metalworks,
Inc. and Real Product Design, Inc. for $863, the repurchase of shares of our
Common Stock of $611, the receipt of $297 from the issuance of shares of our
Common Stock and the repayment of $2,364 of long-term debt.
The increase in accounts receivable of $810, net of the provision for bad debt
and discounts, was due primarily to increased net sales of our Saucony, Hind and
bicycle products in the fourth quarter of fiscal 1998. Our days sales
outstanding for our accounts receivable decreased to 68 days in fiscal 1998 from
73 days in fiscal 1997. Inventories increased $7,002 in fiscal 1998 due
primarily to the buildup of Saucony footwear and Hind apparel inventory in the
latter part of the fourth quarter of fiscal 1998 and increased bicycle inventory
associated with the acquisition and expansion of the Merlin product line. The
inventory increase was due in part to the acquisition of inventory in response
to the significant increase in "futures" orders for Originals footwear models.
As a consequence of the fiscal 1998 year-end inventory increase, our inventory
turns ratio decreased to 2.5 turns in fiscal 1998 from 2.6 turns in fiscal 1997.
The number of days sales in inventory increased 24% to 167 days in fiscal 1998
from 135 days in fiscal 1997.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting our operating cash flows in fiscal
1998 included a decrease of $176 in prepaid expenses (due to a decrease in
advance payments for inventory and certain administrative expenses), an increase
of $1,589 in accrued letters of credit (due to increased in-transit inventory),
an increase of $714 in accounts payable (due to increased inventory purchases),
an increase of $1,921 in accrued expenses (due to increased performance-based
compensation accruals and increased income tax accruals resulting from higher
pre-tax earnings in fiscal 1998).
CREDIT FACILITY
We maintain a revolving credit line of $20,000 for cash borrowings and letters
of credit. As of March 10, 2000, $7,504 was available for borrowing under the
credit facility.
Several of the Company's foreign subsidiaries maintain credit facilities in the
aggregate principal amount of approximately $3,514. At February 25, 2000, an
aggregate of approximately $2,319 was available for borrowing under the
facilities of our foreign subsidiaries. See Note 9 to the Consolidated Financial
Statements.
CAPITAL EXPENDITURES COMMITMENTS
At December 31, 1999, our commitments for capital expenditures were not
material.
OVERALL LIQUIDITY
Our liquidity is contingent upon a number of factors, principally our future
operating results. Management believes that our current cash and cash
equivalents, credit facilities and internally generated funds are adequate to
meet our working capital requirements and to fund our capital investment needs
and debt service payments.
INFLATION AND CURRENCY RISK
The effect of inflation on our results of operations over the past three years
has been minimal. The impact of currency fluctuation on our purchase of
inventory from foreign suppliers has been minimal as the transactions were
denominated in U.S. dollars. We are, however, subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. We have entered into forward
foreign exchange contracts to minimize certain transaction currency risk.
YEAR 2000
We have not experienced any problems with our computer systems relating to
distinguishing twenty-first century dates from twentieth century dates, which
generally are referred to as year 2000 problems. We are also not aware of any
material year 2000 problems with our clients or vendors. Accordingly, we do not
anticipate incurring material expenses or experiencing any material operational
disruptions as a result of any year 2000 problems in the future. We incurred
year 2000 costs of approximately $20 and $177 during fiscal 1998 and 1999,
respectively, in prevention costs relating to anticipated year 2000 problems.
ACCOUNTING PRONOUNCEMENTS
SFAS 133 AND SFAS 137
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (SFAS 133) (as amended by Financial Accounting Standards No. 137, a
deferral of the effective date of FASB statement No. 133 (SFAS 137)), which is
effective for fiscal quarters of fiscal years commencing after June 15, 2000,
with early adoption permitted. SFAS 133 defines the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. Upon adoption of SFAS 133, all derivatives
must be recognized on the balance sheet at their then fair value and any
deferred gains or losses remaining on the balance sheet under previous
hedge-accounting rules must be removed from the balance sheet. In the period of
adoption, the transition adjustments may effect current earnings and may effect
other comprehensive income. SFAS 133 requires companies to recognize adjustments
to the fair value of derivatives that are not hedges currently in earnings when
they occur. For derivatives that qualify as hedges, changes in the fair value of
the derivatives can be recognized currently in earnings, along with an
offsetting adjustment against the basis of the underlying hedged item or be
deferred in other comprehensive income. The Company is assessing the impact of
the provisions of SFAS 133 on its hedging activities, which are currently
limited to forward foreign currency exchange contracts. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
SFAS 133 will have a significant effect on current earnings or on the Company's
financial position, however, at this time, the effect of the adoption of SFAS
133 on the Company's future earnings and financial position cannot be estimated.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated by reference in
this annual report on Form 10-K contain forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will," and "would," or similar
words. You should read statements that contain these words carefully because
they discuss future expectations, contain projections of future results of
operations or of financial position or state other "forward-looking"
information. The important factors listed below as well as any cautionary
language in this annual report on Form 10-K, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations described in these forward-looking statements. You should
be aware that the occurrence of the events described in the risk factors below
and elsewhere in this annual report on Form 10-K could have an adverse effect on
our business, results of operations and financial position.
Any forward-looking statements in this annual report on Form 10-K and the
documents incorporated by reference in this annual report on Form 10-K are not
guarantees of future performance, and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements,
possibly materially. We disclaim any duty to update any forward-looking
statements, all of which are expressly qualified by the statement in this
section.
CERTAIN OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
WE FACE INTENSE COMPETITION
Competition is intense in the markets in which we sell our products. We compete
with a large number of other companies, both domestic and foreign, several of
which have diversified product lines, well-known brands and financial,
distribution and marketing resources substantially greater than ours. The
principal competitors for our Saucony products are Nike, New Balance and ASICS.
The principal competitors for our Hind products are Nike, Pearl Izumi and TYR.
The principal competitors for our Quintana Roo, Merlin and Real Design products
are Cannondale, Trek and Litespeed. We compete based on a variety of factors,
including price, quality, product design, brand image, marketing and promotion
and ability to meet delivery commitments to retailers. A technological
breakthrough or marketing or promotional success by one of our competitors could
adversely affect our competitive position. The intensity of the competition that
we face constitutes a significant risk to our business.
WE DEPEND ON FOREIGN SUPPLIERS
A number of manufacturers located in Asia, primarily in China, Taiwan and
Thailand, supply products and product components to us. During fiscal 1999, one
of our suppliers, located in China, accounted for approximately 62% of our total
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, trade limitations
imposed by the United States or foreign governments and political and labor
instability. In particular, 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, apparel and bicycle
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, as well as the inability to sell such products through our own
factory 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; and,
o general economic conditions.
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 the results of operations for a particular
quarter.
Our current expense levels are based in part on our expectations of future
revenue. As a result, net income for a given period could be disproportionately
affected by any reduction in revenue. It is possible that in some future quarter
our revenue or operating results will be below the expectations of stock market
securities analysts and investors. If that were to occur, the market price of
our common stock could be materially adversely affected.
OUR REVENUES ARE SUBJECT TO FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
We conduct operations in various international countries and a portion of our
sales is transacted in local currencies. As a result, our revenues are subject
to foreign exchange rate fluctuations. From time to time, our financial results
have been adversely affected by fluctuations in foreign currency exchange rates.
We enter into forward currency exchange contracts to protect us from the effect
of changes in foreign exchange rates. However, our efforts to reduce currency
exchange losses may not be successful and currency exchange rates may have an
adverse impact on our future operating results and financial condition.
OUR BUSINESS IS AFFECTED BY SEASONAL CONSUMER BUYING PATTERNS
The footwear, apparel and bicycle industries are generally characterized by
significant seasonality of sales and results of operations. Sales of our Saucony
brand products have historically been seasonal in nature, with the strongest
sales generally occurring in the first and third quarters. In addition, sales of
our Hind brand products are generally strongest in the third and fourth quarters
due to the popularity of the Hind winter apparel collection. We believe that
sales of our products will continue to follow this seasonal cycle. Therefore,
our results of operations for any one quarter may not necessarily be indicative
of the results that we may achieve for a full fiscal year or any future quarter.
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 may be material in
future periods.
WE NEED EFFECTIVE MARKETING AND ADVERTISING PROGRAMS
Because consumer demand for our products is heavily influenced by brand image,
our business requires substantial investments in marketing and advertising.
