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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended January 3, 2003 Commission file number: 000-05083
Saucony, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
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(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 532-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.33-1/3 par value
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(Title of class)
Class B Common Stock, $.33-1/3 par value
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(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 ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ].
The aggregate market value of voting and non-voting common equity stock held by
non-affiliates of the registrant, as of July 5, 2002, was approximately
$32,071,000 (based on the closing sale prices of the Class A Common Stock and
Class B Common Stock on such date as reported on the Nasdaq National Market).
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 7,
2003 was 2,525,047 and 3,554,340, respectively.
Portions of the registrant's Definitive Proxy Statement for its 2003 Annual
Meeting of Stockholders scheduled to be held on May 21, 2003 (the "2003 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after January 3, 2003, are incorporated by reference into
Part III of this Annual Report on Form 10-K. With the exception of the portions
of the 2003 Proxy Statement expressly incorporated into this Annual Report on
Form 10-K by reference, such document shall not be deemed filed as part of this
Annual Report on Form 10-K.
SAUCONY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 3, 2003
Caption Page
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PART I
Item 1. Business 3
Executive Officers of the Registrant 11
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 33
PART III
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters 35
Item 13. Certain Relationships and Related Transactions 35
Item 14. Controls and Procedures 35
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 36
Signatures 37
Certifications 38
PART I
ITEM 1 - BUSINESS
Overview
We design, develop and market performance-oriented athletic footwear, athletic
apparel and casual leather footwear. Our principal products are:
o technical running, walking and outdoor trail shoes and athletic
apparel, which we sell under the Saucony brand name;
o technical running shoe models from the early 1980's, which we
reintroduced in 1998, as Saucony "Originals", our classic footwear
line;
o athletic apparel, which we sell under the Hind brand name;
o shoes for coaches and officials and casual leather walking and
workplace footwear, which we sell under the Spot-bilt brand name.
Our products are sold in the United States at more than 5,500 retail locations
and at our 12 factory outlet stores and outside the United States in 35
countries through 21 distributors located throughout the world. For the fiscal
year ended January 3, 2003, we generated total sales of $133.2 million. During
2002 we relocated our Hind apparel design and development function from Boulder,
Colorado to our facility in Peabody, Massachusetts. Furthermore, we completed
the conversion of our Hind sourcing to a finished goods solution, which we feel
should reduce our inventory requirements.
We are a Massachusetts corporation, founded in 1920. Our headquarters are in
Peabody, Massachusetts.
Saucony(R), Spot-bilt(R), GRID(R), Hyde(R), and Hind(R) are our registered
trademarks. This annual report on Form 10-K also includes other service marks,
trademarks and trade names of ours and of companies other than us. Unless the
context indicates otherwise, the terms "we", "us", "Saucony" and the "Company"
are used herein to refer to Saucony, Inc. and its consolidated subsidiaries.
Segments
Our business is organized into two operating segments. The Saucony segment
consists of Saucony technical and Originals footwear and Saucony apparel. The
Other Products segment consists of Hind athletic apparel, Hyde Authentics
footwear, which footwear brand we no longer distribute, and Spot-bilt shoes for
coaches and officials and casual leather walking and workplace footwear,
together with sales of our products at our 12 factory outlet stores.
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the periods and geographic
areas indicated.
Net Sales
(dollars in thousands)
----------------------
Fiscal 2002 Fiscal 2001 Fiscal 2000
----------- ----------- -----------
$ % $ % $ %
- - - - - -
Saucony
Domestic..............$ 83,182 62% $ 86,414 65% $ 126,758 75%
International......... 27,647 21% 23,878 18% 19,710 12%
---------- -- ---------- -- ---------- --
Total.................$ 110,829 83% $ 110,292 83% $ 146,468 87%
---------- -- ---------- -- ---------- --
Other Products
Domestic..............$ 20,171 15% $ 20,070 15% $ 19,035 12%
International......... 2,196 2% 1,899 2% 2,294 1%
---------- -- ---------- -- ---------- --
Total.................$ 22,367 17% $ 21,969 17% $ 21,329 13%
---------- -- ---------- -- ---------- --
Total....................$ 133,196 100% $ 132,261 100% $ 167,797 100%
========== === ========== === ========== ===
_________________
For further financial information concerning geographic areas and our operating
segments, please see Notes 16 and 17 to our Consolidated Financial Statements in
this Annual Report on Form 10-K.
Products
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Footwear
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Technical Footwear. We sell performance running, walking and outdoor trail shoes
for athletes under the Saucony brand name, which has been marketed in the United
States for over 30 years. A substantial majority of sales are in the running
shoe category. We have several different products within each Saucony brand
category. These products have different designs and features, resulting in
different cushioning, stability, support characteristics and prices.
We design and market separate lines for men and women within most technical
footwear categories. In keeping with our emphasis on performance, we market and
sell our technical footwear to athletes who have a high participation rate in
their sport of choice. We address this market through our "Loyal to the Sport"
advertising campaign. We believe that these consumers are more brand loyal than
those who buy athletic footwear for casual use. The suggested domestic retail
prices for most of our technical footwear products are in the range of $50 to
$90 per pair, with our top-of-the-line running shoes having suggested domestic
retail prices of up to $130 per pair. During fiscal 2002, we introduced several
new shoes targeted at the mid-priced footwear segment, which is the largest
segment of the running shoe market, with retail prices ranging from $60 to $80
per pair.
The Saucony brand is recognized for its technical innovation and performance. As
a result of our application of biomechanical technology in the design process,
we believe that our Saucony footwear has a distinctive "fit and feel" that is
attractive to athletic users. A key element in the design of our shoes is an
anatomically correct toe and heel configuration that provides support and
comfort for the particular activity for which the shoe is designed.
We build a variety of technical features into our shoes. Most of our technical
running and other athletic shoes incorporate our Ground Reaction Inertia Device,
or GRID system, an innovative midsole system that employs molded strings
engineered to create a feeling similar to that of the "sweet spot" of a tennis
racquet. In contrast with conventional athletic shoe midsoles, the GRID system
is designed to react to various stress forces differently, thereby maximizing
shock absorption and minimizing rear foot motion. We have continually improved
the GRID system since it was first introduced in 1991.
During fiscal 2002, we incorporated our newest proprietary footwear technology,
Custom Ride Management, into our core technical footwear products. Custom Ride
Management technology allows us to tailor shoes to the individual
characteristics of a runner, including height, weight, foot size and gait
cycles. By doing so, it allows athletes to select a level of cushioning or
stability based on their need or preference. During fiscal 2002, we incorporated
Custom Ride Management into two running models and in December 2002 commenced
shipment of a walking model.
We design our Saucony technical cross training, women's walking and outdoor
technical trail shoes with many of the same performance features and "fit and
feel" characteristics as are found in Saucony technical running shoes. During
fiscal 2002, our most popular non-running technical athletic shoe was a woman's
performance walking shoe.
Technical footwear, inclusive of full margin and closeout technical footwear,
accounted for approximately 70%, 61% and 51% of our fiscal 2002, fiscal 2001 and
fiscal 2000 consolidated net sales, respectively.
Originals Footwear. In 1998, we reintroduced a number of our technical running
shoe models from the early 1980's under the name "Originals." These shoes are
designed to appeal to younger consumers who do not generally wear them for
athletic purposes. We believe our Originals shoes have benefited from the trend
toward "retro" products in footwear and apparel. We offer these shoes in a
variety of styles with over 100 combinations of colors and materials. The
suggested retail prices for our Originals are in the range of $40 to $60 per
pair.
Our initial Originals offering consisted of two models, the "Jazz Originals" and
the "Shadow Originals." In light of the success of these products, we expanded
the Originals product line to include color and material variations on our
initial Originals and have introduced children's models. During fiscal 2002, we
introduced additional Originals products, including contemporary-styled
reintroductions of our technical running shoe models from the early 1980's and
other casual footwear designed for the 12 to 25 year old footwear consumer.
Originals footwear, inclusive of full margin and closeout originals footwear,
accounted for approximately 12%, 21% and 35% of our fiscal 2002, fiscal 2001 and
fiscal 2000 consolidated net sales, respectively. We attribute the decrease in
sales of Originals footwear primarily to a shift in consumer preference to other
product categories, primarily basketball footwear, which we do not sell.
Spot-bilt
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We sell shoes for coaches and officials and casual leather walking and workplace
footwear under the Spot-bilt brand name through similar distribution channels as
our Saucony brand shoes.
Hyde Authentics
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We formerly sold shoes under the Hyde Authentics brand name.
Athletic Apparel
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Hind
- ----
We sell a full line of technical apparel under the Hind brand name for use in a
variety of sports, including running, fitness and bicycling. We believe that our
Hind products have a reputation among athletes for delivering comfort and
performance. Most of our Hind products incorporate our moisture management
technology, which transfers moisture away from the wearer's skin to enhance
comfort. We frequently add innovations to our Hind product offerings in an
effort to incorporate the latest fabric technology.
Saucony
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We also market athletic apparel under the Saucony label. We target our Saucony
apparel line at the mainstream running consumer. We believe that our Saucony
athletic apparel supports our Saucony athletic footwear products by enhancing
the visibility of the Saucony brand.
Product Design and Development
- ------------------------------
We believe that the technical performance of our Saucony footwear and other
product lines is important to the ultimate consumers of our products. We
continually strive to produce products that improve athletic performance and
maximize comfort. We use the consulting services of professional designers as
well as podiatrists, orthopedists, athletes, trainers and coaches as part of our
product development program. We maintain a staff of 13 design and development
specialists in Peabody, Massachusetts to undertake continuing product
development.
In fiscal 2002, we spent approximately $1.61 million on our product development
programs, compared to approximately $1.14 million in fiscal 2001 and $1.08
million in fiscal 2000. Most of our research and development expenditures relate
to Saucony brand footwear products.
Sales and Marketing
- -------------------
Saucony
- -------
We sell our Saucony footwear products at more than 5,500 retail outlets in the
United States, primarily higher-end, full-margin sporting goods chains,
independent sporting goods stores, athletic footwear specialty stores and
department stores. These retail outlets include Foot Locker, Lady Foot Locker,
Road Runner Sports, The Athletes Foot Group, United Merchandising and DSW Shoe
Warehouse.
We maintain a corporate sales group that is directly responsible for the sales
activity in our largest 42 accounts. We also sell our footwear and apparel to
retail outlets in the United States through 14 independent manufacturers'
agents, whose organizations employ approximately 64 sales representatives. We
coordinate the efforts of these representatives through our field sales
management group. Our web site, saucony.com, receives thousands of "hits" weekly
from consumers looking for new product information and race and event data, as
well as general Saucony information. See "Available Information".
We sell our Saucony products outside the United States in 35 countries through
19 distributors located throughout the world, through our Canadian subsidiary,
in which we hold an 85% ownership interest, and through our wholly owned
subsidiaries located in the Netherlands and the United Kingdom.
We strive to enhance our reputation and image in the marketplace and increase
recognition of the Saucony brand name by advertising our products through print
media and television advertising. For our technical footwear, we advertise
primarily in magazines such as "Runner's World", "Shape" and "Self". We also
sponsor sporting events and telecasts to increase brand awareness and the image
of our technical footwear to athletes. Examples include "Saucony Running and
Racing" seen monthly on ESPN and sponsorship of the Los Angeles Marathon. To
build in-store presence, we use account-specific and in-store promotions, such
as athlete appearances, special events and discounts for store employee
purchases of our products. For our Originals line, we generally advertise in
"lifestyle" magazines that target 12 to 25 year olds, such as "Seventeen".
Most of our advertising and promotional programs for our Saucony brand are
directed toward the ultimate consumer. We also promote the Saucony brand to the
retail trade through attendance at trade shows and similar events. We employ a
cooperative advertising program, which is intended to maximize advertising
resources by having our retailers share in the cost of promoting our Saucony
brand in print advertising, while affording our retailers the opportunity to
promote their stores.
Advertising and promotion efforts in foreign markets are directed by local
distributors, the nature and content of which is subject to our approval.
Other Products
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We sell our Hind products domestically at independent sporting goods stores and
specialty sporting equipment stores through 18 independent manufacturers'
agents, whose organizations employ approximately 48 sales representatives. We
sell our Hind products outside the United States in 3 countries, through two
distributors and our subsidiaries in Canada and the United Kingdom. We market
our Spot-bilt line through our Saucony brand distribution channels and directly
to customers through our website at Spotbilt.com. See "Available Information".
Factory Stores
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We currently operate 12 factory outlet stores at which we sell our Saucony, Hind
and Spot-bilt products. To avoid competing against full-margin retail outlets
for these products, we generally limit the items offered at these stores to
products with cosmetic defects, discontinued merchandise, slow-moving products
and special make-up footwear products. As part of our growth strategy, we plan
to open factory stores in selected, factory-outlet malls in areas in which we
believe the Saucony brand is underdeveloped and there is a significant potential
for sales and profit growth. We believe that this approach will strengthen
Saucony brand name recognition. During fiscal 2002, we opened two new factory
outlet stores and closed one underperforming store. We plan to open an
additional factory outlet store in the first quarter of fiscal 2003 and two more
factory outlet stores in the second quarter of fiscal 2003.
Suppliers
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Independent overseas manufacturers produce all of our Saucony products,
including our Originals products, and our Spot-bilt products. The overseas
footwear manufacturers that supply products to us are located in Asia,
principally in China. We select footwear manufacturers in large part on the
basis of our prior experience with the manufacturer and the availability of
production capacity. We have developed long-term relationships with key footwear
manufacturers that we believe have yielded many benefits, including quality
control, favorable costs, flexible working arrangements and predictable
production capacity. Although to date we have not experienced difficulty in
obtaining manufacturing services, we seek to develop additional overseas
manufacturing sources from time to time, both to increase our sourcing capacity
and to obtain alternative sources of supply.
We perform an array of quality control procedures at various stages of the
production process, from testing of product prototypes prior to manufacture, to
inspection of finished goods prior to shipment. Our quality control program is
designed to ensure that finished goods meet our established design
specifications and high quality standards. We employ approximately 22 Saucony
footwear quality control personnel in China. Our personnel in China regularly
visit our footwear manufacturers throughout Asia to monitor, oversee and improve
the quality control and production processes.
We contract with third parties for the manufacture of our Hind apparel, most of
which is manufactured in the United States of domestically sourced fabrics.
Raw materials required for the manufacture of our products, including leather,
rubber, nylon and other fabrics, are generally available in the country in which
our products are manufactured. We and our suppliers have not experienced
difficulty in satisfying raw material needs to date.
The number of our foreign suppliers and the percentage of products sourced by us
from particular foreign suppliers varies from time to time. During fiscal 2002,
we purchased footwear products from four overseas suppliers. One such supplier,
located in China, accounted for approximately 35% of our total overseas footwear
purchases by dollar volume.
Although we compete with other athletic shoe and apparel companies, including
companies that are much larger than we are, for access to production facilities,
we believe that our relationships with our footwear and other suppliers are
strong. We also believe that we have the ability to develop, over time,
alternative sources in various countries for footwear and other products that we
source from our current suppliers. However, in the event of a supply
interruption, our operations could be materially and adversely affected if a
substantial delay occurred in locating and securing alternative sources of
supply.
Our operations are subject to compliance with the laws and regulations enforced
by the United States Customs Service and to the customary risks of conducting
business abroad, including currency fluctuations, increases in customs duties
and related fees, import controls and trade barriers (imposition of import
quotas), restrictions on the transfer of funds, work stoppages and, in certain
parts of the world, political instability causing disruption of trade. To date,
these factors have not had a material adverse affect on our operations.
Distribution and Inventory
- --------------------------
We distribute our products from our owned warehouses in Massachusetts and leased
warehouses in Canada and The Netherlands, as well as through third-party
operated warehouse facilities located in California and the United Kingdom.
To accommodate our domestic customers' requirements and plan for our own product
needs, we employ a "futures" order program for most of our products under which
we take orders in advance of the selling season for a particular product and
commit to ship the product to the customer in time for the selling season. We
offer our customers price discounts and extended payment terms as an incentive
for using this ordering program. Our futures order program is similar to
programs offered by other athletic footwear companies.