Failure of such investments to achieve the desired effect in terms of increased
retailer acceptance or consumer purchase of our products could adversely affect
our financial results. In addition, we believe that our success depends in part
upon our ability to periodically launch new marketing and advertising programs.
If we are unable to successfully design or execute new marketing and
advertising, or if such programs are ineffective, our business will suffer.
WE DEPEND ON CERTAIN KEY CUSTOMERS
During 1999, we derived approximately 15% of our consolidated revenue from sales
to a single major customer, Venator, which operates Foot Locker, Lady Foot
Locker, Kids Foot Locker and Eastbay Running stores. We anticipate that our
results of operations in any given period will depend to a significant extent
upon sales to major customers. The loss of or a reduction in the level of sales
to one or more major customers could have a material adverse effect on our
business, financial condition and results of operations. Furthermore, if a major
customer were unable or unwilling to proceed with a large order or to pay us for
a large order on a timely basis, our business, financial condition and results
of operations could be materially adversely affected.
CHANGES IN GENERAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT OUR BUSINESS
Our business is sensitive to consumers' spending patterns, which in turn are
subject to prevailing regional and national economic conditions, such as
interest and taxation rates, employment levels and consumer confidence. Adverse
changes in these economic factors may restrict consumer spending, thereby
negatively affecting our growth and profitability.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
exchange rates. Our objective in managing our exposure to interest rates and
foreign currency rate changes is to limit impact of the 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 against short-term fluctuations in financial
results.
We have calculated the effect of a 10% change in interest rates over a month
period 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 are incorporated herein by this
reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Registrant" in PART I hereof, and the remainder is
contained in the Company's Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on May 18, 2000 (the "2000 Proxy Statement") under the
captions "ELECTION OF DIRECTORS" and "SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" and is incorporated herein by this reference. We expect to
file the 2000 Proxy Statement within 120 days after the close of the fiscal year
ended December 31, 1999.
Officers are elected on an annual basis and serve at the discretion of the Board
of Directors.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is contained under the captions
"Compensation of Directors," "Compensation of Executive Officers" and
"Compensation Committee Interlocks and Insider Participation" in the 2000 Proxy
Statement and is incorporated herein by this reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the 2000 Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by this reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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:
- Reports of Independent Accountants
- Consolidated balance sheets at December 31, 1999 and January 1,
1999
- Consolidated statements of income for the years ended December
31, 1999, January 1, 1999 and January 2, 1998
- Consolidated statements of stockholders' equity for the years
ended December 31, 1999, January 1, 1999 and January 2, 1998
- Consolidated statements of cash flows for the years ended
December 31, 1999, January 1, 1999 and January 2, 1998
- Notes to the Consolidated Financial Statements
2. Index to Consolidated Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included
in the Consolidated Financial Statements or notes thereto.
Separate financial statements of the Company have been omitted
since it is primarily an operating Company and its subsidiaries
included in the Consolidated Financial Statements do not have a
minority equity interest or indebtedness to any person other than
the Company in an amount which exceeds 5% of the total assets as
shown by the Consolidated Financial Statements as filed herein.
3. Index to Exhibits
The exhibits filed as part of this Form 10-K are listed on the
Exhibit Index immediately preceding such exhibits, which Exhibit
Index is incorporated herein by reference.
(b) 1. Reports on Form 8-K
-------------------
No Current Reports on Form 8-K were filed in the fourth quarter of
fiscal 1999.
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: March 29, 2000
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, March 29, 2000
- ------------------------- Chief Executive Officer
John H. Fisher and Director
(Principal Executive Officer)
/s/ Charles A. Gottesman Executive Vice President, March 29, 2000
- ------------------------- Chief Operating Officer and
Charles A. Gottesman Director
/s/ Michael Umana Vice President, Finance and March 29, 2000
- ------------------------- Chief Financial Officer
Michael Umana (Principal Financial Officer)
/s/ Roger P. Deschenes Vice President, Controller and March 29, 2000
- ------------------------- Chief Accounting Officer
Roger P. Deschenes (Principal Accounting Officer)
/s/ John J. Neuhauser Director March 29, 2000
- -------------------------
John J. Neuhauser
/s/ Robert J. LeFort, Jr. Director March 29, 2000
- -------------------------
Robert J. LeFort, Jr.
/s/ John M. Connors, Jr. Director March 29, 2000
- -------------------------
John M. Connors, Jr.
/s/ Phyllis H. Fisher Director March 29, 2000
- -------------------------
Phyllis H. Fisher
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
Saucony, Inc.
In our opinion, based on our audits and the report of the other
auditors, 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 December 31, 1999
and January 1, 1999 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles generally accepted in the United
States. 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 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 did not audit the
financial statements of Saucony SP Pty. Ltd., for the year ended January 2,
1998, which statements reflect total revenues of eleven percent of consolidated
revenues for the year ended January 2, 1998. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Saucony SP
Pty. Ltd.(before adjustments to U.S. GAAP), is based solely on the report of the
other auditors. We also audited the translation of the financial statements of
Saucony SP Pty. Ltd., in Australian dollars to U.S. dollars as well as other
adjustments required to ensure that the financial statements are in accordance
with U.S. GAAP for the year ended January 2, 1998. We believe that our audits
and the report of the other auditors provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 7, 2000
Grant Thornton
Independent Audit Report to the Members of Saucony S.P. Pty. Ltd.
Scope
We have audited the financial statements of Saucony S.P. Pty. Ltd., comprising
the Australian statutory accounts (which are not separately presented herein),
for the year ended 2 January 1998. The company's directors are responsible for
the financial statements. We have conducted an independent audit of these
financial statements in order to express an opinion on them to the members of
the company.
Our audit has been conducted in accordance with Australian auditing standards,
which are substantially the same as auditing standards generally accepted in the
United States, to provide reasonable assurance as to whether the financial
statements are free of material misstatement. Our procedures included
examination, on a test basis, of evidence supporting the amounts and other
disclosures in the financial statements, and the evaluation of accounting
policies and significant accounting estimates. These procedures have been
undertaken to form an opinion as to whether, in all material respects, the
financial statements are presented fairly in conformity with generally accepted
accounting principles and so as to present a view which is consistent with our
understanding of the company's financial position, the results of its operations
and its cash flows.
The audit opinion expressed in this report has been formed on the above basis.
Audit Opinion
In our opinion, the financial statements of Saucony S.P. Pty. Ltd. are properly
drawn up so as to present fairly, in all material respects, the company's
financial position as at 2 January 1998 and the results of their operations and
their cash flows for the year ended 2 January 1998 in accordance with accounting
principles generally accepted in Australia which differ in certain aspects from
those followed in the United States.
Going Concern Basis of Accounting
Without qualification to the opinion expressed above, attention is drawn to Note
1 of the financial statements. Notwithstanding the deficiency of working capital
and net assets, the financial statements have been prepared on a going concern
basis as the directors have received an undertaking of continued financial
support from the directors of Hyde Athletic Industries, Inc. and the directors
believe that such financial support will be continued to be made available.
GRANT THORNTON
Chartered Accountants
/s/ B R Gordon
B R GORDON
Partner
2 April 1998
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands, except share amounts)
December 31, January 1,
1999 1999
---- ----
Current assets:
Cash and cash equivalents.........................................................$ 3,515 $ 5,495
Accounts receivable, net of allowance for doubtful accounts
and discounts (1999, $3,534; 1998, $1,880)...................................... 23,968 19,473
Inventories ...................................................................... 35,270 31,072
Deferred income taxes............................................................. 2,140 1,605
Prepaid expenses and other current assets......................................... 1,587 1,318
---------- ---------
Total current assets............................................................ 66,480 58,963
---------- ---------
Property, plant and equipment, net of accumulated depreciation and amortization........ 8,279 8,123
---------- ---------
Other assets:
Goodwill, net of accumulated amortization (1999, $352; 1998, $205) ............... 1,327 1,474
Deferred charges, net of accumulated amortization (1999, $1,569; 1998, $1,472).... 271 223
Long-term accounts and notes receivable........................................... 7 82
Marketable securities............................................................. 307 179
Deferred income taxes............................................................. 99 353
Other............................................................................. 411 482
---------- ---------
Total other assets.............................................................. 2,422 2,793
---------- ---------
Total assets...........................................................................$ 77,181 $ 69,879
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Letters of credit payable...........................................................$ 2,282 $ 2,790
Notes payable....................................................................... 1,928 7,568
Current portion of long-term debt and capital lease obligations..................... 375 324
Accounts payable.................................................................... 3,615 3,454
Accrued expenses.................................................................... 7,203 4,704
---------- ---------
Total current liabilities......................................................... 15,403 18,840
---------- ---------
Long-term obligations:
Long-term debt, net of current portion............................................ 20 36
Capital lease obligations, net of current portion .................................. 272 523
Deferred income taxes............................................................... 2,045 1,851
Other long-term obligations......................................................... 171 157
---------- ---------
Total long-term obligations....................................................... 2,508 2,567
---------- ---------
Commitments and contingencies.......................................................... -- --
Minority interest in consolidated subsidiaries......................................... 308 222
---------- ---------
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 1999, 2,711,127; 1998, 2,707,027)......................................... 904 902
Class B, $.333 par; authorized 20,000,000 shares
(issued 1999, 3,955,309; 1998, 3,826,805)......................................... 1,318 1,276
Additional paid-in capital.......................................................... 16,815 15,921
Retained earnings................................................................... 42,679 32,360
Accumulated other comprehensive income.............................................. (564) (528)
----------- ----------
61,152 49,931
---------- ---------
Less:
Common stock held in treasury, at cost (1999, 346,900 shares; 1998, 305,400 shares). (2,179) (1,665)
Unearned compensation............................................................. (11) (16)
----------- ----------
58,962 48,250
---------- ---------
Total liabilities and stockholders' equity.............................................$ 77,181 $ 69,879
========== =========
See notes to Consolidated Financial Statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998
(in thousands, except share amounts)
1999 1998 1997
---- ---- ----
Net sales................................................................$ 154,058 $ 105,074 $ 93,611
Other revenue............................................................ 633 736 351
---------- ---------- ----------
Total revenue............................................................ 154,691 105,810 93,962
---------- ---------- ----------
Costs and expenses:
Cost of sales......................................................... 95,234 67,623 63,511
Selling expenses...................................................... 22,511 17,507 16,698
General and administrative expenses................................... 18,750 14,939 13,412
Writedown of Australian assets........................................ -- -- 1,426
Writedown of impaired real estate .................................... -- -- 850
---------- ---------- ----------
Total costs and expenses............................................ 136,495 100,069 95,897
---------- ---------- ----------
Operating income (loss).................................................. 18,196 5,741 (1,935)
Non-operating income (expense):
Interest, net......................................................... (683) (707) (817)
Foreign currency...................................................... (88) 124 (1,127)
Other................................................................. 164 80 79
---------- ---------- ----------
Income (loss) before income taxes and minority interest.................. 17,589 5,238 (3,800)
Provision for income taxes............................................... 7,194 1,629 355
Minority interest in income (loss) of consolidated subsidiaries.......... 76 30 (123)
---------- ---------- -----------
Income (loss) from continuing operations................................. 10,319 3,579 (4,032)
Discontinued operations (net of tax):
Loss from discontinued operations..................................... -- -- (394)
Gain on disposal of Brookfield business............................... -- -- 96
---------- ---------- ----------
Net income (loss)........................................................$ 10,319 $ 3,579 $ (4,330)
========== ========== ===========
Per share amounts:
Earnings per common share - basic:
Income (loss) from continuing operations..............................$ 1.64 $ 0.57 $ (0.65)
Income (loss) from discontinued operations............................ 0.00 0.00 (0.05)
---------- ---------- -----------
Net income (loss) per common share - basic...............................$ 1.64 $ 0.57 $ (0.70)
========== ========== ===========
Earnings per common share - diluted:
Income (loss) from continuing operations..............................$ 1.57 $ 0.56 $ (0.65)
Income (loss) from discontinued operations............................ 0.00 0.00 (0.05)
---------- ---------- -----------
Net income (loss) per common share - diluted.............................$ 1.57 $ 0.56 $ (0.70)
========== ========== ===========
See notes to Consolidated Financial Statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998
(in thousands, except share amounts)
Common Stock Paid-In Retained
Class A Class B Capital Earnings
------- ------- ------- --------
Balance, January 3, 1997.....................................$ 902 $ 1,243 $ 15,581 $33,111
Issuance of common stock, stock option exercise.............. -- 5 34 --
Cancellation of below market options......................... -- -- (15) --
Issuance of below market options and
restricted stock.......................................... -- -- 52 --
Amortization of unearned compensation........................ -- -- -- --
Net loss..................................................... -- -- -- (4,330)
Foreign currency translation adjustments..................... -- -- -- --
------ ------- -------- -------
Balance, January 2, 1998.....................................$ 902 $ 1,248 $ 15,652 $28,781
Issuance of common stock, stock options exercised ........... -- 28 269 --
Amortization of unearned compensation........................ -- -- -- --
Repurchasing of common stock, at cost........................ -- -- -- --
Net income................................................... -- -- -- 3,579
Foreign currency translation adjustments..................... -- -- -- --
------ ------- -------- -------
Balance, January 1, 1999.....................................$ 902 $ 1,276 $ 15,921 $32,360
Issuance of common stock, stock options exercised............ 2 42 459 --
Issuance of non-qualified stock options...................... -- -- 113 --
Tax benefit of non-qualified stock options................... -- -- 322 --
Amortization of unearned compensation........................ -- -- -- --
Repurchase of common stock, at cost.......................... -- -- -- --
Net income................................................... -- -- -- 10,319
Foreign currency translation adjustments..................... -- -- -- --
------ ------- -------- -------
Balance, December 31, 1999...................................$ 904 $ 1,318 $ 16,815 $42,679
====== ======= ======== =======
See notes to Consolidated Financial Statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998
(in thousands, except share amounts)
Accumulated
Other Total
Treasury Stock Unearned Comprehensive Stockholders'
Shares Amount Compensation Income Equity
------ ------ ------------ ------ ------
Balance, January 3, 1997............................. 198,400 $ (1,054) $ (65) $ (234) $ 49,484
Issuance of common stock, stock option exercise...... -- -- -- -- 39
Cancellation of below market options................. -- -- 15 -- --
Issuance of below market options and
restricted stock.................................. -- -- (52) -- --
Amortization of unearned compensation................ -- -- 62 -- 62
Net loss ............................................ -- -- -- -- (4,330)
Foreign currency translation adjustments............. -- -- -- (183) (184)
-------- -------- ------ -------- ----------
Balance, January 2, 1998............................. 198,400 $ (1,054) $ (40) $ (417) $ 45,072
Issuance of common stock, stock options exercised.... -- -- -- -- 297
Amortization of unearned compensation................ -- -- 24 -- 24
Repurchase of common stock, at cost.................. 107,000 (611) -- -- (611)
Net income........................................... -- -- -- -- 3,579
Foreign currency translation adjustments............. -- -- -- (111) (111)
-------- -------- ------ -------- ----------
Balance, January 1, 1999............................. 305,400 $ (1,665) $ (16) $ (528) $ 48,250
Issuance of common stock, stock options exercised.... -- -- -- -- $ 503
Issuance of non-qualified stock options ............. -- -- -- -- 113
Tax benefit of non-qualified stock options........... -- -- -- -- 322
Amortization of unearned compensation................ -- -- 5 -- 5
Repurchase of common stock, at cost.................. 41,500 (514) -- -- (514)
Net income........................................... -- -- -- -- 10,319
Foreign currency translation adjustments............. -- -- -- (36) (36)
-------- -------- ------ -------- ----------
Balance, December 31, 1999........................... 346,900 $ (2,179) $ (11) $ (564) $ 58,962
======== ========= ======= ======== =========
See notes to Consolidated Financial Statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, JANUARY 1, 1999 AND JANUARY 2, 1998