We also maintain an open-stock inventory on several core technical footwear
styles, a limited number of Originals footwear styles and Hind apparel products
so that we can satisfy retailers' orders on an "at-once" basis. The majority of
our Originals line of footwear is sold on a "futures" basis, with limited
planned inventory position, because we believe that demand for products from our
Originals line is more closely tied to style and fashion trends than demand for
our other products. By maintaining limited inventory for several styles of our
Originals line, we seek to minimize the risk of inventory obsolescence that can
result from unanticipated changes in consumer preferences. We are, however,
subject to inventory risk for our Originals and technical footwear products in
the event of significant order cancellations.
Backlog
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The athletic and casual footwear and athletic apparel industries in which we
compete are subject to seasonal sales fluctuations. Sales of our Saucony and
other footwear brands and our Hind athletic apparel are generally highest in the
first and third quarters. Because products sold on an "at once" basis are
generally shipped as orders are received, our backlog relates primarily to
products sold on a "futures" basis. The mix of "future" and "at-once" orders can
vary significantly from quarter-to-quarter and year-to-year.
Our backlog of unfilled orders was approximately $52.4 million at January 3,
2003 and $42.5 million at January 4, 2002. We expect that all of our backlog at
January 3, 2003 will be shipped in fiscal 2003, provided that our customers do
not cancel their orders. However, our backlog does not necessarily represent
actual future shipments because orders may be cancelled by our customers without
financial penalty. The rate of customer order cancellations can vary
quarter-to-quarter and year-to-year. Customers may also reject nonconforming
products.
During fiscal 2002, 2001 and 2000 we did not derive more that 10% of our
consolidated revenue from sales to one customer.
Trade Policy
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Our practice of sourcing products overseas, with subsequent importation into the
United States, exposes us to possible product supply disruptions and increased
costs in the event of actions by United States or foreign government agencies
adverse to continued trade or the enactment of legislation that restricts trade.
We are unable to predict whether additional United States customs duties, quotas
or other restrictions may be imposed in the future upon the importation of our
products. Any such occurrences might adversely affect our sales or
profitability, possibly materially.
For example, we import significant amounts of our footwear products from China.
On December 11, 2001, China acceded to the World Trade Organization ("WTO") and
thus now enjoys Permanent Normal Trade Relations with the United States.
Therefore, China receives the same favorable tariff treatment that the United
States extends to its other "normal" trading partners. However, even though it
has joined the WTO, scrutiny of China's trading practices is not likely to
subside. There will be continuing pressure on China to honor its WTO
commitments, particularly those relating to intellectual property protection. If
China does not abide by WTO rules, the United States may come under pressure to
impose sanctions, such as duties or quotas, on imports from China. If any such
action were to include imports of footwear products from China, it could
significantly add to our cost of goods and could restrict our supply of products
from that country.
Competition
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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 with 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 Sugoi. We compete based on a variety of factors, including
price, product style, durability and quality, product design and technical
performance, brand image and awareness, marketing and promotion and our ability
to meet delivery commitments to retailers. We believe that we are competitive in
all of these areas. However, there can be no assurance that we will be able to
retain our market share or respond timely to changing consumer preferences.
Trademarks
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We use trademarks on nearly all of our products and believe that having
distinctive marks is an important factor in marketing our products. We have
registered our Saucony(R), Spot-bilt(R), GRID(R), Hyde(R) and Hind(R) marks,
among others, in the United States. We have also registered some of these marks
in a number of foreign countries. Although we have a foreign trademark
registration program for selected marks, we may not be able to register or use
such marks in each foreign country in which we seek registration.
Employees
- ---------
As of January 3, 2003, we employed approximately 291 people worldwide. Of these
employees, approximately 224 were in the United States and approximately 67 were
in foreign locations. We believe that our employee relations are excellent. We
have never experienced a strike or other work stoppage. Approximately 22
employees in our Peabody, Massachusetts warehouse were represented by a union as
of January 3, 2003. The collective bargaining agreement with the union which
represents our warehouse employees expires on April 30, 2003. While we believe
that we will be able to negotiate a new collective bargaining agreement prior to
that date, we may not be successful in doing so. If we are not successful, we
might experience a strike or other work stoppage, which could have a material
adverse affect on our operations. None of our other employees are represented by
a union or are subject to a collective bargaining agreement.
Available Information
- ---------------------
We maintain a website at www.sauconyinc.com. We make available free of charge on
or through that website our recent Annual Reports on Form 10-K and Quarterly
Reports on Form 10-Q as soon as reasonably practicable after such reports are
electronically filed with, or furnished to, the Securities and Exchange
Commission. Beginning in April 2003, we expect to make available, free of charge
on our website, our recent Current Reports on Form 8-K and filings under Section
16 of the Securities Exchange Act of 1934, as soon as reasonably practicable
after such reports are electronically filed with, or furnished to, the
Securities and Exchange Commission. We are not including the information
contained at www.sauconyinc.com, www.saucony.com, www.hind.com, www.spotbilt.com
or at any other Internet address as part of, or incorporating it by reference
into, this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
Our executive officers, as of March 15, 2003 are as follows:
Name Age Position
---- --- --------
John H. Fisher 55 Chairman of the Board, President and
Chief Executive Officer
Charles A. Gottesman 52 Vice Chairman of the Board and
Executive Vice President,
Business Development
Michael Umana 40 Senior Vice President, Finance,
Chief Operating and Financial Officer
and Treasurer
Wolfgang Schweim 50 President, Saucony International
Michael Jeppesen 43 Senior Vice President, Manufacturing
and Design
Samuel S. Ward 40 Senior Vice President, Operations
and Technology
Roger P. Deschenes 44 Vice President, Controller,
Chief Accounting Officer and
Assistant Treasurer
John H. Fisher has served as one of our directors since 1980 and as Chairman of
the Board since 1991. Mr. Fisher has served as our Chief Executive Officer since
1991 and as our President since 1985. Mr. Fisher served as our Chief Operating
Officer from 1985 to 1991, our Executive Vice President from 1981 to 1985 and as
our Vice President, Sales from 1979 to 1981. He 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 is the son of Phyllis H. Fisher, one
of our directors, and the brother-in-law of Charles A. Gottesman, our Vice
Chairman of the Board and Executive Vice President, Business Development.
Charles A. Gottesman has served as one of our directors since 1983. Mr.
Gottesman has served as our Vice Chairman of the Board and Executive Vice
President, Business Development since July 2001. Mr. Gottesman served as our
Executive Vice President, Chief Operating Officer and Treasurer from 1992 to
June 2001, our Executive Vice President, Finance from 1989 to 1992, our Senior
Vice President from 1987 to 1989, our Vice President from 1985 to 1987, our
Treasurer from 1983 to 1989 and in several other capacities beginning in 1977.
Mr. Gottesman is the son-in-law of Phyllis H. Fisher, one of our directors, and
the brother-in-law of John H. Fisher, our President and Chief Executive Officer.
Michael Umana has served as our Senior Vice President, Finance, Chief Operating
Officer, Chief Financial Officer and Treasurer, since July 2001 after having
served as our Senior Vice President, Finance and Chief Financial Officer since
May 2000. Mr. Umana joined us in October 1999 as our Vice President, Finance and
Chief Financial Officer. From 1997 to October 1999, Mr. Umana served as Vice
President and Chief Financial Officer of the Analytical Instrument Business
Unit, at PerkinElmer, Inc., a high technology manufacturer. From 1985 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. Mr. Umana is a Certified Public Accountant.
Wolfgang Schweim became the President of Saucony International in January 1998
after serving as President of our athletic footwear division from 1994 to
January 1998. From 1993 to 1994, Mr. Schweim served as Managing Director for
Saucony Europe. From 1989 to 1993, Mr. Schweim was the German Managing Director
and Marketing Sales Manager for Europe at Asics, an athletic shoe manufacturer.
Prior to 1989, Mr. Schweim worked in sales and marketing positions with various
shoe manufacturers, including Nike International and Adidas AG.
Michael Jeppesen joined us in May 2001, as Senior Vice President, Manufacturing
and Design. From October 1999 to May 2001, Mr. Jeppesen was employed as Vice
President of Operations for Coach Leatherware Inc, a leather products
manufacturer, where he was responsible for manufacturing and product
development. From December 1996 to October 1999, Mr. Jeppesen held various
senior management positions at Adidas AG, an athletic footwear manufacturer,
including Vice President of European Operations and Vice President - Global
Materials, the most recent being Vice President of European Operations, which he
held beginning in 1997. Mr. Jeppesen was employed as General Manager of Prime
Asia, a footwear manufacturer, from 1994 to 1996.
Samuel S. Ward has served as our Senior Vice President, Operations and
Technology since October 2002. Mr. Ward joined us in February 2001 as Vice
President, Enterprise Solutions, in which capacity he was responsible for
leading a continuous improvement program to improve operational efficiency
through the redesign of business processes and supporting information systems.
From 1994 to 2001, Mr. Ward held various supply chain and business process
improvement consulting positions, including Senior Consultant and Manager, which
he held from 2000 to 2001, in the Business Consulting Group at Arthur Andersen
LLP, a professional services company. Mr. Ward graduated from Duke University's
Fuqua School of Business in 1994. From 1987 to 1992, Mr. Ward held various
finance and operations positions at General Electric Company and completed
General Electric's Financial Management Program.
Roger P. Deschenes has served as our Vice President, Controller, Chief
Accounting Officer and Assistant Treasurer since December 2002 after having
served as our Vice President, Controller and Chief Accounting Officer since
1997, and our Controller and Chief Accounting Officer from 1995 to 1997. Mr.
Deschenes joined us in 1990 as Corporate Accounting Manager. He was employed at
Allen-Bradley Company, a subsidiary of Rockwell International, Corp., from 1987
to 1990 as Financial and Cost Reporting Supervisor. Mr. Deschenes is a Certified
Management Accountant.
Officers are elected on an annual basis and serve at the discretion of the Board
of Directors.
ITEM 2 - PROPERTIES
- -------------------
Our general and executive offices and our main distribution facility are located
in Peabody, Massachusetts and are owned by us. This facility consists of
approximately 126,000 square feet, of which 107,000 square feet is warehouse
space.
We also own a facility in Bangor, Maine containing approximately 73,000 square
feet of space, which we previously had used for the assembly of our domestic
Saucony running shoes. We commenced seeking a buyer for this facility in
February 2002. We also own a facility in Brookfield, Massachusetts containing
approximately 109,000 square feet, which we use for warehousing and
distribution.
We lease factory outlet stores with an aggregate of approximately 23,000 square
feet of retail space at 10 locations in Massachusetts, Maine and Florida. The
terms of these leases range from 3 to 10 years. We also own a factory outlet
store containing approximately 3,000 square feet of retail space in Bangor,
Maine.
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
We are involved in routine litigation incident to our business. We do not
believe that any of these proceedings will have a material adverse effect on our
financial position, operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
During the fiscal quarter ended January 3, 2003, there were no matters submitted
to a vote of security holders of Saucony, through the solicitation of proxies or
otherwise.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
Our Class A Common Stock and Class B Common Stock trade on the Nasdaq National
Market under the symbols "SCNYA" and "SCNYB", respectively. The following table
sets forth, for the periods indicated, the actual high and low sales prices per
share of the Class A Common Stock and the Class B Common Stock as reported by
the Nasdaq National Market.
Class A Class B
Common Stock Common Stock
------------ ------------
High Low High Low
---- --- ---- ---
Fiscal Year ended January 3, 2003
First quarter.........................................$ 7.000 $ 5.400 $ 6.950 $ 5.375
Second quarter........................................ 8.400 6.710 8.590 6.600
Third quarter......................................... 7.900 5.850 7.850 5.650
Fourth quarter........................................ 10.040 6.000 10.000 5.700
Fiscal Year ended January 4, 2002
First quarter.........................................$ 10.500 $ 6.313 $ 10.125 $ 5.969
Second quarter........................................ 8.570 5.570 8.590 5.800
Third quarter......................................... 6.620 5.190 6.400 5.030
Fourth quarter........................................ 5.450 4.530 5.600 4.260
There were 243 and 251 stockholders of record of the Class A Common Stock and
Class B Common Stock, respectively, on March 27, 2003. Only the Class A Common
Stock has voting rights.
We have never paid any cash dividends on shares of our Class A Common Stock or
Class B Common Stock. Our credit facility agreement restricts the payment or
declaration of any dividend without the consent of our lender. Each share of
Class B Common Stock is entitled to a regular cash dividend equal to 110% of the
regular cash dividend, if any, payable on a share of Class A Common Stock.
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
The selected consolidated financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
in this Annual Report on Form 10-K.
The selected consolidated financial data set forth below as of January 3, 2003
and January 4, 2002 and for the years ended January 3, 2003, January 4, 2002 and
January 5, 2001 are derived from the audited consolidated financial statements
of Saucony included in this Annual Report on Form 10-K. All other selected
consolidated financial data set forth below is derived from audited financial
statements of Saucony not included in this Annual Report on Form 10-K. Saucony's
historical results are not necessarily indicative of its results of operations
to be expected in the future.
Year Year Year Year Year
Ended Ended Ended Ended Ended
Jan. 3, Jan. 4, Jan. 5, Dec. 31, Jan. 1,
2003 2002 2001 (1) 1999 1999
---- ---- -------- ---- ----
(in thousands except per share amounts)
Selected Income Statement Data
Revenues ..............................................$ 133,499 $132,364 $167,920 $155,887 $ 105,810
Operating income (loss) (2), (3)....................... 8,943 (269) 16,123 18,196 5,741
Net income (loss)...................................... 5,243 (940) 8,963 10,319 3,579
Earnings per common share - basic......................$ 0.86 $ (0.15) $ 1.45 $ 1.64 $ 0.57
========= ======== ======== ======== ========
Earnings per common share - diluted....................$ 0.85 $ (0.15) $ 1.41 $ 1.57 $ 0.56
========= ======== ======== ======== ========
Weighted average common shares and
equivalents outstanding
Basic EPS .......................................... 6,107 6,080 6,192 6,292 6,242
Diluted EPS ........................................ 6,186 6,080 6,341 6,568 6,373
Cash dividends per share of common stock............... -- -- -- -- --
Selected Balance Sheet Data
Jan. 3, Jan. 4, Jan. 5, Dec. 31, Jan. 1,
2003 2002 2001 1999 1999
---- ---- ---- ---- ----
(in thousands)
Current assets.........................................$ 80,670 $ 69,538 $ 73,531 $ 66,480 $ 58,963
Current liabilities.................................... 16,343 12,325 15,919 15,403 18,840
Working capital........................................ 64,327 57,213 57,612 51,077 40,123
Total assets........................................... 87,540 78,100 83,285 77,181 69,879
Long-term debt and capitalized lease
obligations, net of current portion................. -- -- 34 292 559
Stockholders' equity................................... 68,696 63,162 64,620 58,962 48,250
- ---------------------------
(1) See Note 1 to our Consolidated Financial Statements regarding reporting period.
(2) See Note 15 to our Consolidated Financial Statements regarding our Bangor, Maine plant closing and other
charges incurred in fiscal 2001.
(3) See Note 14 to our Consolidated Financial Statements regarding the sale of our cycling division in
fiscal 2000.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
- ------------
In the following management's discussion and analysis of financial condition and
results of operations: (1) when we refer to the 2002 fiscal year, we mean the
fiscal year ended January 3, 2003, (2) when we refer to the 2001 fiscal year, we
mean the fiscal year ended January 4, 2002, (3) when we refer to the 2000 fiscal
year, we mean the fiscal year ended January 5, 2001 and (4) all dollar amounts
are in thousands, except per share amounts.
Business Overview
- -----------------
Our core business focus is to design, develop and market performance-oriented
athletic footwear and athletic apparel, which we sell under the Saucony brand
name, and athletic apparel, which we sell under the Hind brand name. Sales of
Saucony brand products accounted for approximately 83%, 83% and 87% of our
consolidated net sales for 2002, 2001 and 2000, respectively, the significant
majority of which are sales of Saucony footwear products. Our results of
operations, financial position and cash flows are heavily dependent upon our
Saucony footwear business. Our ability to increase Saucony footwear sales is
dependent upon increasing our share of the market for footwear sales.