(in thousands)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss).......................................................$ 10,319 $ 3,579 $ (4,330)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Writedown of Australian assets........................................ -- -- 2,766
Discontinued operations............................................... -- -- 298
Depreciation and amortization......................................... 1,862 1,836 1,594
Provision for bad debt and discounts.................................. 6,880 4,908 4,887
Deferred income tax provision (benefit)............................... (99) 461 (1,269)
Writedown of impaired real estate..................................... -- -- 850
Compensation from stock grants and options............................ 113 -- --
Minority interest in income (loss) of consolidated subsidiaries....... 76 30 (123)
Other................................................................. 45 (17) (29)
Changes in operating assets and liabilities, net of effects of
acquisitions, dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Accounts and notes receivable........................................... (11,248) (5,718) (6,711)
Inventories............................................................. (4,700) (7,002) (1,301)
Prepaid expenses and other current assets............................... (42) 176 (539)
Increase (decrease) in liabilities:
Letters of credit payable............................................... 994 1,589 (612)
Accounts payable........................................................ (1,242) 714 919
Accrued expenses........................................................ 3,337 977 (296)
Accrued income taxes.................................................... (801) 944 159
---------- --------- --------
Total adjustments.......................................................... (4,825) (1,102) 593
---------- ---------- --------
Net cash provided (used) by continuing operations.......................... 5,494 2,477 (3,737)
Net cash provided by discontinued operations............................... -- -- 2,227
--------- --------- --------
Net cash provided (used) by operating activities........................... 5,494 2,477 (1,510)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from the sale of Brookfield business........................... -- -- 6,841
Purchases of property, plant and equipment.............................. (1,661) (1,257) (1,305)
Proceeds from the sale of equipment..................................... 3 72 511
Change in deferred charges, deposits and other.......................... (8) 92 (26)
Marketable securities - realized and unrealized (gain) loss............. (127) (31) 88
Payments for business acquisitions...................................... -- (863) (140)
--------- ---------- ---------
Net cash provided (used) by investing activities........................... (1,793) (1,987) 5,969
---------- ---------- --------
Cash flows from financing activities:
Net short-term borrowings............................................... (5,429) 3,426 (1,063)
Repayment of long-term debt and capital lease obligations............... (375) (2,364) (2,711)
Common stock repurchased................................................ (514) (611) --
Issuances of common stock, including options............................ 503 297 39
--------- --------- ---------
Net cash provided (used) by financing activities........................... (5,815) 748 (3,735)
Effect of exchange rate changes on cash and cash equivalents............... 134 (175) 905
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents....................... (1,980) 1,063 1,629
Cash and cash equivalents at beginning of period........................... 5,495 4,432 2,803
--------- --------- ---------
Cash and cash equivalents at end of period.................................$ 3,515 $ 5,495 $ 4,432
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds..........................................$ 8,090 $ 257 $ 663
========= ========= =========
Interest..............................................................$ 688 $ 657 $ 887
========= ========= =========
Non-cash Investing and Financing Activities:
Property purchased under capital leases.................................$ 160 $ 141 $ 86
========= ========= =========
See notes to Consolidated Financial Statements
SAUCONY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, January 1, 1999 and January 2, 1998
(in thousands, except share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
The Company is an importer and manufacturer of a broad line of
high-performance athletic footwear, athletic apparel and high-quality
bicycles, bicycle frames and components. 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 1999, 1998 and 1997
represent the fiscal years ended December 31, 1999, January 1, 1999 and
January 2, 1998, respectively. In management's opinion, the Consolidated
Financial Statements for 1999, 1998 and 1997 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
In fiscal 1999, one of our suppliers, located in China, accounted for
approximately 62% of our total purchases by dollar volume. See Footnotes
18 and 20 for additional disclosure of risks and uncertainties.
REVENUE RECOGNITION
Sales, net of discounts and estimated returns and allowances, and related
costs of sales are recognized upon shipment of products. Provisions for
returns and allowances are determined principally on the basis of past
experience.
CASH AND CASH EQUIVALENTS
Cash equivalents include all short-term deposits with an original
maturity of three months or less.
INVENTORIES
Inventories are stated at lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Land, buildings and equipment, including significant improvements to
existing facilities, are at the lower of cost or estimated carrying
values. The assets are depreciated over their estimated useful lives or
capital 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 consolidated net income.
INVESTMENTS IN MARKETABLE SECURITIES
Investment 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 since the Company intends to hold these investments, until certain
deferred compensation payments are due.
DEFERRED CHARGES AND GOODWILL
Deferred charges consist primarily of trademarks. Trademarks are
amortized over five years; goodwill, representing the excess of the
purchase price over the estimated fair value of the net assets of the
acquired business, is being amortized over the period of expected benefit
of fifteen 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 December 31, 1999 and
January 1, 1999 reflect the estimated future tax effects attributable to
temporary differences and carryforwards based on the provisions of
enacted tax law.
EARNINGS PER SHARE
Earnings per common share is calculated in accordance with Financial
Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). Basic
earnings per share excludes the dilutive effect of options, warrants and
convertible securities. Diluted earnings per share includes the dilutive
effect of options, warrants and convertible securities.
STOCK-BASED COMPENSATION
The Company grants stock options to officers, key employees, directors,
consultants and advisors with the exercise price determined by the
Compensation Committee of the Board of Directors. The Company accounts
for stock option grants in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which defines
stock compensation as the excess of the quoted market price of the
Company's stock at the date of the grant over the exercise price an
employee is required to pay. Grants to non-employees are accounted for in
accordance with SFAS 123. As prescribed under SFAS 123, "Accounting for
Stock-Based Compensation," the Company has disclosed in Notes 11 and 12
the pro forma effects on net income and earnings per share of determining
stock-based compensation expense based upon the fair value of the stock
options granted subsequent to December 31, 1994.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
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 are offset
against foreign currency exchange gains or losses on the underlying
hedged item.
RECLASSIFICATIONS
Certain items in prior years' Consolidated Financial Statements have been
reclassified to conform to the 1999 presentation.
ADVERTISING AND PROMOTION
Advertising and promotion costs, including print media production cost,
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
$10,065, $7,912 and $8,543 for 1999, 1998 and 1997, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Expenditures for research and development of products are expensed as
incurred. Research and development expenses amounted to approximately
$1,676, $1,681 and $1,438 for 1999, 1998 and 1997, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," (SFAS 133) (as amended by Financial Accounting
Standards No. 137 (SFAS 137), with respect to the delayed effective date
of SFAS 133) which is effective for fiscal quarters of fiscal years
commencing after June 15, 2000, with early adoption permitted. SFAS 133
defines the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging
activities. Upon adoption of SFAS 133, all derivatives must be recognized
on the balance sheet at their then fair value and any deferred gains or
losses remaining on the balance sheet under previous hedge-accounting
rules must be removed from the balance sheet. The Company is still
assessing the impact of the provisions of SFAS 133 on its hedging
activities, which are currently limited to forward foreign currency
exchange contracts. Because of the Company's minimal use of derivatives,
management does not anticipate that the adoption of the new Statement
will have a significant effect on earnings. At this time, the effect of
the adoption of SFAS 133 on the Company's future earnings and financial
position cannot be estimated.
2. MARKETABLE SECURITIES:
---------------------
As of December 31, 1999, 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 December 31, 1999 and January 1, 1999
was $133 and $134, respectively. As of December 31, 1999 and January 1,
1999, the market value of such securities was $307 and $179,
respectively.
Included in the determination of net income for the years ended December
31, 1999 and January 1, 1999 and January 2, 1998 were: 1999, net realized
gains of $1 and net unrealized gains of $127; 1998, net realized losses
of $3 and net unrealized gains of $35; and 1997, net realized gains of
$22 and net unrealized gains of $2.
3. INVENTORIES:
-----------
Inventories at December 31, 1999 and January 1, 1999 consisted of the
following (in thousands):
1999 1998
---- ----
Finished goods..........................$ 30,067 $ 24,194
Work-in-process......................... 920 834
Raw materials and supplies.............. 4,283 6,044
-------- --------
Total...................................$ 35,270 $ 31,072
======== ========
4. PROPERTY, PLANT AND EQUIPMENT:
-----------------------------
Major classes of property, plant and equipment at December 31, 1999 and
January 1, 1999 were as follows (in thousands):
1999 1998
---- ----
Land.....................................$ 484 $ 484
Buildings and improvements............... 6,186 5,997
Machinery and equipment.................. 10,513 9,777
Capitalized leases....................... 1,666 1,586
Leasehold improvements................... 418 275
--------- ---------
19,267 18,119
Less accumulated depreciation
and amortization......................... 10,988 9,996
--------- ---------
Total....................................$ 8,279 $ 8,123
========= =========
Accumulated amortization of the leased property was $1,133 and $790 at
December 31, 1999 and January 1, 1999, respectively.
5. ACCRUED EXPENSES:
Accrued expenses at December 31, 1999 and January 1, 1999 consisted of
the following (in thousands):
1999 1998
---- ----
Payroll and bonuses......................$ 2,734 $ 1,249
Income taxes............................. -- 869
Sales commissions........................ 282 237
Selling and advertising.................. 567 186
Other.................................... 3,620 2,163
-------- ---------
Total....................................$ 7,203 $ 4,704
======== =========
Included in prepaid expenses at December 31, 1999, were prepaid income
taxes of $287.
6. LONG-TERM DEBT:
The Company has two notes with monthly installments of $0.6 and $0.7,
respectively. Payments are due through June 2002, with interest rates
ranging from 3.9% to 10.0%. As of December 31, 1999 and January 1, 1999,
the outstanding balance was $31 and $47, respectively. The current
portion of the long-term debt was $11 for the year ending December 31,
1999 and January 1, 1999.
Long-term debt maturities payable for the three years or after subsequent
to December 31, 1999 are as follows (in thousands):
2000........................... 11
2001........................... 14
2002........................... 6
------
Total..........................$ 31
======
7. CAPITAL LEASE OBLIGATIONS:
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments as of December 31, 1999 (in thousands):
2000...................................................$ 388
2001................................................... 248
2002................................................... 28
2003................................................... 5
---------
Total minimum lease payments........................... 669
Less amounts representing interest..................... 33
---------
Present value of minimum lease payments................ 636
Less current portion................................... 364
---------
Long-term portion......................................$ 272
=========
8. EMPLOYEE RETIREMENT PLANS:
The Company has maintained a qualified retirement savings plan ("401(k)
Plan") since 1991. As amended, all United States employees of the Company
who meet the minimum age and service requirements are eligible to
participate in the 401(k) Plan. 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. Such
contributions amounted to $121, $72 and $83 for 1999, 1998 and 1997,
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. Such expenses amounted to $31, $14 and $10
for 1999, 1998 and 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES:
-----------------------------
LEASE COMMITMENTS
The Company is obligated under various operating leases for equipment and
rental space through 2005. Total equipment and rental expenses for 1999,
1998 and 1997 were $903, $959 and $910, respectively. Future minimum
equipment and rental payments are as follows: 2000, $745; 2001, $599;
2002, $480; 2003, $149; 2004 and thereafter, $81.
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, which was amended and increased on March 15, 1999 to
$20,000, terminates on July 31, 2001. Borrowings under the facility bear
interest at either the bank's prime rate of interest, less 0.5%, 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, a minimum tangible net worth, as defined,
restrictions on annual capital expenditures, a minimum current ratio, as
defined, a minimum leverage ratio, a minimum interest coverage, as
defined. The credit facility is subject to the bank's periodic review of
the Company's operations.
The Company was in compliance with such covenants at December 31, 1999.
At December 31, 1999, there were no borrowings outstanding under the
facility and there were letters of credit outstanding of $2,845.
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 and as such the availability of
advances under the lines of credit are at the sole discretion of the
bank. At December 31, 1999, aggregate borrowings under the demand lines
of credit amounted to $1,928.
Saucony Canada, Inc. maintains a credit facility with a Canadian lender.
The agreement provides Saucony Canada with a credit line of Canadian
Dollars 1,000,000 for cash borrowings and letters of credit. At December
31, 1999, there were no borrowings or letters of credits outstanding
under this credit facility.
At December 31, 1999, the Company was committed under foreign exchange
contracts to purchase U.S. dollars in the notional amount of $750 and
$735 at December 31, 1999 and January 1, 1999, respectively. Unrealized
gains or losses relating to these contracts at December 31, 1999 were not
material.
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 will have a
material adverse effect on the Company's financial position, operations
or cash flows (irrespective of any potential insurance recovery).
10. COMMON STOCK:
------------
The Company has two classes of Common Stock. The Class A Common Stock has
voting rights. The Class B Common Stock is non-voting, except with
respect to amendments to the Company's Articles of Organization that
alter or change the powers, preferences or special rights of the Class B
Common Stock so as to affect them adversely and as otherwise required by
law. The Class B Common Stock has certain features, including a "Class B
Protection" feature and a premium equal to 110% of the cash dividend,
payable on Class A Common Stock, if any, which are intended to minimize
the economic reasons for the Class A Common Stock to trade at a premium
compared to the Class B Common Stock. The other terms of the Class A
Common Stock and Class B Common Stock, including rights with respect to
special cash dividends, stock dividends, stock splits, consideration
payable in a merger or consolidation and distributions upon liquidation,
generally are the same.
As of December 31, 1999, January 1, 1999 and January 2, 1998, 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 3, 1997..................... 2,703,227 3,533,659
Shares issued............................................. -- 14,428
----------- -----------
Shares outstanding at January 2, 1998..................... 2,703,227 3,548,087
Shares issued............................................. 800 83,318
Shares repurchased........................................ (25,000) (82,000)
------------ ------------
Shares outstanding at January 1, 1999..................... 2,679,027 3,549,405
Shares issued............................................. 4,100 128,504
Shares repurchased........................................ (15,000) (26,500)
------------ ------------
Shares outstanding at December 31, 1999................... 2,668,127 3,651,409
=========== ===========
11. STOCK OPTIONS:
-------------
Under the Company's 1993 Equity Incentive Plan (the "Equity Incentive
Plan") the Company may grant incentive stock options and restricted stock
awards to officers, key employees and Directors of the Company. Outside
consultants and advisors to the Company are eligible to receive
non-statutory stock options and awards of restricted stock.
The Equity Incentive Plan is administered by the Compensation Committee
of the Board of Directors which, at its sole discretion, grants options
to purchase shares of Common Stock and make awards of restricted stock.
The purchase price per share of Common Stock shall be determined by the
Board of Directors, provided, however, in the case of Incentive Stock
Options, the purchase price shall 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, wherein the term cannot exceed ten
years. The vesting schedule is subject to the discretion of the Board of
Directors.
Restricted stock awards which may be 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 shall determine the purchase price, which can be less than
the fair market value of the Common Stock, and the vesting schedule for
such award.
At December 31, 1999, a total of 1,150,000 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
shall equal the fair market value of Class B Common Stock on the date of
the grant. The options are exercisable at any time, in whole or in part,
prior to the fifth anniversary of the date of the grant. No further
options may be granted under the Director Stock Option Plan which expired
in 1998. The remaining 62,000 shares reserved under the Plan are no
longer available for grant.
The following table summarizes the awards available for grant under the
Company's 1993 Equity Incentive Plan and the Director Stock Option Plan
for the three-year reporting period ended December 31, 1999:
Shares
------
Shares available at January 3, 1997..................... 457,726
Additional shares reserved.............................. 350,000
Awards granted.......................................... (149,150)
Options expired......................................... 25,278
-----------
Shares available at January 2, 1998..................... 683,854
Awards granted.......................................... (18,750)
Options expired......................................... 26,666
Director stock option plan expiration................... (62,000)
------------
Shares available at January 1, 1999..................... 629,770
Awards granted.......................................... (345,575)
Options expired or cancelled............................ 50,465
-----------
Shares available at December 31, 1999................... 334,660
===========
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." 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.
Stock-based compensation arising from the issuance of restricted stock
warrants and below market options, is being amortized to expense over the
vesting period of the stock grant or option term and amounted to $38, $24
and $62 for 1999, 1998 and 1997, respectively.