We pursue different strategies for our two Saucony footwear product categories.
For our technical footwear category, we combine high quality material and
components and technical features designed to meet the performance requirements
of athletes who have a high participation rate in their choice of sport. We
incorporate either our Ground Reaction Inertia Device, or GRID system, or our
proprietary footwear technology, Custom Ride Management, into the majority of
our technical footwear products. For our Originals footwear category, we design
fashion-oriented footwear intended to appeal to younger consumers who generally
do not wear the footwear for athletic purposes.
Our primary footwear focus is in technical footwear. As a result, we direct most
of our design and development efforts and working capital investments towards
our Saucony technical footwear. We view our Originals footwear as a market
opportunity which we must carefully manage due to rapid shifts in consumer
preferences. Accordingly, we limit our investment in working capital for, and
our spending on design and development of, our Originals footwear.
Our Saucony technical footwear and Originals footwear, along with athletic
apparel we sell under the Saucony brand name, constitute one operating segment.
We have another operating segment which consists of athletic apparel we sell
under the Hind brand name, shoes for coaches and officials and casual leather
walking and workplace footwear we sell under the Spot-bilt brand name and sales
of all of our products at our 12 factory outlet stores. We refer to this segment
as our Other Products segment. Sales from our Other Products segment accounted
for approximately 17%, 17% and 13% of our consolidated net sales for 2002, 2001,
and 2000, respectively. A majority of these sales are sales of our Hind athletic
apparel.
We compete in intensely competitive markets. Our ability to achieve sales growth
is dependent upon several factors including, but not limited to, product design
and technical performance, product quality, price, styling and our ability to
market and promote our brand and our products. Our business is sensitive to
consumer spending patterns, which in turn are subject to prevailing regional and
national economic patterns, such as employment levels and consumer confidence.
Continued increases in national unemployment levels and decreased consumer
confidence may restrict consumer spending, thereby negatively affecting our
sales and results of operations.
Critical Accounting Policies and Estimates
- ------------------------------------------
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results may differ materially from these
estimates. Our significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this Annual Report on
Form 10-K. Critical accounting policies are those policies that are reflective
of significant judgments and uncertainties and could potentially result in
materially different results under different assumptions and conditions. Our
most critical accounting policies are as follows:
- - Revenue Recognition
We recognize revenue from product sales when title passes and all the
rewards and risk of loss have been transferred and all the criteria
for revenue recognition described in SEC Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101), as amended
by SAB 101A and 101B are met. Title generally passes upon shipment or
upon receipt by the customer. Retail store revenues are recorded at
the time of sale.
As part of our revenue recognition policy, we must make estimates for
defective product returns and other allowances related to current
period product revenue. We record a provision for defective product
returns and other allowances based upon past experience and the
receipt of notification of pending returns. While the returns have
historically been within our expectations and the provisions
established, the product return rate may not remain constant. Any
significant increase in the product return rate and resulting
reduction in our net sales could have a material adverse effect on our
results of operations and cash flows for the period in which the
returns materialize. If actual or expected future returns and
allowances were significantly greater or lower than the reserves we
established, we would record a reduction or increase to our reserves
in the period in which such determination was made.
- - Accounts Receivable - Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts and therefore must
estimate losses resulting from the inability of our customers to make
required payments. We analyze our accounts receivable, historical bad
debt trends, customer credit worthiness, economic trends and changes
in our customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. As noted in Note 18 of the
consolidated financial statements, we have a credit risk
concentration, due to the concentration of our domestic Saucony
footwear sales among a relatively small customer base. If the
liquidity or financial condition of any of our larger customers were
to deteriorate, resulting in an impairment of their ability to make
payments due us or if payment schedules of our customers are otherwise
delayed from historical trends, additional allowances might be
required, which could materially increase our allowance for doubtful
accounts and effect our results of operations and cash flows.
- - Inventories
We value our inventory at the lower of the actual cost to purchase or
the current estimated market value. We calculate the provision for
excess and obsolete inventory as the difference between the cost of
the inventory and our estimated market value of the inventory. We
estimate market value based upon estimated product demand and market
conditions. The provision is recorded as a charge to cost of sales. If
actual future demand or market conditions are less favorable than
those we project, additional provisions to write-down inventory may be
required, which could materially reduce our amount of current assets
and affect our results of operations and cash flows.
- - Property, Plant and Equipment
We record property, plant and equipment, including buildings,
leasehold improvements, equipment and computer equipment at cost and
depreciate it over the applicable estimated useful life. Changes in
circumstances, such as technological advances or changes to our
business operations, can result in differences between the actual and
estimated useful lives. In those cases where we determine that the
useful life of a long-lived asset should be decreased, we would
increase depreciation over the remaining useful life to depreciate the
asset's net book value to its salvage value. Decreasing an assets'
estimated useful life could affect our results of operations.
- - Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets (property, plant
and equipment and trademarks) when events or changes in circumstances
occur that indicate that the carrying value of the assets may not be
recoverable. We recognize an impairment of a long-lived asset if the
carrying value of the long-lived asset is not recoverable from its
estimated future undiscounted cash flows. We measure an impairment
loss as the difference between the carrying amount of the asset and
its estimated fair value. During fiscal 2002, we recorded an
impairment charge of $44 to reduce the carrying amount of long-lived
assets used in our retail operations, which carrying value we deemed
to be not recoverable from its undiscounted future cash flows. The
charge is included in general and administrative expenses. Should
future events and circumstance cause cash flows associated with any of
our long-lived assets to decline significantly from our estimates, we
may need to record charges for impairment of long-lived assets, which
would affect our results of operations and financial position.
We no longer amortize goodwill and other indefinite-lived intangible
assets. Rather, we review them for impairment. When events or
circumstances indicate that the carrying value of a long-lived asset
may be impaired, we estimate the future undiscounted cash flows to be
derived from the asset to determine whether or not a potential
impairment exists. If the carrying value exceeds our estimate of
future undiscounted cash flows, we then calculate the impairment as
the excess of the carrying value of the asset over our estimate of its
fair market value. We record impairment charges as a component of
general and administrative expenses. We test the impairment of our
goodwill annually. We completed an annual test for impairment at
January 3, 2003 and determined that goodwill was not impaired. At
January 3, 2003, the carrying value of goodwill was $912. Our
estimates of undiscounted future cash flows may differ materially from
actual cash flows due to, technological changes, economic conditions
or changes to our business operations. A charge for impairment of
goodwill may be necessary if we experience a significant decline in
our undiscounted future cash flows. Such a charge would affect our
results of operations and financial position.
- - Income Taxes
We estimate our income taxes in each of the jurisdictions that we
operate. This process requires us to estimate our current tax
exposure, together with assessing temporary differences, which result
in deferred tax assets and liabilities. We recognize deferred tax
assets and liabilities based on the difference between the financial
statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for
recoverability and establish valuation allowances when we determine
that it is more likely than not that the deferred tax assets resulting
from operating losses will not be realized. Realization of deferred
tax assets (such as net operating loss carryforwards) is dependent
upon future taxable earnings and is therefore uncertain. During fiscal
2002, we recorded deferred tax valuation allowances of $94 on loss
carryforwards that are not expected to be realized, increasing our tax
expense in the period such determination was made. At January 3, 2003,
we have provided valuation allowances in an amount equal to our
deferred tax assets which have resulted from net operating losses.
U.S. generally accepted accounting principles allow companies to defer
the recognition of tax liability on undistributed earnings of foreign
subsidiaries that are indefinitely reinvested in the foreign
operation. At January 3, 2003, we had approximately $4,055 of
undistributed earnings of foreign subsidiaries that are indefinitely
reinvested in foreign operations for which we have not recorded
deferred income taxes. Were we to repatriate foreign earnings which
have been designated as indefinitely invested in foreign operations,
we would record additional tax expense at the time of repatriation.
- - Stock-Based Compensation
We have elected to continue to measure stock-based compensation
expense using the intrinsic value method. Accordingly, we measure
compensation cost for stock options and restricted stock awards as the
excess, if any, of the quoted market price of our stock at the date of
the grant over the exercise price an employee must pay to acquire the
stock. We calculate compensation cost for stock purchase warrants
based upon the fair value at the grant date. We amortize stock-based
compensation arising from the issuance of restricted stock warrants,
below market options and stock-based compensation resulting from stock
purchase warrants over the vesting period of the stock grant, option
term or the warrant term. Amortization of stock-based compensation
amounted to $43, $38 and $6 for 2002, 2001 and 2000, respectively. Had
we determined the stock-based compensation expense for our stock
options based upon the fair value at the grant date for stock option
awards in fiscal 2002, 2001 and 2000, our reported net income would
have been reduced by $684, $746 and $535, respectively.
- - Hedge Accounting for Derivatives
We enter into forward currency exchange contracts to hedge anticipated
foreign currency exchange transactions, as well as the resulting
intercompany liabilities which are denominated in currencies other
than the functional currency. These contracts economically function as
effective hedges of the underlying exposures; however, we are required
to record changes in the fair value of these foreign currency
contracts against earnings in the period of the change.
We estimate the fair value of our foreign currency exchange contracts
based on foreign exchange rates as of January 3, 2003. At January 3,
2003, the notional value our foreign currency exchange contracts to
purchase U.S. dollars was $5,685. The fair value of our foreign
currency exchange contracts at January 3, 2003 was $5,504. We recorded
a charge of $181 against earnings to adjust our derivatives to their
fair value. Since January 3, 2003, the value of the U.S. dollar has
decreased against the Canadian dollar and the Euro. Continued weakness
of the U.S. dollar will require that we record additional charges in
fiscal 2003 to adjust our derivatives to their fair value. The amount
of the potential charge is dependent upon the change in foreign
exchange rates from the January 3, 2003 rates to the time that the
forward exchange contract matures or to the foreign exchange rates as
of the period end reporting date. These charges could have a material
effect on our results of operations, financial position and cash
flows.
- - Contingencies
We are involved in legal proceedings involving employee and
contractual relationships, product liability claims, trademark rights
and other matters. We record contingent liabilities for claims against
us when it is probable that a liability has been incurred and the
amount of the loss is reasonably estimable. We disclose contingent
liabilities when there is a reasonable possibility that the claim will
exceed the recorded liability. Estimating probable losses requires
analysis of several factors and may include our judgment as to the
potential actions of third party claimants and courts. Currently, we
do not believe that any of our pending legal proceedings or claims
will have a material impact on our earnings or on our financial
position. If actual or estimated probable future claims exceed our
recorded liability for the claims, we would record additional charges
during the period in which the actual loss or change in estimate
occurred.
Highlights
Increase (Decrease)
2002 vs. 2001 2001 vs. 2000
------------- -------------
Net sales.................................................$ 935 0.7% $ (35,536) (21.2)%
Gross profit.............................................. 3,703 8.8 (20,059) (32.3)
Selling, general and administrative expenses.............. (3,129) (7.7) (3,134) (7.2)
$ Change
2002 vs. 2001 2001 vs. 2000
------------- -------------
Operating income.................................................$ 9,212 $ (16,392)
Income before income taxes....................................... 9,645 (15,877)
Net income....................................................... 6,183 (9,903)
Percent of Net Sales
2002 2001 2000
---- ---- ----
Gross profit................................................. 34.4% 31.9% 37.1%
Selling, general and administrative expenses................. 28.0 30.6 25.9
Operating income (loss) ..................................... 6.7 (0.2) 9.6
Income (loss) before income taxes............................ 7.0 (0.3) 9.2
Net income (loss)............................................ 3.9 (0.7) 5.3
Consolidated Net Sales
- ----------------------
Fiscal 2002, fiscal 2001 and fiscal 2000 consisted of 52, 52 and 53 weeks,
respectively. Our net sales and results of operations for each of fiscal 2002,
fiscal 2001 and fiscal 2000 are comparable. Net sales increased $935, or 1%, to
$133,196 in fiscal 2002 from $132,261 in fiscal 2001. Net sales decreased
$35,536, or 21%, to $132,261 in fiscal 2001 from $167,797 in fiscal 2000. Net
sales for 2000 included $3,188 in net sales from our cycling division, which we
divested in June 2000.
On a geographic basis, domestic sales decreased $3,131, or 3%, to $103,353 in
fiscal 2002 from $106,484 in fiscal 2001. International sales increased $4,066,
or 16%, to $29,843 in fiscal 2002 from $25,777 in fiscal 2001. Favorable changes
in foreign exchange rates accounted for $214 of the international sales increase
in fiscal 2002. Domestic sales decreased $39,309, or 27%, to $106,484 in fiscal
2001 from $145,793 in fiscal 2000. International sales increased $3,773, or 17%,
to $25,777 in fiscal 2001 from $22,004 in fiscal 2000. Unfavorable changes in
foreign exchange rates reduced the international sales increase in fiscal 2001
by $940.
Saucony Segment
2002 2001
Total / Change Total / Change 2000
from Prior Year from Prior Year Total
--------------- --------------- -----
Net Sales $110,829 / 1% $110,292 / -25% $146,468
Net Sales: 2002 Compared to 2001
- ---------------------------------
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $537, or 1%, to $110,829 in fiscal 2002 from $110,292 in fiscal 2001,
due primarily to a 10% increase in international footwear unit volumes and
higher domestic wholesale per pair average sell prices, offset by decreased
overall domestic footwear unit volumes. The volume of footwear sold in fiscal
2002 decreased 9% to 3,707 pair from 4,075 pair in fiscal 2001, primarily due to
lower Originals and closeout footwear unit volumes. The overall average domestic
wholesale selling price per pair of domestic footwear increased 12% in fiscal
2002 versus fiscal 2001, due to an increase in technical footwear unit volumes
and decreased closeout footwear unit volumes and Originals footwear unit
volumes, both of which sell at prices below our first quality technical
footwear.
Domestic net sales decreased $3,232, or 4%, to $83,182 in fiscal 2002 from
$86,414 in fiscal 2001, due primarily to a 42% decrease in Originals footwear
unit volumes and a 52% decrease in closeout footwear unit volumes, offset
partially by a 16% increase in technical footwear unit volumes, a 5% increase in
special make-up footwear unit volumes and a 12% increase in the overall average
domestic wholesale per pair selling price. The volume of domestic footwear sold
in fiscal 2002 decreased 14% to 2,775 pair from 3,224 pair in fiscal 2001. The
higher average wholesale selling price per pair was due to increased unit volume
of first quality technical footwear and lower unit volumes of closeout footwear
and originals footwear, both of which sell at prices below our first quality
technical footwear. Sales of closeout footwear accounted for approximately 5% of
domestic Saucony net sales in fiscal 2002 compared to 12% in fiscal 2001. The
decrease in closeout footwear sales is due to lower inventory quantities of past
season footwear available for sale in fiscal 2002. Originals footwear accounted
for 19% of fiscal 2002 domestic footwear unit volume versus 29% in fiscal 2001.
The unit volume decrease in Originals footwear is primarily due to a shift in
consumer preference to other product categories, primarily basketball footwear,
which we do not sell. Our domestic order cancellation rate for fiscal 2002 was
comparable with our historical averages.
International net sales increased $3,769, or 16%, to $27,647 in fiscal 2002 from
$23,878 in fiscal 2001, due primarily to a 10% increase in footwear unit volumes
and, to a lesser extent the favorable impact on a weaker U.S. dollar against
European currencies, partially offset by lower average per pair wholesale
selling price. The volume of international footwear sold in fiscal 2002
increased 10% to 932 pair from 852 pair in fiscal 2001. Footwear unit volumes
increased 36% at our European and Canadian subsidiaries, which was partially
offset by a 16% unit volume decrease at our international distributor business
in fiscal 2002 versus fiscal 2001. The footwear unit volume increase at our
European and Canadian subsidiaries was due to increased sales of our technical
footwear. Sales at our international distributor business decreased in fiscal
2002 due primarily to decreased Originals footwear unit volume sold in the
Japanese footwear market. Distributor sales into the Japanese footwear market
accounted for 9% of international sales in fiscal 2002, compared to 14% in
fiscal 2001.
Net Sales: 2001 Compared to 2000
- ---------------------------------
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
decreased $36,176, or 25%, to $110,292 in fiscal 2001 from $146,468 in fiscal
2000, due primarily to a 22% decrease in footwear unit volumes and lower
domestic and international wholesale per pair average selling prices. The
overall average domestic wholesale selling price per pair of domestic footwear
decreased 2% in fiscal 2001 versus fiscal 2000, due primarily to a 33% increase
in special make-up footwear unit volumes and a 34% increase in closeout footwear
unit volumes, both of which sell at prices below our first quality technical
footwear and, a change in the product mix for technical footwear to lower priced
products.
Domestic net sales decreased $40,344, or 32%, to $86,414 in fiscal 2001 from
$126,758 in fiscal 2000, due primarily to a 62% decrease in Originals footwear
unit volumes, a 13% decrease in technical footwear unit volumes and a lower
average wholesale per pair selling price, partially offset by a 34% increase in
closeout footwear unit volumes and a 33% increase in special make-up footwear
unit volumes. The lower average wholesale selling price per pair is due to
higher unit volumes of closeout footwear and special make-up footwear, both of
which sell at prices below our first quality technical footwear. Sales of
closeout footwear accounted for approximately 12% of domestic Saucony net sales
in fiscal 2001 compared to 5% in fiscal 2000. The Originals footwear accounted
for 29% of fiscal 2001 domestic footwear unit volume versus 53% in fiscal 2000.
The unit volume decrease in Originals footwear is primarily due to a shift in
consumer preference to other product categories, primarily basketball footwear,
which we do not sell. During the second half of fiscal 2001, the domestic order
cancellation rate for our Saucony footwear decreased from the order cancellation
rate in the first half of fiscal 2001 and was comparable with our historical
average.
International net sales increased $4,168, or 21%, to $23,878 in fiscal 2001 from
$19,710 in fiscal 2000, due primarily to a 40% increase in footwear unit
volumes, partially offset by a lower average per pair wholesale selling price
and the negative impact of the stronger U.S. dollar against European currencies.
Footwear unit volumes increased 73% at our international distributor business
and 17% at our European and Canadian subsidiaries, respectively, in fiscal 2001
versus fiscal 2000. The footwear unit volume increase in our international
distributor business was due primarily to the success of our Originals footwear
product in the Japanese footwear market in 2001, which accounted for
approximately 91% of the international distributor unit volume increase, and
increased market penetration in the Pacific Rim. Distributor sales into the
Japanese market accounted for 14% of international sales in fiscal 2001,
compared to 4% in fiscal 2000.
Other Products Segment
2002 2001
Total / Change Total / Change 2000
from Prior Year from Prior Year Total
Net Sales $22,367 / 2% $21,969 / 3% $21,329
The Other Products segment consists of our Hind athletic apparel, twelve factory
outlet stores, Spot-bilt coaches' and official shoes and casual walking and
workplace footwear, sales of our Hyde Authentics casual footwear, which brand we
no longer distribute, and sales from our former cycling division. Each of these
businesses represented less than 10% of total revenues and, in the aggregate,
represented 17% of total net sales in fiscal 2002.
Net Sales: 2002 Compared to 2001
- ---------------------------------
Worldwide sales of Other Products increased $398, or 2%, to $22,367 in fiscal
2002 from $21,969 in fiscal 2001 due primarily to increased domestic and
international sales of our Hind brand apparel, partially offset by lower sales
of our Hyde Authentics footwear and lower sales at our factory outlet division.
Domestic net sales of Other Products increased $101, or 1%, to $20,171 in fiscal
2002 from $20,070 in fiscal 2001 due primarily to a 5% increase in unit volume
of our Hind apparel and, to a lesser extent, a 4% increase in the average per
pair wholesale selling price of our Hind apparel, partially offset by decreased
sales of Hyde Authentics footwear due to lower unit volume and a lower average
per pair wholesale selling price and, a 2% decrease in sales at our factory
outlet division due to reduced closeout sales. The increase in the average
wholesale unit selling price for our Hind apparel brand is due to new product
introductions, which carry higher selling prices. Sales at our factory outlet
division decreased due to lower closeout sales volume in fiscal 2002 compared to
fiscal 2001. Close out sales accounted for approximately 3% of fiscal 2002 sales
compared to approximately 9% in fiscal 2001.
International net sales of Other Products increased $297, or 16%, to $2,196 in
fiscal 2002 from $1,899 in fiscal 2001, due primarily to increased Hind apparel
sales at our European and Canadian subsidiaries.
Net Sales: 2001 Compared to 2000
- ----------------------------------
Worldwide sales of Other Products increased $640, or 3%, to $21,969 in fiscal
2001 from $21,329 in fiscal 2000 due primarily to increased sales at our factory
outlet stores, increased Hyde Authentic unit volume and increased sales of our
Hind brand apparel, partially offset by the elimination of sales resulting from
the cycling division divestiture in fiscal 2000.
Domestic net sales of Other Products increased $1,035, or 5%, to $20,070 in
fiscal 2001 from $19,035 in fiscal 2000 due primarily to increased sales at our
factory outlet division, reflecting the net addition of one factory outlet store
and increased sales at stores open for more than one year, increased Hyde
Authentics footwear unit volume, increased unit volume of our Hind apparel
brand, partially offset by the elimination of sales from our former cycling
division, which was divested in fiscal 2000.
International net sales of Other Products decreased $395, or 17%, to $1,899 in
fiscal 2001 from $2,294 in fiscal 2000, primarily due to decreased Hind apparel
sales in Europe.
Costs and Expenses
- ------------------
Our gross margin in fiscal 2002 increased 2.5% to 34.4% from 31.9% in fiscal
2001 due primarily to increased Saucony domestic sales of first quality footwear
products at full margin. Other factors contributing to the fiscal 2002 margin
increase were proportionately lower sales of closeout footwear products, reduced
cost resulting from the closing of our Bangor, Maine manufacturing operations,
improved margins on several domestic footwear products and higher levels of
domestic at-once shipments, which shipments carry lower discounts, partially
offset by increased inventory provisions for obsolete Hind raw material and for
some slow-moving Hind apparel finished goods.
Our gross margin in fiscal 2001 decreased 5.2% to 31.9% from 37.1% in fiscal
2000 due primarily to the significant decline in Saucony domestic sales of first
quality footwear products at full margin. Other factors contributing to the
fiscal 2001 margin decrease were proportionately higher sales of closeout
products, due to our decision to reduce inventory levels and of special make-up
footwear, both of which carry lower margins, and to a lesser extent
manufacturing inefficiencies, domestic pricing pressures, changes in the
geographic mix of sales and the negative impact of the U.S. dollar on our
European margins.
The ratio of selling, general and administrative expenses to net sales decreased
2.6% to 28.0% in fiscal 2002 from 30.6% in 2001. The decrease in the ratio
resulted from decreased advertising, selling and administrative expenses in
fiscal 2002. In absolute dollars, selling, general and administrative expenses
decreased to $37,278 in 2002, or 8%, from $40,407 in fiscal 2001. Decreased
spending in fiscal 2002 was due primarily to decreased print media advertising,
lower provisions for bad debts and, to a lesser extent, decreased promotional
spending, decreased account specific advertising, decreased depreciation
expense, decreased professional fees and lower selling payroll, partially offset
by increased incentive compensation, due to improved operating profit, increased
administrative payroll and increased insurance costs.
The ratio of selling, general and administrative expenses to net sales increased
4.7% to 30.6% in fiscal 2001 from 25.9% in 2000. The increase in the ratio
resulted from advertising, selling and administrative expenses decreasing at a
lower rate than the rate of the sales decrease. In absolute dollars, selling,
general and administrative expenses decreased to $40,407 in 2001, or 7%, from
$43,541 in fiscal 2000. Decreased spending in fiscal 2001 was due primarily to
reduced operating expenses resulting from the cycling division divestiture,
decreased television and print media advertising, decreased account-specific
advertising, promotion and event sponsorship and decreased variable selling
expenses and incentive compensation, offset partially by increased operating
expenses associated with the factory outlet division expansion and higher
provisions for doubtful accounts.
Plant Closing and Other Charges
- -------------------------------
On November 9, 2001 we announced the cessation of manufacturing and closing of
our Bangor, Maine facility. During the fourth quarter of fiscal 2001, we
relocated our Asian sourcing and quality control office to China, resulting in
the closure of our Taiwan office, and negotiated an early termination and exit
of a retail store lease. As a result of these actions, we recorded pre-tax
charges of $2,108. The closing of our Bangor, Maine facility in January 2002
resulted in the termination of 104 employees, of which 61 were terminated
subsequent to January 4, 2002. Assets used by our Bangor, Maine manufacturing
facility, the Taiwan office and our retail store were written down to fair
market value.
Expenses associated with the plant closing and other charges were as follows:
Bangor Taiwan Retail
Plant Office Store Total
----- ------ ----- -----
Employee severance and termination benefits.......................$ 1,121 $ 150 $ 4 $ 1,275
Facility and equipment lease exit costs and
other non-cancelable contractual commitments..................... 228 -- 200 428
Writedown of machinery and equipment
to fair market value............................................. 248 25 77 350
Professional fees and other transaction costs..................... 47 -- 8 55
------- ------ ------- --------
Total............................................................$ 1,644 $ 175 $ 289 $ 2,108
======= ====== ======= ========
During fiscal 2002, we recorded a pre-tax net benefit of $214 to reduce expenses
accrued in the fourth quarter of fiscal 2001, associated with the closing of our
Bangor, Maine manufacturing facility and the early termination and exit of a
retail store lease. Partially offsetting this pre-tax benefit was a pre-tax
charge of $142 incurred to close an underperforming retail store. Expenses
associated with the store closing included lease termination and other
contractual costs of $51 and $91 to write-off leasehold improvements.
Included in accrued expenses at January 3, 2003 and January 4, 2002 were $36 and
$1,461 of costs associated with the plant closing and other charges. The charge
recorded for the Bangor, Maine plant closing and the Taiwan office closing were
included in income before tax for the Saucony segment, while the retail store
closing was included in income before tax for the Other Products segment.
As of January 4, 2002, our Bangor, Maine real property had a net book value of
$357 and was included on the balance sheet under the caption "Property, plant
and equipment". We commenced marketing the property for sale in February 2002
and have reclassified the real property to current assets as "Assets Held For
Sale." The property is available for immediate sale in its current condition,
and we expect that the property will be sold during 2003.
Sale of Cycling Division
- ------------------------
On June 29, 2000, we sold substantially all of the assets and business of our
cycling division, consisting of inventory, prepaid expenses, equipment and
tradenames, to QR Merlin Acquisition LLC for $1,350 in cash and the assumption
of $39 in liabilities. In connection with the sale, we recorded a pre-tax loss
of $2,661, inclusive of $1,012 of expenses associated with the transaction and
expenses resulting from our exit of the cycling business. As a result of the
transaction, a majority of the cycling division employees were severed and
assets used exclusively in the cycling business, which were not sold, were
deemed impaired and were written off. Expenses associated with the sale and exit
of the cycling division were as follows:
Transaction costs............................................$ 358
Costs to exit facility and equipment leases and
other non-cancelable contractual commitments............... 142
Employee severance and termination benefits.................. 210
Writeoff leasehold improvements.............................. 84
Writeoff goodwill and other deferred charges................. 218
--------
Total........................................................$ 1,012
========
Net sales from the cycling division, which are included in our Other Products
segment, represented approximately 1.9% of consolidated net sales for fiscal
year 2000. The loss on the sale of the cycling division was included in the
income before tax for the Other Products segment.
Interest Income
- ---------------
Interest income increased to $332 in fiscal 2002 from $136 in fiscal 2001.
Interest income increased to $136 in fiscal 2001 from $78 in fiscal 2000. The
increases in both 2002 and 2001 were due primarily to higher average cash
balances invested in money market funds.
Interest Expense
- ----------------
Interest expense decreased to $5 in fiscal 2002 from $213 in fiscal 2001 due
primarily to the absence of borrowings under our domestic and foreign credit
facilities. Interest expense decreased to $213 in fiscal 2001 from $695 in
fiscal 2000 due primarily to lower average debt levels and reduced borrowings
under our domestic and foreign credit facilities.
Income (Loss) Before Taxes and Minority Interest
- ------------------------------------------------
Segment 2002 2001 2000
------- ---- ---- ----
Saucony.......................$ 10,288 $ (296) $ 18,507
Other Products................ (1,007) (68) (2,994)
---------- -------- ---------
Consolidated..................$ 9,281 $ (364) $ 15,513
========== ======== =========
We evaluate business performance and the performance of key managers based on
profit or loss before income taxes. Income before tax increased by $9,645 in
fiscal 2002 to a profit of $9,281 compared to a loss of $364 in fiscal 2001, due
primarily to the significant improvement in the domestic Saucony segment due to
higher gross margins, reduced selling, general and administrative expenses the
charges of $1,819 incurred in fiscal 2001 in connection with the closure of our
Bangor, Maine manufacturing facility and the closure of our Taiwan office and
improved profitability at our Saucony international business due to increased
sales and improved margins at our Canadian and European subsidiaries. The
decrease in our Other Products segment income before tax in 2002, as compared to
2001, was due primarily to lower gross margins realized by our Hind apparel
brand due to an increase in provisions for obsolete raw material and some slow
moving finished goods inventory, partially offset by increased profitability at
our factory outlet division, due to higher gross margins, lower operating
expenses due to the closing of underperforming retail stores in fiscal 2002 and
the charge of $289 incurred in fiscal 2001 due to the early termination and exit
of a retail store outlet.
Income before tax decreased by $15,877 in fiscal 2001 to a loss of $364 compared
to a profit of $15,513 in fiscal 2000 due primarily to the significant reduction
in the domestic Saucony segment due to lower sales and lower gross margins and,
to a lesser extent, charges of $1,819 incurred in connection with the closure of
our Bangor, Maine manufacturing facility and the closure of our Taiwan office.
Our Other Products segment income before tax increased in fiscal 2001 due
primarily to the $2,661 loss on the sale of our former cycling division recorded
in fiscal 2000, partially offset by the charge of $289 incurred in fiscal 2001
due to the early termination and exit of a retail store outlet.
Income Taxes
- ------------
The provision for income taxes increased to $3,865 in fiscal 2002 from $475 in
fiscal 2001 due primarily to increased domestic and international pre-tax
income. The effective tax rate decreased to 41.6% in fiscal 2002, compared to
130.5% in fiscal 2001, due primarily to an increase in fiscal 2001 in valuation
allowances on foreign loss carryforwards that are not expected to be realized.
The $21 and $8 in income tax benefit of options exercised during fiscal 2002 and
fiscal 2001, respectively, were credited to additional paid-in capital and
therefore did not impact the effective tax rate.
The provision for income taxes decreased to $475 in fiscal 2001 from $6,461 in
fiscal 2000 due primarily to a decrease in domestic pre-tax income, partially
offset by an increase in deferred valuation allowances on foreign loss
carryforwards that are not expected to be realized and a shift in the
composition of domestic and foreign pre-tax earnings.
Minority Interest in Net Income of Consolidated Subsidiary
- ----------------------------------------------------------
Minority interest expense represents a minority shareholders' allocable share of
our Canadian subsidiary's earnings after deducting for income tax.
Minority interest expense increased to $173 in fiscal 2002 from $101 in fiscal
2001 due primarily to increased sales and, to a lesser extent, improved gross
margins. Minority interest expense increased to $101 in fiscal 2001 from $89 in
fiscal 2000 due primarily to increased sales.
Net Income (Loss)
- -----------------
Net income for fiscal 2002 was $5,243, or $0.85 per diluted share, compared to a
net loss of $940, or $0.15 per diluted share, in fiscal 2001. Weighted average
common shares and common stock equivalents of 6,186,000 were used to calculate
diluted earnings per share for fiscal 2002. Weighted average common shares of
6,080,000 were used to calculate diluted earnings per share for fiscal 2001.
Common stock equivalents were not used in fiscal 2001 to calculate diluted
earnings per share because they were anti-dilutive.
The net loss for fiscal 2001 was $940, or $0.15 per diluted share, compared to
net income of $8,963, or $1.41 per diluted share, in fiscal 2000. Weighted
average common shares of 6,080,000 were used to calculate diluted earnings per
share for fiscal 2001, while weighted average common shares and common stock
equivalents of 6,341,000 were used to calculate diluted earnings per share for
fiscal 2000. Common stock equivalents were not used in fiscal 2001 to calculate
diluted earnings per share because they were anti-dilutive.