The following table summarizes the Company's stock option activity as of
January 2, 1998, January 1, 1999 and December 31, 1999:
Weighted
Average
Exercise Option
Shares Price Price Range
------ ----- -----------
Outstanding at January 3, 1997..................... 333,174 $ 4.36 $ 2.00 - $ 12.25
Granted....................................... 147,350 $ 4.50 $ 4.44 - $ 5.00
Exercised..................................... (12,628) $ 3.11 $ 2.50 - $ 3.69
Forfeited..................................... (38,278) $ 5.87 $ 2.50 - $ 8.50
Expired....................................... (3,000) $ 3.35 $ 2.88 - $ 3.63
-----------
Outstanding at January 2, 1998..................... 426,618 $ 4.32 $ 2.00 - $ 12.25
Granted....................................... 18,750 $ 5.05 $ 4.44 - $ 6.50
Exercised..................................... (84,118) $ 3.52 $ 2.25 - $ 5.00
Forfeited..................................... (3,266) $ 3.27 $ 2.50 - $ 5.00
Expired....................................... (23,400) $ 8.46 $ 3.69 - $ 12.25
-----------
Outstanding at January 1, 1999..................... 334,584 $ 4.28 $ 2.00 - $ 6.50
Granted....................................... 345,575 $ 9.84 $ 4.13 - $ 22.63
Exercised..................................... (132,404) $ 3.78 $ 2.00 - $ 6.50
Forfeited..................................... (41,465) $ 8.03 $ 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
=======
Options exercisable for shares of the Company's Class A and Class B
Common Stock as of January 2, 1998, January 1, 1999 and December 31, 1999
are as follows:
Options Exercisable
Weighted Average
Exercise Price
--------------
Class A Class B Class A Class B
Common Common Common Common
Stock Stock Total Stock Stock
----- ----- ----- ----- -----
January 2, 1998 4,900 228,586 233,486 $ 2.27 $ 4.71
January 1, 1999 4,100 224,054 228,154 $ 2.27 $ 4.22
December 31, 1999 -- 203,220 203,220 -- $ 5.88
The following table summarizes information about stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted
Shares Average Weighted Shares Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices 12/31/99 Life Price 12/31/99 Price
--------------- -------- ---- ----- -------- -----
$ 4.00 - $ 4.88 199,090 2.02 $ 4.52 131,820 $ 4.56
$ 5.00 - $ 5.75 130,400 4.02 $ 5.12 47,000 $ 5.12
$ 6.00 - $ 7.00 4,900 3.90 $ 6.49 400 $ 6.09
$ 11.375 33,400 4.35 $ 11.38 -- $ --
$ 12.50 - $ 13.44 8,500 4.90 $ 12.60 -- $ --
$ 14.63 - $ 14.69 44,750 4.80 $ 14.69 24,000 $ 14.69
$ 16.16 - $ 17.75 60,250 4.81 $ 16.53 -- $ --
$ 19.88 - $ 23.63 7,000 4.50 $ 23.09 -- $ --
---------- ---------
488,290 203,220
========== =========
12. EARNINGS PER SHARE
The following table sets forth the computation of basic earnings per
common share and diluted earnings per common share (dollars in thousands,
except per share amounts):
1999 1998 1997
--------------------- ---------------------- ----------------------
Earnings Earnings Earnings Earnings Earnings Earnings
per per per per per per
Common Common Common Common Common Common
Share - Share - Share - Share - Share - Share -
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
Net income (loss)
Income (loss) from
continuing operations $ 10,319 $ 10,319 $ 3,579 $ 3,579 $ (4,032) $ (4,032)
Loss from discontinued
operations -- -- -- -- (298) (298)
-------- -------- ------- ------- --------- ---------
Net income (loss) available
for common shares and
assumed conversions $ 10,319 $ 10,319 $ 3,579 $ 3,579 $ (4,330) $ (4,330)
======== ======== ======= ======= ========= =========
Weighted-average common shares
and equivalents outstanding:
Weighted-average shares
outstanding 6,292 6,292 6,242 6,242 6,240 6,240
Effect of dilutive securities:
Stock options -- 276 -- 131 -- --
-------- -------- ------- ------- -------- --------
6,292 6,568 6,242 6,373 6,240 6,240
======== ======== ======= ======= ======== ========
Earnings per share:
Income (loss) from
continuing operations $ 1.64 $ 1.57 $ 0.57 $ 0.56 $ (0.65) $ (0.65)
Loss from discontinued
operations 0.00 0.00 0.00 0.00 (0.05) (0.05)
-------- -------- ------- ------- -------- ---------
Net income (loss) $ 1.64 $ 1.57 $ 0.57 $ 0.56 $ (0.70) $ (0.70)
======== ======== ======= ======= ======== =========
Options to purchase 112,000 shares of common stock were outstanding at
December 31, 1999, but were not included in the computations of EPS since
the options were anti-dilutive. There were no anti-dilutive options
outstanding at January 1, 1999 and January 2, 1998.
The weighted average fair value at date of grant for options granted in
1999, 1998 and 1997 was $4.91, $2.30 and $2.03 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 1999, 1998 and 1997, respectively:
risk-free interest rates of 5.5%, 5.6%, and 6.3%; dividend yields of 0%,
0% and 0%; volatility factors of the expected market price of the
Company's common stock of 62.3%, 42.9% and 40.7%; and a weighted-average
expected life of the options of 3.5, 5.0 and 5.0 years.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for
stock option awards in 1999, 1998 and 1997, 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 (dollars in thousands, except per share amounts):
1999 1998 1997
---------------------- --------------------- ------------
Earnings Earnings Earnings Earnings Earnings Earnings
per per per per per per
Common Common Common Common Common Common
Share - Share - Share - Share - Share - Share -
Basic Diluted Basic Diluted Basic Diluted
Net income (loss):
As reported $ 10,319 $ 10,319 $ 3,579 $ 3,579 $ (4,330) $ (4,330)
Compensation expense for
stock, net of tax 304 304 (81) (81) (63) (63)
--------- --------- -------- -------- --------- ---------
Pro forma net income (loss) $ 10,015 $ 10,015 3,498 3,498 (4,393) (4,393)
========= ========= ======= ======= ========= =========
Pro forma earnings per share:
As reported $ 1.64 $ 1.57 $ 0.57 $ 0.56 $ (0.70) $ (0.70)
Compensation expense for
stock, net of tax (0.05) (0.05) (0.01) (0.01) (0.01) (0.01)
---------- ---------- -------- -------- -------- --------
Pro forma net income (loss)
per share $ 1.59 $ 1.52 $ 0.56 $ 0.55 $ (0.71) $ (0.71)
========= ========= ======= ======= ======== ========
The pro forma net income for 1999, 1998 and 1997 is not representative of
the pro forma effect on net income in future years because SFAS 123 does
not take into consideration pro forma compensation expense related to
option grants made prior to 1995.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes
in the subjective assumptions can materially affect the fair value
estimate, management believes the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
13. INCOME TAXES:
The provision for income taxes was based on pre-tax income (loss) from
continuing operations before minority interest which was subject to
taxation by the following jurisdictions (in thousands):
1999 1998 1997
---- ---- ----
Pre-tax income (loss):
United States...............$ 15,864 $ 3,870 $ 369
Foreign..................... 1,725 1,368 (4,169)
-------- -------- --------
Total.......................$ 17,589 $ 5,238 $ (3,800)
======== ======== ========
The provision (credit) for income taxes consists of the following (in
thousands):
1999 1998 1997
---- ---- ----
Current:
Federal...........................$ 5,349 $ 830 $ 1,058
State............................. 1,511 234 309
Foreign........................... 421 104 223
------- ------- -------
7,281 1,168 1,590
------- ------- -------
Deferred:
Federal........................... (139) 239 (971)
State............................. (47) 90 (298)
Foreign........................... 466 (36) (1,365)
------- -------- --------
280 293 (2,634)
------- -------- --------
Change in valuation allowance....... (367) 168 1,399
-------- -------- --------
Total.............................$ 7,194 $ 1,629 $ 355
======= ======= ========
The net deferred tax asset or liability reported on the consolidated
balance sheet consist of the following items as of December 31, 1999 and
January 1, 1999 (in thousands):
1999 1998
---- ----
Net current deferred tax assets:
Allowance for doubtful accounts and discounts..............................$ 1,207 $ 581
Inventory allowances and tax costing adjustments........................... 338 336
Deferred compensation...................................................... 330 468
Other accrued expenses..................................................... 103 172
Unrealized gain on marketable securities................................... (70) (18)
Foreign loss carryforwards................................................. 232 66
--------- ---------
Total...................................................................$ 2,140 $ 1,605
--------- ---------
Net long-term deferred tax assets:
Foreign loss carryforwards.................................................$ 197 $ 921
Valuation allowance........................................................ (98) (568)
---------- ----------
Total...................................................................$ 99 $ 353
--------- ---------
Net long-term deferred tax liabilities:
Property, plant and equipment..............................................$ 868 $ 697
Investment in limited partnership.......................................... 1,177 1,154
--------- ---------
Total...................................................................$ 2,045 $ 1,851
--------- ---------
Net deferred tax asset.......................................................$ 194 $ 107
========= =========
The foreign loss carryforwards relate to operating losses of
approximately $1,156 which may be carried forward indefinitely. At
December 31, 1999, the Company has determined that it is more likely than
not that $98 of the deferred tax assets resulting from foreign operating
losses will not be realized.