Liquidity and Capital Resources
- -------------------------------
Fiscal 2002
- -----------
As of January 3, 2003, our cash and cash equivalents totaled $34,483, an
increase of $12,256 from January 4, 2002. The increase was due primarily to the
generation of $13,230 of cash from operations and, to a lesser extent, the
receipt of payment on notes receivable of $312, the receipt of $329 from the
issuance of shares of our common stock, the conversion of $197 in marketable
securities to cash and the receipt of $90 from the sale of capital assets,
partially offset by cash outlays for the repurchase of shares of our common
stock of $880, purchases of capital assets of $777, the repayment of long-term
debt of $88 and debt financing costs of $87.
Our accounts receivable increased $622, net of the provision for bad debts and
discounts, due primarily to increased net sales of our Saucony products in the
fourth quarter of fiscal 2002 and an increase in our days sales outstanding for
our accounts receivable. Our days sales outstanding for our accounts receivable
increased to 42 days in fiscal 2003 from 41 days in fiscal 2001. Days sales
outstanding is defined as the number of average daily net sales in our accounts
receivable as of the period end date and is calculated by dividing the end of
period accounts receivable by the average daily net sales. The provision for bad
debts and doubtful accounts decreased to $4,752 in fiscal 2002 from $5,767 in
fiscal 2001 due to a decrease in the provision for doubtful accounts in fiscal
2002 and a change in pricing programs for several of our larger customers to net
pricing, which reduced discounts in fiscal 2002.
Inventories decreased $1,848 in fiscal 2002 due primarily to improvements in our
supply chain which is intended to reduce on-hand inventory and our decision to
reduce inventory of our Hind brand apparel and Spot-bilt footwear products. Our
inventory turns ratio increased to 3.1 turns in fiscal 2002 from 2.7 turns in
fiscal 2001. The number of days sales in inventory decreased to 113 days in
fiscal 2002 from 115 days in fiscal 2001. The inventory turns ratio represents
our net sales for a period divided by our inventory at the end of the period.
Days sales in inventory is defined as the number of average daily cost of sales
in our inventory as of the period end date and is calculated by dividing the end
of period inventories by the average daily cost of sales.
Principal factors, other than net income, accounts receivable, provision for bad
debts and discounts and inventory, affecting our operating cash flows in fiscal
2002, included an increase of $1,862 in account payable due to extended payment
terms provided by our footwear suppliers, a $1,754 increase in accrued income
taxes payable, due to higher pre-tax profits and the timing of tax payments and,
a $1,295 increase in accrued expenses, due primarily to increased accruals for
incentive compensation.
During fiscal 2002, we repurchased approximately 95,000 shares of our common
stock for a total expenditure of $880. Since the approval of the stock buyback
program by the Board of Directors in May 1998, we have repurchased a total of
562,000 shares of our common stock for a total expenditure of $5,244. Our credit
facility limits our repurchases of shares of our common stock to $3,000 over the
term of the facility, which expires on August 30, 2004. During the term of the
facility, we have repurchased a total of 95,000 shares of our common stock for a
total expenditure of $880.
Fiscal 2001
- -----------
As of January 4, 2002, our cash and cash equivalents totaled $22,227, an
increase of $17,489 from January 5, 2001. The increase was due primarily to the
generation of $21,588 of cash from operations, partially offset by cash outlays
for capital assets of $1,326, the repayment of short-term borrowings under our
credit facilities of $2,474 and the repayment of long-term debt of $226.
Our accounts receivable decreased $11,827, net of the provision for bad debt and
discounts, due primarily to decreased net sales of our Saucony and other
products in the fourth quarter of fiscal 2001 and a decrease in our days sales
outstanding for our accounts receivable. Our days sales outstanding for our
accounts receivable decreased to 41 days in fiscal 2001 from 58 days in fiscal
2000, due primarily to a reduction in payment date sales terms reflecting
increased sales of special make-up and closeout footwear and increased foreign
distributor volume, for which dating programs are shorter. In addition, the
increased provisions for doubtful accounts reduced days sales outstanding by
approximately two days in fiscal 2001. The provision for bad debts and discounts
increased to $5,767 in fiscal 2001 from $5,525 in fiscal 2000 due to an increase
in the provision for doubtful accounts.
Inventories decreased $9,418 in fiscal 2001 due primarily to our decision to
reduce domestic Saucony footwear inventories, which had increased in the fourth
quarter of fiscal 2000 due to increased order cancellations, and lower factory
outlet inventories, which had increased due to the expansion of the factory
outlet division. The increase in domestic Saucony footwear inventory in fiscal
2000 resulted from increased order cancellations in the fourth quarter of 2000
for both technical and Originals footwear. The decision to reduce domestic
Saucony footwear inventories decreased fiscal 2001 gross margins. Our inventory
turns ratio decreased to 2.7 turns in fiscal 2001 from 2.9 turns in fiscal 2000.
The number of days sales in inventory decreased to 115 days in fiscal 2001 from
132 days in fiscal 2000.
Principal factors, other than net income, accounts receivable, provision for bad
debts and discounts and inventory, affecting our operating cash flows in fiscal
2001 included a decrease of $3,472 in accrued letters of credit, due to new
inventory supplier payment terms, an increase of $3,484 in accounts payable, due
to a change in inventory purchase terms, a decrease of $2,286 in accrued
expenses, due to decreased performance-based compensation accruals and lower
operating spending levels, and an increase of $344 in income tax payable due to
the timing of income tax payments.
During fiscal 2001, we repurchased approximately 19,000 shares of our common
stock for a total expenditure of $132.
Credit Facility
- ---------------
On August 30, 2002, we entered into a revolving credit agreement under the terms
of which a bank committed to a maximum of $15,000 to us for cash borrowings and
letters of credit. The credit facility, which terminates on August 31, 2004,
amends and restates in its entirety our prior revolving credit agreement which
terminated on August 30, 2002. Maximum borrowings under the credit facility are
limited to the lesser of $15,000 or the sum of 65% of eligible receivables plus
20% of eligible finished goods inventory. Borrowings under the credit facility
are made at the bank's prime rate of interest, less 1.0%, or at the LIBOR rate,
plus 1.5%. In addition, we pay a quarterly commitment fee of 0.25% on the
average daily unused credit line. The credit facility contains restrictions and
financial covenants including: restrictions on additional indebtedness,
restrictions on the annual amount of capital expenditures and limits on
repurchases of our common stock to $3,000 over the term of the facility.
Furthermore, for any fiscal quarter during the term of the credit facility, our
consolidated pre-tax income may not exceed a pre-tax loss of $2,500. For any two
consecutive fiscal quarters, our consolidated pre-tax income may not exceed a
pre-tax loss of $1,000.
We were in compliance with all covenants of the credit facility at January 3,
2003. As of January 3, 2003 and March 7, 2003, $14,652 and $15,000,
respectively, were available for borrowing under the credit facility.
One of our foreign subsidiaries maintains a credit facility for cash borrowings
and letters of credit in the amount of $1,024. At March 7, 2003, $1,024 was
available for borrowing under the facility. See Note 8 to the Consolidated
Financial Statements.
Capital Expenditures
- --------------------
At January 3, 2003, our commitments for capital expenditures were not material.
We anticipate capital expenditures to range between $1,000 to $1,500 in fiscal
2003. Of this amount, we expect approximately $775 to $1,250 will be spent on
computer hardware and software and approximately $225 to $250 will be spent to
open three retail stores.
Contractual Obligations
- -----------------------
Below is a table which presents our contractual obligations and commitments at
January 3, 2003.
Payments due by year
------------------------------------------------------------------
2007
Contractual and
Obligations Total 2003 2004 2005 2006 thereafter
----------- ----- ---- ---- ---- ---- ----------
Long-term debt..................................$ -- $ -- $ -- $ -- $ -- $ --
Capital lease obligations....................... -- -- -- -- -- --
Operating leases................................ 3,050 962 842 523 254 469
Other long-term obligations (1)................. 1,960 1,296 445 179 20 20
-- ------- ------- -------- -------- ------- --------
Total contractual obligations...................$ 5,010 $ 2,258 $ 1,287 $ 702 $ 274 $ 489
======= ======= ======== ======== ======= ========
_______________
(1) Other long-term obligations include athlete and event sponsorship and
employment contracts with two key executives. The amounts included for athlete
sponsorship represent base compensation. Actual payments may be higher than the
amounts included as these contracts provide for bonus payments to the athletes
based upon athletic achievements in future periods.
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 other operating expenses and to fund
our capital investment needs and debt service payments in the near term. During
fiscal 2002 we generated $13,230 in cash from operating cash flows due to our
operating profit and an increase in our accrued liabilities and accounts
payable. In 2001, we generated $21,588 in cash from operating cash flows, due
primarily to decreases in our accounts receivable and inventories. As of January
3, 2003, we had $15,496 in accounts receivable and $27,201 in inventories.
At January 3, 2003, we had no borrowings outstanding under our credit
facilities. Our short-term liquidity could potentially be adversely impacted
should demand for our products decline significantly, which could result in
extended payment terms for our customers and the increased use of price
concessions to induce customers to purchase our products.
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
foreign currency denominated payables. During fiscal 2001 the gross margins of
our European subsidiaries were reduced due to currency fluctuation. We have
entered into forward foreign exchange contracts to minimize various transaction
currency risks. We believe that our forward foreign currency contracts function
as economic hedges of our cash flows and that our foreign exchange management
program effectively minimizes various transaction currency risks.
Accounting Pronouncements
- -------------------------
SFAS 144
- --------
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets", "SFAS 144". SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
"SFAS 121", and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", "APB 30", for the disposal of a
segment of a business as previously defined in APB 30. SFAS 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", "ARB
51" to eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. The provisions of SFAS 144 are to be applied
to all long-lived assets, with the exception of goodwill. SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss only if the carry
amount of the long-lived asset is not recoverable from its undiscounted cash
flows and measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. SFAS 144 expands upon the criteria
beyond that previously specified in SFAS 121 to determine when a long-lived
asset is held for sale and provides guidance on the accounting for long-lived
assets classified as held for sale if the asset is being reclassified as held
and used.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. The statement retains the basic provisions of APB
30 for the presentation of discontinued operations in the statement of
operations but broadens the definition of a discontinued operations to include a
component of an entity rather than a segment of a business.
The Company adopted SFAS 144 in the first quarter of fiscal 2002. During fiscal
2002, the Company recorded an impairment charge of $44 to reduce the carrying
amount of certain long-lived assets used in the Company's retail operations,
which carrying value was not deemed recoverable from its undiscounted cash
flows.
SFAS 148
- --------
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure - amendment of SFAS 123", "SFAS 148". SFAS 148
amends Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", "SFAS 123" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. In addition, this statement amends the disclosure
requirements for SFAS 123, to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We
have elected to continue to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", "APB 25", and related
interpretations. Accordingly, compensation cost for stock options and restricted
stock awards is measured as the excess, if any, of the quoted market price of
our stock at the date of the grant over the exercise price an employee must pay
to acquire the stock. We have adopted the annual disclosure provisions of SFAS
148 in our financial statements for the year ended January 3, 2003 and will
adopt the interim disclosure provisions in our financial statements for the
quarter ended April 4, 2003. Since the adoption of SFAS 148 involves disclosure
only, we do not expect a material impact on our earnings or on our financial
position.
Special Note Regarding Forward-Looking Statements
- -------------------------------------------------
This Annual Report on Form 10-K and the documents incorporated by reference in
this annual report on Form 10-K contain forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate", "believe", "could",
"estimate", "expect", "intend", "may", "should", "will", and "would", or similar
words. You should read statements that contain these words carefully because
they discuss future expectations, contain projections of future results of
operations or of financial position or state other "forward-looking"
information. The important factors listed below, as well as any cautionary
language elsewhere in this Annual Report on Form 10-K, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations described in these forward-looking statements.
You should be aware that the occurrence of the events described in the risk
factors below and elsewhere in this Annual Report on Form 10-K could have an
adverse effect on our business, results of operations and financial position.
Any forward-looking statements in this Annual Report on Form 10-K are not
guarantees of future performance, and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements,
possibly materially. We disclaim any duty to update any forward-looking
statements.
Certain Other Factors That May Affect Future Results
- ----------------------------------------------------
We face intense competition
- ---------------------------
Competition is intense in the markets in which we sell our products. We compete
with a large number of other companies, both domestic and foreign, several of
which are large organizations with diversified product lines, well-known brands
and financial, distribution and marketing resources substantially greater than
ours. The principal competitors for our Saucony products are Nike, New Balance
and Asics. The principal competitors of our Hind products are Nike, Pearl Izumi
and Sugoi. We compete based on a variety of factors, including price, product
style, durability and quality, product design and technical performance, brand
image and awareness, marketing and promotion and the ability to meet delivery
commitments to retailers. A technological breakthrough or marketing or
promotional success by one of our competitors could adversely affect our
competitive position. The intensity of the competition that we face constitutes
a significant risk to our business.
We depend on foreign suppliers
- ------------------------------
A number of manufacturers located in Asia, primarily in China, supply products
to us. During fiscal 2002, one of our suppliers, located in China, accounted for
approximately 35% of our total footwear purchases by dollar volume. We are
subject to the usual risks of a business involving foreign suppliers, such as
currency fluctuations, government regulation of fund transfers, export and
import duties, administrative trade cases, trade limitations imposed by the
United States or foreign governments and political and labor instability. There
are a number of trade-related and other issues creating significant friction
between the governments of the United States and China, and the imposition of
punitive import duties on certain categories of Chinese products has been
threatened in the past and may be implemented in the future. In addition, we
have no long-term manufacturing agreements with our foreign suppliers and
compete with other athletic shoe and apparel companies, including companies that
are much larger than us, for access to production facilities.
We need to anticipate and respond to consumer preferences and merchandise trends
- --------------------------------------------------------------------------------
The footwear and apparel industries are subject to rapid changes in consumer
preferences. Demand for our products, particularly our Originals line has been
and may continue to be affected adversely by changing fashion trends and
consumer style preferences. We believe that our success depends in substantial
part on our ability to anticipate, gauge and respond to changing consumer
demands and fashion trends in a timely manner. In addition, our decisions
concerning new product designs often need to be made several months before we
can determine consumer acceptance. As a result, our failure to anticipate,
identify or react appropriately to changes in styles or features could lead to
problems such as excess inventories and higher markdowns, lower gross margins
due to the necessity of providing discounts to retailers and the inability to
sell such products through our own factory outlet stores.
Our quarterly results may fluctuate
- -----------------------------------
Our revenues and quarterly operating results may vary significantly depending on
a number of factors, including:
o the timing and shipment of individual orders;
o market acceptance of footwear and other products offered by us;
o changes in our operating expenses;
o personnel changes;
o mix of products sold;
o changes in product pricing;
o general economic conditions; and,
o weather.
In addition, a substantial portion of our revenue is realized during the last
few weeks of each quarter. As a result, any delays in orders or shipments are
more likely to result in revenue not being recognized until the following
quarter, which could adversely impact our results of operations for a particular
quarter.
Our current expense levels are based in part on our expectations of future
revenue. As a result, net income for a given period could be disproportionately
affected by any reduction in revenue. It is possible that in some future quarter
our revenue or operating results will be below the expectations of stock market
securities analysts and investors. If that were to occur, the market price of
our common stock could be materially adversely affected.
Our revenues are subject to foreign currency exchange fluctuations
- ------------------------------------------------------------------
We conduct operations in various international countries, and a portion of our
sales is transacted in local currencies. As a result, our revenues are subject
to foreign exchange rate fluctuations. From time to time, our financial results
have been adversely affected by fluctuations in foreign currency exchange rates.
We enter into forward currency exchange contracts to protect us from the effect
of changes in foreign exchange rates. However, our efforts to reduce currency
exchange losses may not be successful, and currency exchange rates may have an
adverse impact on our future operating results and financial condition.
Our business is affected by seasonal consumer buying patterns
- -------------------------------------------------------------
The athletic and casual footwear and athletic apparel industries in which we
compete are generally characterized by significant seasonality of sales and
results of operations. Sales of our Saucony brand and Hind brand products have
historically been seasonal in nature, with the strongest sales generally
occurring in the first and third quarters. We believe that sales of our products
will continue to follow this seasonal cycle. Therefore, our results of
operations for any one quarter may not necessarily be indicative of the results
that we may achieve for a full fiscal year or any future quarter.
Our operating results may be affected by order cancellations
- ------------------------------------------------------------
Customers may cancel orders of our products at any time without financial
penalty. As a result, our backlog does not necessarily represent actual future
shipments. The rate of customer cancellations can vary quarter-to-quarter and
year-to-year. If the retail market continues to be weak or weakens again in the
future, our customers could cancel further orders of our products, which could
have a material adverse effect on our operating results.
We are susceptible to financial difficulties of retailers
- ---------------------------------------------------------
We sell our products primarily to major retailers, some of whom have experienced
financial difficulties, including bankruptcy. We cannot predict what effect the
future financial condition of such retailers will have on our business. In
particular, we cannot guarantee that our bad debt expenses will not be material
in future periods.
We need effective marketing and advertising programs
- ----------------------------------------------------
Because consumer demand for our products is heavily influenced by brand image,
our business requires substantial investments in marketing and advertising.
Failure of such investments to achieve the desired effect in terms of increased
retailer acceptance or consumer purchase of our products could adversely affect
our financial results. In addition, we believe that our success depends in part
upon our ability to periodically launch new marketing and advertising programs.
If we are unable to successfully design or execute new marketing and
advertising, or if such programs are ineffective, we may not be able to increase
or maintain our sales and our brand image.
We depend on certain key customers
- ----------------------------------
Approximately 42% of our gross trade receivables balance was represented by 18
customers at January 3, 2003. 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 or the failure of a major customer to proceed with a large order or to
timely pay us for a large order could materially reduce our sales.
We depend on the strength of our intellectual property protection of our
- ------------------------------------------------------------------------
products
- --------
We use trademarks on nearly all of our products and believe that having
distinctive marks is an important factor in marketing our products. We have
registered our marks in the United States and in a number of foreign countries.
We may not be able to register or use our marks in each foreign country in which
we seek to register them. Moreover, the registrations we seek and secure may be
inadequate. We may incur significant expense in any legal proceedings to protect
our trademarks.
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
Market Risk
- -----------
We are exposed to market risk from changes in interest rates and foreign
exchange rates, which could affect our future results of operations and
financial position. Our objective in managing our exposure to interest rates and
foreign currency rate changes is to limit the impact of these changes on cash
flows and earnings and to lower our overall borrowing costs. In order to achieve
these objectives we identify the risks and manage them by adjusting fixed and
variable rate debt positions and selectively hedging foreign currency risks.
Borrowings under our credit facilities are based on floating rates, which would
increase interest expense in an environment of rising interest rates. We enter
into forward exchange contracts to hedge firm and anticipated purchase and sale
commitments denominated in currencies other than our subsidiaries; local
currencies. The purpose of our currency hedging activities is to protect our
local subsidiaries' cash flows related to these commitments from fluctuations in
currency exchange rates. Our forward exchange contracts principally hedge U.S.
denominated transactions with our Canadian, Dutch and British subsidiaries.
While we have a policy of selectively hedging foreign currency risks, but there
are no assurances that this program will fully insulate us against short-term
fluctuations in financial results.
Currency Risk
- -------------
The fair value of our forward exchange contracts is sensitive to changes in
currency exchange rates. The fair value of forward exchange contracts is the
estimated amount that we would pay or receive upon termination of the contract,
taking into account the change in the currency exchange rates. As of January 3,
2003, the fair value of our forward exchange contracts was $5,504. We have
calculated the effect of a 10% depreciation in the year-end currency exchange
rates related to the forward exchange contracts. This depreciation would result
in an increase in the unrealized loss on forward exchange contracts of $602,
which would affect our fiscal 2003 results of operations and financial position.
The unrealized losses on our forward exchange contracts resulting from changes
in currency exchange rates will be partially offset by gains on the exposures
being hedged. We have also calculated the effect of a 10% depreciation in
year-end interest rates and have determined the effects to our results of
operations and financial position 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 15 and the
Consolidated Financial Statements, notes and schedules that are filed as part of
this Form 10-K following the certifications page and incorporated herein by this
reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required to be reported in this Item was previously reported in
Saucony's Current Reports on Form 8-K (1) dated July 9, 2002 and filed with the
Securities and Exchange Commission on July 10, 2002, (2) dated July 1, 2002 and
filed with the Securities and Exchange Commission on July 1, 2002 and (3) dated
April 11, 2001 and filed with the Securities and Exchange Commission on April
17, 2001.
Our consolidated financial statements as of and for the fiscal year ended
January 4, 2002 were audited by Arthur Andersen LLP, independent accountants. On
August 31, 2002, Arthur Andersen ceased practicing before the SEC. Therefore,
Arthur Andersen did not participate in the preparation of this Annual Report on
Form 10-K, did not reissue its audit report with respect to the financial
statements included in this Annual Report on Form 10-K and did not consent to
the inclusion of its audit report in this Annual Report on Form 10-K. As a
result, holders of our securities, and investors evaluating offers and
purchasing securities pursuant to a prospectus incorporating by reference this
Annual Report on Form 10-K, may have no effective remedy against Arthur Andersen
in connection with a material misstatement or omission in the financial
statements to which its audit report relates. In addition, even if such holders
or investors were able to assert such a claim, because it has ceased operations,
Arthur Andersen may fail or otherwise have insufficient assets to satisfy claims
made by such persons that might arise under federal securities laws or otherwise
with respect to Arthur Andersen's audit report.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Executive Officers of the Registrant" in Part I of this Annual Report on
Form 10-K. The information required by Items 401 and 405 of Regulation S-K and
appearing in our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 21, 2003, which will be filed with the Securities
and Exchange Commission not later than 120 days after January 3, 2003, is
incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 21, 2003, which will be filed with the Securities and Exchange Commission
not later than 120 days after January 3, 2003, is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Items 201(d) and 403 of Regulation S-K and appearing
in our definitive Proxy Statement for the Annual Meeting of Stockholders to be
held on May 21, 2003, which will be filed with the Securities and Exchange
Commission not later than 120 days after January 3, 2003, is incorporated herein
by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 21, 2003, which will be filed with the Securities and Exchange Commission
not later than 120 days after January 3, 2003, is incorporated herein by
reference.
ITEM 14 - CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Form 10-K, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
the Company's Senior Vice President and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's President and
Chief Executive Officer and the Company's Senior Vice President and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company, including its consolidated subsidiaries, required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect those internal
controls subsequent to the date of their most recent evaluation. PART IV
ITEM 15 - 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
certifications pages:
- Independent Auditors Report - Deloitte and Touche LLP
- Report of Independent Public Accountants - Arthur Andersen LLP
- Report of Independent Accountants - PricewaterhouseCoopers LLP -
Consolidated balance sheets at January 3, 2003 and January 4, 2002
- Consolidated statements of income for the years ended January 3, 2003,
January 4, 2002 and January 5, 2001
- Consolidated statements of stockholders' equity for the years ended
January 3, 2003, January 4, 2002 and January 5, 2001
- Consolidated statements of cash flows for the years ended January 3,
2003, January 4, 2002, and January 5, 2001 - Notes to the Consolidated
Financial Statements
Separate financial statements of the Company's subsidiaries have been
omitted since the Company 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.
2. Index to Consolidated Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
3. Index to Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are listed on
the Exhibit Index immediately preceding such exhibits, which Exhibit Index
is incorporated herein by this reference. Documents listed on such Exhibit
Index, except for documents identified by footnotes, are being filed as
exhibits herewith. Documents identified by footnotes are not being filed
herewith and, pursuant to Rule 12b-32 under the Securities Exchange Act of
1934, reference is made to such documents as previously filed as exhibits
with the Securities and Exchange Commission. Our file number under the
Securities Exchange Act of 1934 is 000-05083.
(b) Reports on Form 8-K
Saucony did not file any Current Reports on Form 8-K during the fiscal
quarter ended January 3, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SAUCONY, INC.
(Registrant)
By: /s/ John H. Fisher
----------------------
John H. Fisher
President and Chief Executive Officer
Date: April 3, 2003
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 Chairman of the Board, April 3, 2003
John H. Fisher President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Charles A. Gottesman Vice Chairman of the Board, April 3, 2003
Charles A. Gottesman and Executive Vice President,
Business Development
/s/ Michael Umana Senior Vice President, April 3, 2003
Michael Umana Chief Operating and Financial Officer
(Principal Financial Officer)
/s/ Roger P. Deschenes Vice President, Controller and April 3, 2003
Roger P. Deschenes Chief Accounting Officer
(Principal Accounting Officer)
/s/ Phyllis H. Fisher Director April 3, 2003
Phyllis H. Fisher
/s/ Jonathan O. Lee Director April 3, 2003
Jonathan O. Lee
/s/ Robert J. LeFort, Jr. Director April 3, 2003
Robert J. LeFort, Jr.
/s/ John J. Neuhauser Director April 3, 2003
John J. Neuhauser
CERTIFICATION
-------------
I, John H. Fisher, certify that:
1. I have reviewed this annual report on Form 10-K of Saucony, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: April 3, 2003 /s/ John H. Fisher
- -------------------- ------------------
Name: John H. Fisher
Title: President and Chief Executive Officer
CERTIFICATION
-------------
I, Michael Umana, certify that:
1. I have reviewed this annual report on Form 10-K of Saucony, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: April 3, 2003 /s/ Michael Umana
- -------------------- -----------------
Name: Michael Umana
Title: Senior Vice President, Finance
Chief Financial Officer
Independent Auditors' Report
To the Board of Directors and Stockholders of
Saucony, Inc. and subsidiaries
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheet of Saucony, Inc. and
subsidiaries as of January 3, 2003, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended. Our audit
also included the January 3, 2003 financial statement schedule listed in the
Index at Item 15(a)2. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the January 3, 2003 financial statements and
financial statement schedule based on our audit. The financial statements and
financial statement schedule as of January 4, 2002 and for the year then ended,
before the inclusion of the goodwill disclosures in Note 1 to the financial
statements, were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements and
stated that such January 4, 2002 financial statement schedule, when considered
in relation to the January 4, 2002 basic financial statements taken as a whole,
presented fairly, in all material respects, the information set forth therein,
in their reports dated February 14, 2002. The financial statements and financial
statement schedule of the Company for the year ended January 5, 2001 were
audited by other auditors whose report, dated February 26, 2001, expressed an
unqualified opinion on those statements and financial statement schedule.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the January 3, 2003 consolidated financial statements present
fairly, in all material respects, the financial position of Saucony, Inc. and
subsidiaries as of January 3, 2003, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the January 3, 2003 financial statement schedule, when considered in
relation to January 3, 2003 basic consolidated financial statements taken as a
whole, presents fairly in all material respects, the information set forth
therein.
As discussed above, the financial statements of Saucony, Inc. and subsidiaries
as of January 4, 2002 and for the year then ended, were audited by other
auditors who have ceased operations. As described in Note 1, these financial
statements have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142), which was adopted by the Company as of January 5,
2002. Our audit procedures with respect to the disclosures in Note 1 with
respect to the year ended January 4, 2002 included (1) comparing the previously
reported net income to the previously issued financial statements and the
adjustments to reported net income representing amortization expense (including
any related tax effects) recognized in those periods related to goodwill to the
Company's underlying analysis obtained from management, and (2) testing the
mathematical accuracy of the reconciliation of adjusted net income to reported
net income and the related earnings-per-share amounts. In our opinion, the
disclosures for the year ended January 4, 2002 in Note 1 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
January 4, 2002 financial statements of the Company other than with respect to
such disclosures and, accordingly, we do not express an opinion or any other
form of assurance on the January 4, 2002 financial statements taken as a whole.
As discussed in Note 1, in the year ended January 3, 2003 the Company changed
its method of accounting for goodwill and intangible assets to conform with the
provisions of SFAS 142.