A reconciliation from the U.S. statutory federal income tax rate to the
effective income tax rate on pre-tax income from continuing operations
before minority interest follows:
1999 1998 1997
---- ---- ----
U.S. federal income tax rate...............................................34.3% 34.0% (34.0%)
State income tax, net of federal benefit....................................5.5 4.8 0.2
Non-deductible expenses and tax-exempt income...............................1.7 0.4 0.7
International tax rate differences..........................................1.6 (7.6) 7.0
Detriment (benefit) of valuation allowance relating
to foreign losses........................................................(2.1) 3.2 36.8
Low-income housing tax credits.............................................(0.1) (0.7) (1.4)
Adjustment of prior years' estimated tax liabilities...................... 0.0 (3.0) 0.0
----- ------ -----
Effective income tax rate................................................. 40.9% 31.1% 9.3%
====== ====== ======
The Company has not recorded deferred income taxes on the undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in
foreign operations. These earnings amounted to approximately $2,002 at
December 31, 1999.
14. DISCONTINUED OPERATIONS:
On July 4, 1997, the Brookfield Athletic Co., Inc. ("Brookfield"), a
wholly owned domestic subsidiary of the Company, sold substantially all
of the net assets used in its business of distributing recreational
products for $6,841. The Company recorded a pre-tax gain on the sale of
$417, net of transaction costs of $278.
The operating results of Brookfield for the 1997 fiscal year has been
segregated from continuing operations and is reported as discontinued
operations in the Company's Consolidated Financial Statements. A summary
of such results follows (in thousands):
1997
----
Revenues..............................................$ 2,381
Costs and expenses.................................... 3,037
--------
Loss before income taxes.............................. (656)
Income tax benefit.................................... (262)
---------
Loss from discontinued operations.....................$ (394)
=========
Gain on sale of net assets............................$ 417
Post measurement date operating losses................ (243)
---------
Gain on disposal before income taxes.................. 174
Income tax expense.................................... 78
--------
Gain on disposal of Brookfield business...............$ 96
========
Total loss from discontinued operations...............$ (298)
=========
15. ASSET WRITEDOWNS:
----------------
During 1997, the Company's Australian subsidiary recorded a $1,426
non-recurring charge to write-down accounts receivables (by $858) and
other assets (by $568) to their net realizable values. In addition, a
write-down of inventory of $1,340 was included in cost of sales in 1997.
The Company recorded a deferred tax valuation allowance of $999 relating
to net operating loss carryforwards of the Australian subsidiary which
are not expected to be realized.
During the second quarter of fiscal 1997, the Company recorded a
non-recurring charge of $850 ($508 after tax, $0.08 per diluted share) to
reduce the carrying value of the Company's inactive distribution facility
in East Brookfield, Massachusetts to estimated fair value. The fair value
of the facility was based on a present value calculation of assumed
market rental income using a discount rate of 12.0%.
This facility consisted of approximately 109,000 square feet of warehouse
and distribution space, as well as a retail factory outlet situated on
approximately 5.4 acres of land. The facility encompassed nine separate
buildings adjoined together. The dates of construction for the buildings
range from 1925 to 1972.
The facility had functioned as an overflow warehouse for the Company. On
July 4, 1997, the Company's wholly-owned subsidiary, Brookfield Athletic
Co., Inc., ("Brookfield"), sold substantially all of the assets used in
Brookfield's business. At that time, approximately 15% of the facilities
aggregate square footage was either utilized by the Company or let out.
The Company had no current or anticipated future need for the
under-utilized space, nor were there any definitive or prospective plans
to lease additional space. Attempts to lease the facility were
unsuccessful due to the inefficient configuration of the facility.
Accordingly, the Company determined that the East Brookfield distribution
facility was impaired. Management is assessing the use of this facility
and is considering various options. Management believes that the carrying
value at December 31, 1999 represents the fair value of the facility.
The non-recurring charge affected the United States business segment.
16. GEOGRAPHIC SEGMENT DATA:
-----------------------
The following table summarizes the Company's continuing operations by
geographic area for the years ended December 31, 1999, January 2, 1998
and January 3, 1997 and identifiable assets as of December 31, 1999,
January 1, 1999 and January 2, 1998. Operating income (loss) for fiscal
1997 has been reclassified on a basis consistent with operating segment
information presented in Note 17.
(in thousands)
1999 1998 1997
---- ---- ----
REVENUES:
United States...................................................$ 135,410 $ 83,617 $ 65,711
International................................................... 19,281 22,193 28,251
----------- ----------- -----------
$ 154,691 $ 105,810 $ 93,962
=========== =========== ===========
INTERNATIONAL REVENUES:
United States - based divisions................................. 3,560 $ 4,086 $ 5,602
Foreign subsidiaries............................................ 15,721 18,107 22,649
----------- ----------- -----------
$ 19,281 $ 22,193 $ 28,251
=========== =========== ===========
INTER-AREA REVENUES:
United States...................................................$ 828 $ 629 $ 786
International................................................... 8,442 9,286 7,430
----------- ----------- -----------
$ 9,270 $ 9,915 $ 8,216
=========== =========== ===========
TOTAL REVENUES:
United States...................................................$ 136,238 $ 84,246 $ 66,497
International................................................... 27,723 31,479 35,681
Less: Inter-area eliminations.................................. (9,270) (9,915) (8,216)
------------ ------------ ------------
$ 154,691 $ 105,810 $ 93,962
=========== =========== ===========
OPERATING INCOME (LOSS):
United States...................................................$ 16,815 $ 6,902 $ 2,934
International................................................... 1,469 (1,117) (4,572)
Less: Inter-area eliminations.................................. (88) (44) (297)
------------ ------------ ------------
$ 18,196 $ 5,741 $ (1,935)
=========== =========== ============
IDENTIFIABLE ASSETS:
United States...................................................$ 79,288 $ 72,677 $ 59,521
International................................................... 13,078 14,171 13,142
Less: Inter-area eliminations.................................. (15,185) (16,969) (11,347)
------------ ------------ ------------
$ 77,181 $ 69,879 $ 61,316
=========== =========== ===========
Revenues are classified based on customer location. Other revenue
consists primarily of royalty income and freight and handling income on
product shipments. Inter-area revenues consist primarily of inventory
shipments to the Company's international subsidiaries. These inter-area
sales are generally priced to recover cost plus an appropriate mark-up
for profit and are eliminated in the determination of consolidated net
sales. Operating income consists of revenue, less cost of sales, selling
expenses and general and administrative expenses and for 1997 includes
non-recurring charges of $850 and $2,766 relating to the reduction in the
carrying value of the Company's East Brookfield, Massachusetts facility
to market and the Australian subsidiaries write-down of assets to
estimated realizable values, respectively.
17. OPERATING SEGMENT DATA:
----------------------
The Company's operating segments are organized based on the nature of
products. A description of operating segments for the Company are as
follows:
SAUCONY SEGMENT
Performance running, walking, cross training and outdoor trail footwear
and multi-sport and triathlon athletic apparel sold under the Saucony
brand name.
OTHER PRODUCTS SEGMENT
Other Product segment aggregates several product lines, none of which
meet the criteria as defined in SFAS 131 as a reportable segment.
Included in other products are: Hind multi-sport athletic apparel;
Quintana Roo triathlon, road and mountain bicycles, bicycle components
parts and wetsuits; Merlin titanium bicycle frames; Spot-bilt coaches and
official footwear; Real bicycle components, and the Company's retail
factory outlet stores.