/s/ Deloitte & Touche LLP
- -------------------------
Boston, Massachusetts
February 13, 2003 (March 11, 2003 as to Note 22)
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
Report of Independent Public Accountants
To the Board of Directors of Saucony, Inc.:
We have audited the accompanying consolidated balance sheet of Saucony, Inc. (a
Massachusetts corporation) and subsidiaries as of January 4, 2002, and the
related consolidated statement of income, stockholders' equity and cash flow for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saucony, Inc. and
subsidiaries as of January 4, 2002, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Boston, Massachusetts
February 14, 2002
Report of Independent Accountants
To The Board of Directors and Shareholders of
Saucony, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) for the year ended January 5, 2001, present
fairly, in all material respects, the results of operations and cash flows of
Saucony, Inc. and its subsidiaries for the year ended January 5, 2001, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2001
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 3, 2003 AND JANUARY 4, 2002
(in thousands, except share and per share amounts)
ASSETS
January 3, January 4,
2003 2002
---- ----
Current assets:
Cash and cash equivalents...........................................................$ 34,483 $ 22,227
Accounts receivable, net of allowance for doubtful accounts
and discounts (2002, $2,406; 2001, $2,457)........................................ 15,496 14,742
Inventories ........................................................................ 27,201 28,404
Deferred income taxes............................................................... 1,916 2,098
Prepaid expenses and other current assets........................................... 1,217 2,067
Assets held for sale................................................................ 357 --
---------- ---------
Total current assets.............................................................. 80,670 69,538
---------- ----------
Property, plant and equipment, net .................................................... 5,714 6,989
---------- ----------
Other assets:
Goodwill, net of accumulated amortization (2002, $551; 2001, $551).................. 912 912
Deferred charges, net of accumulated amortization (2002, $1,320; 2001, $1,249)...... 208 217
Marketable securities............................................................... -- 296
Other............................................................................... 36 148
---------- ---------
Total other assets................................................................$ 1,156 $ 1,573
---------- ---------
Total assets...........................................................................$ 87,540 $ 78,100
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................$ 8,543 $ 6,635
Accrued expenses.................................................................... 7,800 5,602
Current portion of long-term debt and capital lease obligations..................... -- 88
---------- ---------
Total current liabilities......................................................... 16,343 12,325
---------- ---------
Long-term obligations:
Deferred income taxes............................................................... 1,859 1,949
Other long-term obligations......................................................... -- 204
---------- ---------
Total long-term obligations....................................................... 1,859 2,153
---------- ---------
Commitments and contingencies:
Minority interest in consolidated subsidiary........................................... 642 460
---------- ---------
Stockholders' equity:
Preferred stock, $1.00 par value per share; authorized 500,000 shares; none issued.. -- --
Common stock:
Class A, $.333 par value per share; authorized 20,000,000 shares
(issued 2002, 2,711,127 and 2001, 2,711,127).................................... 904 904
Class B, $.333 par value per share; authorized 20,000,000 shares
(issued 2002, 4,106,343 and 2001, 4,037,399).................................... 1,369 1,346
Additional paid-in capital.......................................................... 17,769 17,398
Retained earnings................................................................... 55,945 50,702
Accumulated other comprehensive loss................................................ (870) (1,301)
Common stock held in treasury, at cost (2002, 760,806; 2001, 665,976)............... (6,297) (5,417)
Notes receivable.................................................................... -- (303)
Unearned compensation............................................................. (124) (167)
---------- ---------
Total stockholders' equity........................................................ 68,696 63,162
---------- ---------
Total liabilities and stockholders' equity.............................................$ 87,540 $ 78,100
========== =========
The accompanying notes are an integral part of these consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED JANUARY 3, 2003, JANUARY 4, 2002 AND JANUARY 5, 2001
(in thousands, except per share amounts)
2002 2001 2000
---- ---- ----
(53 weeks)
Net sales................................................................$ 133,196 $ 132,261 $ 167,797
Other revenue............................................................ 303 103 123
---------- ---------- ----------
Total revenue............................................................ 133,499 132,364 167,920
---------- ---------- ----------
Costs and expenses:
Cost of sales......................................................... 87,350 90,118 105,595
Selling expenses...................................................... 17,790 21,910 25,503
General and administrative expenses................................... 19,488 18,497 18,038
Plant closing and other charges (credits)............................. (72) 2,108 --
Loss on disposition of cycling division............................... -- -- 2,661
---------- ---------- ----------
Total costs and expenses............................................ 124,556 132,633 151,797
---------- ---------- ----------
Operating income (loss).................................................. 8,943 (269) 16,123
Non-operating income (expense):
Interest income....................................................... 332 136 78
Interest expense...................................................... (5) (213) (695)
Foreign currency gains (losses)....................................... 20 (46) (28)
Other................................................................. (9) 28 35
---------- ---------- ----------
Income (loss) before income taxes and minority interest.................. 9,281 (364) 15,513
Provision for income taxes............................................... 3,865 475 6,461
Minority interest in income of consolidated subsidiary................... 173 101 89
---------- ---------- ----------
Net income (loss)........................................................$ 5,243 $ (940) $ 8,963
========== ========== ==========
Per share amounts:
Earnings (loss) per common share - basic..............................$ 0.86 $ (0.15) $ 1.45
========== ========== ==========
Earnings (loss) per common share - diluted............................$ 0.85 $ (0.15) $ 1.41
========== ========== ==========
Weighted-average shares outstanding:
Basic................................................................. 6,107 6,080 6,192
Diluted............................................................... 6,186 6,080 6,341
The accompanying notes are an integral part of these consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 3, 2003, JANUARY 4, 2002 AND JANUARY 5, 2001
(in thousands, except share amounts)
Additional
Common Stock Paid-in Retained Treasury Stock
Class A Class B Capital Earnings Shares Amount
------- ------- ------- -------- ------ ------
Balance, December 31, 1999...........................$ 904 $ 1,318 $ 16,815 $42,679 346,900 $(2,179)
Issuance of 64,160 shares of common stock upon
exercise of stock options......................... -- 22 297 -- -- --
Interest income on notes receivable.................. -- -- -- -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Repurchase of 299,600 shares of common stock, at cost -- -- -- -- 299,600 (3,106)
Net income........................................... -- -- -- 8,963 -- --
Foreign currency translation adjustments............. -- -- -- -- -- --
------ ------- ------- ------- ------- -------
Balance, January 5, 2001.............................$ 904 $ 1,340 $ 17,112 $51,642 646,500 $(5,285)
Issuance of 17,930 shares of common stock upon
exercise of stock options......................... -- 6 78 -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Issuance of non-qualified stock options.............. -- -- 3 -- -- --
Issuance of stock warrants........................... -- -- 197 -- -- --
Tax benefit related to stock options................. -- -- 8 -- -- --
Repurchase of 19,476 shares of common stock, at cost. -- -- -- -- 19,476 (132)
Interest income on notes receivable.................. -- -- -- -- -- --
Payment of interest income on notes receivable....... -- -- -- -- -- --
Net loss............................................. -- -- -- (940) -- --
Foreign currency translation adjustments............. -- -- -- -- -- --
------ ------- -------- ------- ------- -------
Balance, January 4, 2002.............................$ 904 $ 1,346 $ 17,398 $50,702 665,976 $(5,417)
Issuance of 68,944 shares of common stock upon
exercise of stock options......................... -- 23 306 -- -- --
Stock compensation on stock warrants................. -- -- 44 -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Tax benefit related to stock options................. -- -- 21 -- -- --
Repurchase of 94,830 shares of common stock, at cost. -- -- -- -- 94,830 (880)
Interest income on notes receivable.................. -- -- -- -- -- --
Payment of principal and interest on notes receivable -- -- -- -- -- --
Net income........................................... -- -- -- 5,243 -- --
Foreign currency translation adjustments............. -- -- -- -- -- --
------ ------- -------- ------- ------- -------
Balance, January 3, 2003.............................$ 904 $ 1,369 $ 17,769 $55,945 760,806 $(6,297)
====== ======= ======== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
FOR THE FISCAL YEARS ENDED JANUARY 3, 2003, JANUARY 4, 2002 AND JANUARY 5, 2001
(in thousands, except share amounts)
Accumulated
Other Total
Note Unearned Comprehensive Stockholders' Comprehensive
Receivable Compensation Loss Equity Income (Loss)
---------- ------------ ---- ------ -------------
Balance, December 31, 1999.........................$ -- $ (11) $ (564) $58,962 $ 10,283
Issuance of 64,160 shares of common stock upon
exercise of stock options....................... (276) -- -- 43 --
Interest income on notes receivable................ (20) -- -- (20) --
Amortization of unearned compensation.............. -- 6 -- 6 --
Repurchase of 299,600 shares of common stock, at cost -- -- -- (3,106) --
Net income......................................... -- -- -- 8,963 8,963
Foreign currency translation adjustments........... -- -- (228) (228) (228)
------- ------- ------- ------- --------
Balance, January 5, 2001...........................$ (296) $ (5) $ (792) $64,620 $ 8,735
========
Issuance of 17,930 shares of common stock upon
exercise of stock options....................... -- -- -- 84 --
Amortization of unearned compensation.............. -- 38 -- 38 --
Issuance of non-qualified stock options............ -- (3) -- -- --
Issuance of stock warrants......................... -- (197) -- -- --
Tax benefit related to stock options............... -- -- -- 8 --
Repurchase of 19,476 shares of common stock, at cost -- -- -- (132) --
Interest income on notes receivable................ (18) -- -- (18) --
Payment of interest income on notes receivable..... 11 -- -- 11 --
Net loss........................................... -- -- -- (940) (940)
Foreign currency translation adjustments .......... -- -- (509) (509) (509)
------- ------- ------- ------- --------
Balance, January 4, 2002...........................$ (303) $ (167) $(1,301) $63,162 $ (1,449)
========
Issuance of 68,944 shares of common stock upon
exercise of stock options....................... -- -- -- 329 --
Stock compensation on stock warrants............... -- -- -- 44 --
Amortization of unearned compensation.............. -- 43 -- 43 --
Tax benefit related to stock options............... -- -- -- 21 --
Repurchase of 94,830 shares of common stock, at cost -- -- -- (880) --
Interest income on note receivable................. (9) -- -- (9) --
Payment of principal and interest notes receivable. 312 -- -- 312 --
Net income......................................... -- -- -- 5,243 5,243
Foreign currency translation adjustments .......... -- -- 431 431 431
------- ------- ------- ------- --------
Balance, January 3, 2003...........................$ -- $ (124) $ (870) $68,696 $ 5,674
======= ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 3, 2003, JANUARY 4, 2002 AND JANUARY 5, 2001
(in thousands)
2002 2001 2000
---- ---- ----
(53 weeks)
Cash flows from operating activities:
Net income (loss).......................................................$ 5,243 $ (940) $ 8,963
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Plant closing and other (credits) charges ............................ (123) 1,725 --
Loss on disposition of cycling division............................... -- -- 2,661
Depreciation and amortization......................................... 1,597 1,969 1,958
Provision for bad debt and discounts.................................. 4,752 5,767 5,525
Deferred income tax provision (benefit)............................... 91 (656) 678
Compensation from stock grants and options............................ 87 38 6
Minority interest in income of consolidated subsidiaries.............. 173 101 89
Marketable securities - unrealized (gains) losses..................... -- 32 50
Other................................................................. (20) 12 (12)
Changes in operating assets and liabilities, net of effects
of dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Accounts receivable..................................................... (5,374) 6,060 (8,599)
Inventories............................................................. 1,848 9,418 (6,018)
Prepaid expenses and other current assets............................... 45 (8) 125
Increase (decrease) in liabilities:
Letters of credit payable............................................... -- (3,472) 1,210
Accounts payable........................................................ 1,862 3,484 (412)
Accrued expenses........................................................ 1,295 (2,286) (1,185)
Income taxes............................................................ 1,754 344 (889)
--------- --------- ----------
Total adjustments.......................................................... 7,987 22,528 (4,813)
--------- --------- ----------
Net cash provided by operating activities.................................. 13,230 21,588 4,150
--------- --------- ---------
Cash flows from investing activities:
Proceeds from the sale of cycling division.............................. -- -- 1,350
Purchases of property, plant and equipment.............................. (777) (1,326) (1,669)
Change in deposits and other............................................ 94 62 (30)
Marketable securities - realized (gain) loss............................ 99 15 (86)
Proceeds from the sale of Marketable securities......................... 197 -- --
Proceeds from the sale of equipment..................................... 90 1 --
--------- --------- ----------
Net cash used by investing activities...................................... (297) (1,248) (435)
--------- --------- ----------
Cash flows from financing activities:
Net short-term borrowings (payments).................................... -- (2,474) 335
Repayment of long-term debt and capital lease obligations............... (88) (226) (360)
Common stock repurchased................................................ (880) (132) (2,688)
Issuances of common stock, stock option exercises....................... 329 84 43
Debt financing costs.................................................... (87) -- --
Receipt of payment on notes receivable.................................. 312 -- --
--------- -------- ----------
Net cash used by financing activities...................................... (414) (2,748) (2,670)
Effect of exchange rate changes on cash and cash equivalents............... (263) (103) 178
--------- -------- ----------
Net increase (decrease) in cash and cash equivalents....................... 12,256 17,489 1,223
Cash and cash equivalents at beginning of period........................... 22,227 4,738 3,515
--------- --------- ---------
Cash and cash equivalents at end of period.................................$ 34,483 $ 22,227 $ 4,738
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended January 3, 2003, January 4, 2002 and January 5, 2001
(in thousands, except percentages, employee data and per share amounts)
1. Summary of Significant Accounting Policies:
-------------------------------------------
Business Activity
-----------------
The Company designs, develops and markets performance-oriented athletic
footwear, athletic apparel and casual leather footwear. The Company markets
its products principally to domestic and international retailers and
distributors.
Reporting Period
----------------
The Company's fiscal year ends on the first Friday falling on or after
December 31, resulting in fiscal years of 52 or 53 weeks. The Consolidated
Financial Statements and notes for 2002, 2001 and 2000 represent the fiscal
years ended January 3, 2003, January 4, 2002 and January 5, 2001,
respectively. There were 52 weeks in fiscal 2002, 52 weeks in fiscal 2001
and 53 weeks in fiscal 2000.
Principles of Consolidation
---------------------------
The Consolidated Financial Statements include the accounts of Saucony, Inc.
and all of its wholly -owned and majority-owned subsidiaries.
All 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.
Revenue Recognition
-------------------
Sales, net of discounts and estimated returns and allowances, and related
costs of sales are recognized upon shipment when title and all the rewards
and risks of loss have been transferred to the buyer, there are no
uncertainties regarding acceptance, there exists persuasive evidence of an
arrangement, the sales price is fixed or determinable and collection of the
related accounts receivable is reasonably assured. Provisions for returns
and allowances are determined on the basis of past experience and the
receipt of notification of pending returns.
Cash and Cash Equivalents
-------------------------
Cash equivalents include all short-term deposits with an original maturity
of three months or less.
Inventories
-----------
Inventories include materials, labor and overhead and are stated at lower
of cost or market. Cost is determined using the first-in, first-out (FIFO)
method. Inventories are regularly reviewed and, where necessary, provisions
to reduce the inventory to its estimated net realizable value are recorded
based on the Company's forecast of product demand, selling price and market
conditions.
Property, Plant and Equipment
-----------------------------
Land, buildings and equipment, including significant improvements to
existing facilities, are at cost. The assets are depreciated over their
estimated useful lives or lease terms, if shorter, using the straight-line
method. The estimated useful lives of the assets are: 33 years for
buildings, 15 years for building improvements and 3 to 15 years for
machinery and equipment. Major additions and betterments are capitalized.
Maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation of all property, plant and equipment retired or
otherwise disposed of are removed from the accounts. Any gain or loss
resulting from the retirement or disposition of property, plant and
equipment is included in other non-operating income.
Deferred Charges
----------------
Deferred charges consist primarily of acquired software licenses and
trademarks. Software licenses and trademarks are amortized over five years.
Intangible assets are amortized over their estimated useful lives which
range from two to five years. The Company has recorded no intangible assets
with indefinite lives other than goodwill. The Company reviews intangible
assets when indications of potential impairment exists, such as a
significant reduction in cash flows associated with the assets. Intangible
assets as of January 3, 2003 and January 4, 2002 are as follows:
2002 2001
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Software licenses................$ 1,060 $ (928) $ 132 $ 1,041 $ (839) $ 202
Capitalized debt
financing costs............... 87 (14) 73 44 (39) 5
Other............................ 381 (378) 3 381 (371) 10
-------- --------- ------ -------- -------- -------
Total............................$ 1,528 $ (1,320) $ 208 $ 1,466 $ (1,249) $ 217
======== ========= ====== ======== ======== =======
Amortization of intangible assets was $117, $91 and $87, respectively, in
fiscal 2002, fiscal 2001 and fiscal 2000.
The estimated future amortization expense of intangible assets is as
follows:
2003................................$ 93
2004................................ 81
2005................................ 29
2006................................ 5
2007 and thereafter................. --
Goodwill
--------
Goodwill, represents the excess of the purchase price over the estimated
fair value of the net assets of the acquired business.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets", "SFAS 142". SFAS 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets acquired individually or
with a group of other assets (excluding those acquired in a business
combination) at acquisition. The statement also addresses financial
accounting and reporting for goodwill and other intangibles subsequent to
their acquisition. SFAS 142 supersedes Accounting Principles Board Opinion
No. 17, "Intangible Assets" "APB 17". Under SFAS 142, the amortization of
goodwill ceased and the Company assesses the realizability of this asset
annually and whenever events or changes in circumstances indicate that it
may be impaired. The Company adopted SFAS 142 on January 5, 2002 and
discontinued amortizing goodwill. The Company estimates the fair value of
its reporting units by using forecasts of discounted cash flows. In
applying SFAS 142 the Company performed the transitional assessment and
impairment test required as of January 5, 2002 and determined that there
was no impairment of goodwill. The Company completed an annual test for
impairment at January 3, 2003 and determined that goodwill was not
impaired. At January 3, 2003 and January 4, 2002, the carrying value of
goodwill was $912.
The transitional disclosure of reported earnings for the fiscal years ended
January 3, 2003, January 4, 2002 and January 5, 2001, as adjusted, is
presented in the table below:
2002 2001 2000
---- ---- ----
Net income (loss), as reported..............................$ 5,243 $ (940) $ 8,963
Addback amortization of goodwill, net of tax................ -- 79 80
-------- --------- ---------
Adjusted net income (loss)..................................$ 5,243 $ (861) $ 9,043
======== ========= =========
Earnings per share:
Basic
Net income (loss), as reported.........................$ 0.86 $ (0.15) $ 1.45
Addback amortization of goodwill, net of tax........... -- 0.01 0.01
-------- ---------- ---------
Adjusted net income (loss).............................$ 0.86 $ (0.14) 1.46
======== ========== =========
Diluted
Net income (loss), as reported.........................$ 0.85 $ (0.15) $ 1.41
Addback amortization of goodwill, net of tax........... -- 0.01 0.01
-------- ---------- ---------
Adjusted net income (loss).............................$ 0.85 $ (0.14) $ 1.42
======== ========== =========
Income Taxes
------------
Income taxes are provided for the amount of taxes payable or refundable in
the current year and for the expected future tax consequences of events
that have been recognized in the financial statements or tax returns. As a
result of recognition and measurement differences between tax laws and
financial accounting standards, temporary differences arise between the
amount of taxable income and pretax financial income for a year and the tax
bases of assets or liabilities and their reported amount in the financial
statements. The deferred tax assets and liabilities reported as of January
3, 2003 and January 4, 2002 reflect the estimated future tax effects
attributable to temporary differences and carryforwards based on the
provisions of enacted tax law.
Earnings per Share
------------------
Basic earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common
shares (the denominator) for the period. The computation of diluted
earnings per share is similar to basic earnings per share, except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the potentially dilutive common shares
had been issued. See Note 11 for the calculation of basic and diluted
earnings per share.
Comprehensive Income
--------------------
Comprehensive income encompasses net income and other components of
comprehensive income that are excluded from net income under U.S. generally
accepted accounting principles, comprising items previously reported
directly in stockholders' equity.