The following table summarizes the Company's operating segments for the
years ended December 31, 1999, January 1, 1999 and January 2, 1998 and
identifiable assets as of December 31, 1999, January 1, 1999 and January
2, 1998:
(in thousands)
1999 1998 1997
---- ---- ----
REVENUES:
Saucony............................................$ 132,275 $ 86,651 $ 78,771
Other.............................................. 22,416 19,159 15,191
---------- --------- ----------
$ 154,691 $ 105,810 $ 93,962
========== ========= ==========
PRE-TAX INCOME (LOSS):
Saucony............................................$ 18,965 $ 5,497 $ (2,946)
Other Products..................................... (1,376) (259) (854)
----------- ---------- -----------
Total segment pre-tax income (loss)................ 17,589 5,238 (3,800)
Provision for income taxes......................... 7,194 1,629 355
Minority interest.................................. 76 30 (123)
---------- --------- -----------
Net income (loss) from continuing operations..........$ 10,319 $ 3,579 $ (4,032)
========== ========= ===========
ASSETS:
Saucony............................................$ 61,584 $ 53,906 $ 51,974
Other Products..................................... 15,597 15,973 9,342
---------- --------- ----------
$ 77,181 $ 69,879 $ 61,316
========== ========= ==========
DEPRECIATION AND AMORTIZATION:
Saucony............................................$ 1,516 $ 1,606 $ 1,493
Other Products..................................... 346 230 101
---------- --------- ----------
$ 1,862 $ 1,836 $ 1,594
========== ========= ==========
INTEREST, NET:
Saucony............................................$ 228 $ 252 $ 568
Other Products..................................... 455 455 249
---------- --------- ----------
$ 683 $ 707 $ 817
========== ========= ==========
COMPONENTS OF INTEREST, NET
Interest expense...................................$ 729 $ 733 $ 888
Interest income.................................... 46 26 71
---------- --------- ----------
Interest, net....................................$ 683 $ 707 $ 817
========== ========= ==========
18. MAJOR CUSTOMER:
--------------
During 1999 and 1998, the Company had one customer that accounted for
approximately 15% and 13% of gross sales, respectively. For 1997 the
Company did not have a customer account for more than 10% of gross sales.
19. ACQUISITIONS:
------------
SAUCONY S.P. PTY. LTD.
On April 2, 1998, Hyde International Services, Limited ("Hyde
International"), a wholly-owned subsidiary of the Company, acquired all
of the outstanding shares of Saucony S.P. Pty. Ltd.'s capital stock
(other than those shares already owned by Hyde International) for a
nominal amount. Saucony S.P. Pty. Ltd. is currently in the process of
liquidation.
MERLIN
On February 17, 1998, the Company acquired substantially all of the
assets of Merlin Materials, Inc. ("Merlin"), a manufacturer of high-end
titanium road and mountain bicycle frames, for $644 in cash. The
acquisition was accounted for as a purchase. Goodwill of $120,
representing the excess of the acquisition cost over the net assets
acquired, is being amortized on a straight-line basis over 15 years.
The Merlin purchase agreement included provisions for additional purchase
price consideration in the form of deferred contingent amounts. The
earnout payouts are subject to annual maximum earnout amounts for each of
the three fiscal years, covered by the Agreement, and a cumulative
aggregate earnout amount not to exceed $1,200. As of December 31, 1999
and January 1, 1999, the Company had not incurred any additional
obligations under the deferred contingent payout clause.
REAL DESIGN
On August 11, 1998, Quintana Roo, Inc., a wholly-owned subsidiary of the
Company, acquired substantially all of the assets of Real Product Design,
Inc. ("Real"), a manufacturer of bicycle components for $240 in cash. The
acquisition was accounted for as a purchase.
The Real purchase agreement included provisions for additional purchase
price consideration in the form of contingent earnout amounts. The
cumulative earnout amount cannot exceed approximately $380. As of
December 31, 1999 and January 1, 1999, the Company had not incurred any
additional obligations under the deferred contingent payout clause.
20. 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 41% of
the Company's gross trade receivables balance was represented by 17
customers at December 31, 1999, which exposes the Company to a
concentration of credit risk.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS:
-----------------------------------
The carrying value of cash, cash equivalents, receivables, long-term debt
and other notes payable approximates fair value. The Company believes
similar terms for current long-term debt and other notes payable would be
attainable. The fair value of marketable securities is estimated based
upon quoted market prices for these securities. The Company enters into
forward currency exchange contracts to hedge intercompany liabilities
denominated in other than the functional currency. The fair value of the
Company's foreign currency exchange contracts is estimated based on
current foreign exchange rates. At December 31, 1999 and January 1, 1999,
the notational value of the Company's foreign currency exchange contracts
to purchase U.S. dollars was $750 and $735, respectively. Gains and
losses on forward exchange contracts are deferred and offset against
foreign currency exchange gains and losses on the underlying hedged item.
At December 31, 1999 and January 1, 1999, estimated fair value of the
Company's financial instruments approximated the carrying value.
22. COMPREHENSIVE INCOME:
--------------------
As defined in Financial Accounting Standard No. 130, "Reporting
Comprehensive Income," (SFAS 130) comprehensive income encompasses net
income and other components of comprehensive income that are excluded
from net income under Generally Accepted Accounting Principles,
comprising items previously reported directly in stockholders' equity.
SFAS 130 limits the excluded components to the following: foreign
currency translation adjustments, minimum pension liability adjustments
and unrealized gains and losses on certain investments in debt and equity
investments classified as available-for-sales securities.
The following table sets forth comprehensive income for the years ended
December 31, 1999, January 1, 1999 and January 2, 1998 (in thousands):
1999 1998 1997
---- ---- ----
Net income (loss)........................................$ 10,319 $ 3,579 $ (4,330)
--------- --------- ----------
Other comprehensive income (loss):
Foreign currency translation adjustment................$ (36) $ (111) $ (183)
Income tax expense (benefit) related to
other comprehensive income (loss).................... (30) (32) 5
Reclassification adjustment, net of tax................ 57 27 --
--------- --------- ---------
Other comprehensive income (loss), net
of tax.................................................$ 51 $ (52) $ (188)
--------- ---------- ----------
Comprehensive income (loss)..............................$ 10,370 $ 3,527 $ (4,518)
========= ========= ==========
23. QUARTERLY INFORMATION:
---------------------
(Unaudited)
(in thousands, except per share amounts)
1999 Quarter 1 Quarter 2 Quarter 3 Quarter 4
---- --------- --------- --------- ---------
Net sales.........................................$ 42,406 $ 37,706 $ 43,454 $ 30,492
Gross profit...................................... 15,421 14,137 17,371 11,895
Net income........................................ 3,333 2,257 3,094 1,635
Earnings per share:
Basic........................................... 0.54 0.36 0.49 0.26
Diluted......................................... 0.52 0.34 0.47 0.25
1998 (1) Quarter 1 Quarter 2 Quarter 3 Quarter 4
---- --------- --------- --------- ---------
Net sales.........................................$ 29,624 $ 26,562 $ 26,056 $ 22,832
Gross profit...................................... 9,973 10,082 9,250 8,146
Net income........................................ 989 689 818 1,083
Earnings per share:
Basic........................................... 0.16 0.11 0.13 0.17
Diluted......................................... 0.16 0.11 0.13 0.17
--------------
(1)Quarterly net income for each of the four quarters of fiscal 1998 have
been restated. The earnings restatement had no impact on earnings per
share.
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 1999 and fiscal 1998.
SAUCONY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, January 1, 1999 and January 2, 1998
(dollars in thousands)
Additions
Balance charged to Deductions Balance
beginning costs and from end
of year expenses reserve of year
------- -------- ------- -------
Year ended December 31, 1999:
Allowance for doubtful accounts and discounts...................$ 1,880 $ 7,151 $ 5,497 $ 3,534
Year ended January 1, 1999:
Allowance for doubtful accounts and discounts...................$ 2,032 $ 4,908 $ 5,060 $ 1,880
Year ended January 2, 1998:
Allowance for doubtful accounts and discounts...................$ 1,234 $ 5,475 $ 4,677 $ 2,032
EXHIBIT INDEX
Exhibit
Number Description
3.1 Restated Articles of Organization, as amended, of the Registrant
are incorporated herein by reference to the Registrant's current
report on Form 8-K dated May 21, 1998. *
3.2 By-Laws, as amended, of the Registrant are incorporated
herein by reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form S-2, as amended
(File No. 33-61040) (the "Form S-2"). *
10.1 Credit Agreement between the Registrant and State Street
Bank and Trust Company dated August 31, 1998 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 Amendment dated March 15, 1999 to the Credit Agreement
between the Registrant and State Street Bank and Trust
Company, dated August 31, 1998, incorporated herein by
reference to Exhibit 10.2 to the Registrant's Annual Report
on Form 10-K for the year ended January 1, 1999. *
10.3** 1982 Employee Stock Option Plan, as amended, is
incorporated herein by reference to Exhibit 10.7 to the Form S-2 *
10.4** 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. *
10.5** Amendment No. 3 to 1993 Equity Incentive Plan
10.6** VP Bonus Plan is incorporated herein by reference to
Exhibit 10.19 to the Form S-2 *
10.7** 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 quarter ended April 2, 1993, as amended (the "1993
Form 10-Q") *
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Grant Thornton
27 Financial Data Schedule for the fiscal year ended December 31, 1999.
* 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.