The financial statements of the Company's foreign subsidiaries are measured
using the current rate method. Under the current rate method, assets and
liabilities of these subsidiaries are translated at exchange rates as of
the balance sheet date. Revenues and expenses are translated at average
rates of exchange in effect during the year. The resulting cumulative
foreign currency translation adjustments have been recorded in Accumulated
Other Comprehensive Loss, a component of stockholders' equity. Net income
from foreign currency translation amounted to $431 in 2002. Net losses from
foreign currency translation amounted to $509 and $228 for 2001 and 2000,
respectively and are recorded in Accumulated Other Comprehensive Loss.
Stock-Based Compensation
------------------------
The Company accounts for employee stock options and share awards under the
intrinsic-value method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", "APB 25", as
interpreted, with pro-forma disclosures of net earnings and earnings per
share, as if the fair value method of accounting defined in Statement of
Financial Accounting Standards No. 123, "SFAS 123". SFAS 123 establishes a
fair value based method of accounting for stock-based employee compensation
plans. Under the fair value method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for
stock option awards in 2002, 2001 and 2000, consistent with the provisions
of SFAS 123, the Company's net income (loss) and net income (loss) per
share would have been reduced to the pro forma amounts indicated below:
2002 2001 2000
---- ---- ----
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
Net income (loss):
As reported........................$ 5,243 $ 5,243 $ (940) $ (940) $ 8,963 $ 8,963
Add: Stock-based compensation
expense included in reported net
income (loss), net of related tax
benefit............................ 26 26 22 22 4 4
Less: Total stock-based compensation
expense determined under the fair
value based method for all rewards,
net of related tax benefit......... (710) (710) (768) (768) (539) (539)
========= ========= ========= ========= ========= =========
Pro forma net income (loss).........$ 4,559 $ 4,559 $ (1,686) $ (1,686) $ 8,428 $ 8,428
======== ======== ======== ======== ======== ========
Pro forma earnings per share:
As reported $ 0.86 $ 0.85 $ (0.15) $ (0.15) $ 1.45 $ 1.41
Add: Stock-based compensation
expense included in reported net
income (loss), net of related tax 0.00 0.00 0.00 0.00 0.00 0.00
Less: Total stock-based compensation
expense determined under the fair
value based method for all rewards,
net of related tax benefit (0.11) (0.11) (0.12) (0.12) (0.09) (0.08)
--------- --------- --------- --------- -------- --------
Pro forma net income (loss)
per share $ 0.75 $ 0.74 $ (0.27) $ (0.27) $ 1.36 $ 1.33
======== ======== ======== ======== ======= =======
See Note 12 for the weighted-average assumptions incorporated into the
Black-Scholes option-pricing model, used to calculate the fair value
stock-based employee compensation.
Derivative Instruments and Hedging Activities
---------------------------------------------
The Company accounts for its derivative instruments in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" "SFAS 133". SFAS 133 defines
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. SFAS 133
requires that all derivatives must be recognized on the balance sheet at
their then fair value.
SFAS 133 requires companies to recognize adjustments to the fair value of
derivatives that are not hedges currently in earnings when they occur. For
derivatives that qualify as hedges, changes in the fair value of the
derivatives can be recognized currently in earnings, along with an
offsetting adjustment against the basis of the underlying hedged item, or
can be deferred in other comprehensive income, depending on the exposure of
the underlying transaction.
From time to time, the Company enters into forward foreign currency
exchange contracts to hedge certain foreign currency denominated payables.
Gains or losses on forward contracts which do not qualify for special hedge
accounting are recorded in current earnings in other non-operating income
or expense. Gains and losses that qualify for special hedge accounting are
recorded in "Accumulated Other Comprehensive Loss" in the statement of
stockholders' equity.
Advertising and Promotion
-------------------------
Advertising and promotion costs, including print media production costs,
are expensed as incurred, with the exception of co-operative advertising,
which is accrued and the advertising costs expensed in the period of
revenue recognition. Advertising and promotion expense amounted to $7,313,
$10,885 and $12,904 for 2002, 2001 and 2000, respectively.
Impairment Accounting
---------------------
The Company reviews the recoverability of its long-lived assets (property,
plant and equipment and trademarks) when events or changes in circumstances
occur that indicate that the carrying value of the assets may not be
recoverable. This review is based on the Company's ability to recover the
carrying value of the assets from expected undiscounted future cash flows.
If an impairment is indicated, the Company measures the loss based on the
fair value of the asset using various valuation techniques. If an
impairment exists, the amount of the loss will be recorded in the
consolidated statements of operations. It is possible that future events or
circumstances could cause these estimates to change.
Research and Development Expenses
---------------------------------
Expenditures for research and development of products are expensed as
incurred. Research and development expenses amounted to approximately
$1,611, $1,135 and $1,083 for 2002, 2001 and 2000, respectively.
Related Party Transactions
--------------------------
At January 4, 2002, the Company held notes of $179 and $124, respectively,
from two officers of the Company who are also directors and principal
shareholders of the Company's Class A Common Stock. The notes, which are
included as a component of stockholders' equity, were due and were repaid
on March 17, 2002, were full recourse notes and accrued interest at 9.0%
per annum. Interest income from the two notes amounted to $9, $18 and $20
for 2002, 2001 and 2000.
Reclassifications
-----------------
Certain items in prior years' consolidated financial statements have been
reclassified to conform with current year presentation.
Recent Accounting Pronouncements
--------------------------------
SFAS 144
--------
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets", "SFAS 144". SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets, and supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", "SFAS 121", and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", "APB 30", for the disposal of a segment of a business as
previously defined in APB 30. SFAS 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" "ARB 51", to eliminate
the exception to consolidation for a subsidiary for which control is likely
to be temporary. The provisions of SFAS 144 are to be applied to all
long-lived assets, with the exception of goodwill. SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss only if the
carrying amount of the long-lived asset is not recoverable from its
undiscounted cash flows and measure an impairment loss as the difference
between the carrying amount and the fair value of the asset. SFAS 144
expands upon the criteria beyond that previously specified in SFAS 121 to
determine when a long-lived asset is held for sale and provides guidance on
the accounting for long-lived assets classified as held for sale if the
asset is being reclassified as held and used.
Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell. The statement retains the basic
provisions of APB 30 for the presentation of discontinued operations in the
statement of operations but broadens the definition of a discontinued
operations to include a component of an entity rather than a segment of a
business.
The Company adopted SFAS 144 in the first quarter of fiscal 2002. During
fiscal 2002, the Company recorded an impairment charge of $44, to reduce
the carrying amount of certain long-lived assets used in the Company's
retail operations, which carrying value was not deemed recoverable from its
future undiscounted cash flows.
SFAS 148
--------
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS 123", "SFAS
148". SFAS 148 amends Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", "SFAS 123", to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based compensation. In addition, this
statement amends the disclosure requirements for SFAS 123 to require
prominent disclosure in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has elected to
continue to account for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", "APB 25", and related
interpretations. Accordingly, compensation cost for stock options and
restricted stock awards is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
exercise price an employee must pay to acquire the stock. The Company has
adopted the annual disclosure provisions of SFAS 148 in its financial
statements for the year ended January 3, 2003 and will adopt the interim
disclosure provisions in its financial statements for the quarter ended
April 4, 2003. Since the adoption of SFAS 148 involves disclosure only, the
Company does not expect a material impact on its earnings or on the
Company's financial position.
2. Marketable Securities:
----------------------
The Company liquidated its investment in its marketable securities in
December 2002. As of January 4, 2002, the Company's holdings in marketable
securities consisted primarily of equity securities which are classified as
trading securities.
The cost of the securities held at January 4, 2002 was $204. As of January
4, 2002, the market value of such securities was $296.
Included in the determination of net income for the years ended January 3,
2003, January 4, 2002 and January 5, 2001 were: 2002, realized losses of
$99; 2001, net realized losses of $15 and unrealized losses of $32; and
2000, net realized gains of $86 and unrealized losses of $50.
3. Inventories:
-----------
Inventories at January 3, 2003 and January 4, 2002 consisted of the
following:
2002 2001
---- ----
Finished goods........................$ 26,528 $ 25,466
Raw materials and supplies............ 480 1,501
Work-in-process....................... 193 1,437
--------- ----------
Total.................................$ 27,201 $ 28,404
========= ==========
4. Assets Held for Sale:
---------------------
In February, 2002, the Company commenced marketing its Bangor, Maine real
property, which had been previously used for the assembly of the Company's
domestic Saucony footwear. The property is available for immediate sale in
its current condition and the Company expects that the property will be
sold during fiscal 2003. The property is being actively marketed for sale
at a price that management believes is reasonable in relation to its
current fair value. As of January 3, 2003, the fair value of the property,
based upon an independent appraisal, exceeds the net book value of the
property, which was $357 as of January 3, 2003. As a result of the
Company's decision to sell the property, the Bangor, Maine real property
has been reclassified to "Assets Held for Sale" and is included on the
balance sheet at January 3, 2003 in Current Assets.
5. Property, Plant and Equipment:
------------------------------
Major classes of property, plant and equipment at January 3, 2003 and
January 4, 2002 were as follows: 2002 2001
Land and improvements.................$ 494 $ 598
Buildings and improvements............ 5,920 6,270
Machinery and equipment............... 12,280 11,523
Capitalized leases.................... -- 1,696
Leasehold improvements................ 556 793
--------- ---------
$ 19,250 $ 20,880
Less accumulated depreciation
and amortization...................... 13,536 13,891
--------- ---------
Total.................................$ 5,714 $ 6,989
========= =========
Accumulated amortization of leased property was $1,473 at January 4, 2002.
6. Accrued Expenses:
----------------
Accrued expenses at January 3, 2003 and January 4, 2002 consisted of the
following:
2002 2001
---- ----
Payroll and incentive compensation............$ 2,350 $ 1,223
Income taxes.................................. 936 --
Inventory freight and duty.................... 818 479
Professional fees............................. 307 352
Sales commissions............................. 301 289
Selling and advertising....................... 300 130
Plant closing and other charges............... 36 1,461
Other......................................... 2,752 1,668
-------- ---------
Total.........................................$ 7,800 $ 5,602
======== =========
7. Employee Retirement Plans:
-------------------------
The Company has maintained a qualified retirement savings plan (401(k)
Plan) since 1991. All United States employees of the Company who meet the
minimum age and service requirements are eligible to participate in the
401(k) Plan. The Company may make discretionary contributions to the 401(k)
Plan equal to a certain percentage of the participating employees'
contributions, subject to the limitations imposed by the 401(k) Plan and
the Internal Revenue Code. The Company's contributions amounted to $155,
$175 and $211 for 2002, 2001 and 2000, respectively.
In 1995, the Company established a deferred compensation program (DCP) to
provide key executives and highly compensated employees with supplemental
retirement benefits. Eligibility is determined by the Company's Board of
Directors. The DCP is not qualified under Section 401 of the Internal
Revenue Code. The Company may make discretionary contributions to the DCP
equal to a certain percentage of the participants' contributions. The
Company's contributions amounted to $17, $19 and $18 for 2002, 2001 and
2000, respectively.
At the 2001 Annual Meeting of Stockholders held on May 24, 2001, the
stockholders approved the Company's 2001 Employee Stock Purchase Plan
(Employee Stock Purchase Plan), adopted by the Company's Board of Directors
on April 6, 2001. An aggregate of 250,000 shares of Class B Common Stock,
$0.33-1/3 par value per share, of Saucony, Inc. have been reserved by the
Company and may be issued under the Employee Stock Purchase Plan. The plan
provides employees of the Company and its designated subsidiaries with an
opportunity to purchase common stock of the Company through accumulated
payroll deductions, at a price per share equal to 85% of the fair market
value of a share of common stock on the enrollment date or on the exercise
date, whichever is lower. The plan qualifies as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code and its provisions are
construed so as to extend and limit participation in a manner consistent
with the requirements of that section of the code.
All employees who meet minimum age and service requirements are eligible to
participate in the 2001 Employee Stock Purchase Plan. Employee payroll
deductions associated with the 2001 Employee Stock Purchase Plan began in
September 2001. As of January 3, 2003, there were 11,294 shares of common
stock purchased under the plan. There were no purchases of common stock
made under the plan as of January 4, 2002.
8. Commitments and Contingencies:
-----------------------------
Operating Lease Commitments
---------------------------
The Company is obligated under various operating leases for equipment and
rental space through 2010. Total equipment and rental expenses for 2002,
2001 and 2000 were $1,602, $1,720 and $1,261, respectively.
Future minimum equipment and rental payments:
2003 ..............................$ 962
2004 ..............................$ 842
2005 ..............................$ 523
2006 ..............................$ 254
2007 and thereafter................$ 469
Short-Term Borrowing Arrangements
---------------------------------
On August 30, 2002, the Company entered into a revolving credit agreement
under the terms of which a bank committed to a maximum of $15,000 to the
Company for cash borrowings and letters of credit. The credit facility
which terminates on August 31, 2004, amends and restates, in its entirety,
the revolving credit agreement which terminated on August 30, 2002. Maximum
borrowings under the credit facility are limited to the lesser of $15,000
or the sum of 65% of eligible receivables plus 20% of eligible finished
goods inventory. Borrowings under the credit facility are made at the
bank's prime rate of interest, less 1.0%, or at the LIBOR rate, plus 1.5%.
In addition, the Company pays a quarterly commitment fee of 0.25% on the
average daily unused credit line. The credit facility contains restrictions
and financial covenants including: restrictions on additional indebtedness,
restrictions on the annual amount of capital expenditures and limits the
repurchase of our common stock to $3,000 over the term of the facility. The
credit facility is subject to the bank's periodic review of the Company's
operations. The Company was in compliance with all covenants of the credit
facility at January 3, 2003. At January 3, 2003, there were no borrowings
outstanding under the facility. We had open commitments under letters of
credit in the amount of $348 at January 3, 2003.
Saucony Canada, Inc. maintains a credit facility with a Canadian lender.
The agreement provides Saucony Canada with a credit line of 1,500 Canadian
Dollars for cash borrowings and letters of credit. At January 3, 2003,
there were no borrowings or letters of credit outstanding under this credit
facility.
Employment Agreements
---------------------
On August 17, 2000, the Company entered into employment agreements with two
key executives. The employment agreements provide for minimum aggregate
annual base salaries of $925, annual consumer price index adjustments, life
insurance coverage, cash bonuses calculated as a percentage of the
Company's consolidated pre-tax income. The employment agreements are
scheduled to expire in August 2003, but extend automatically for additional
one-year terms beginning upon such scheduled expiration unless prior notice
is given by the Company or the employee. The Company has included an
aggregate bonus expense to the key executives of $511, $0 and $853 in
general and administrative expenses for 2002, 2001 and 2000, respectively.
Included in accrued expenses at January 3, 2003 and January 4, 2002, are
accrued bonus expense of $511 and $0, respectively.
Litigation
----------
The Company is involved in routine litigation incident to its business.
Many of these proceedings are covered in whole or in part by insurance. In
management's opinion, none of these proceedings is expected to have a
material adverse effect on the Company's financial position, operations or
cash flows.
9. Common Stock:
-------------
The Company has two classes of Common Stock. The Class A Common Stock has
voting rights. The Class B Common Stock is non-voting, except with respect
to amendments to the Company's Articles of Organization that alter or
change the powers, preferences or special rights of the Class B Common
Stock so as to affect them adversely and as otherwise required by law. The
Class B Common Stock has certain features, including a "Class B Protection"
feature and a feature pursuant to which the Class B Common Stock is
entitled to receive cash dividends equal to 110% of the cash dividends
payable on Class A Common Stock, if any, which are intended to minimize the
economic reasons for the Class A Common Stock to trade at a premium
compared to the Class B Common Stock. The other terms of the Class A Common
Stock and Class B Common Stock, including rights with respect to special
cash dividends, stock dividends, stock splits, consideration payable in a
merger or consolidation and distributions upon liquidation, generally are
the same.
The following table summarizes the activity for the Class A Common Stock
and Class B Common Stock, for the periods ended January 5, 2001, January 4,
2002 and January 3, 2003:
Class A Class B
Common Stock Common Stock
------------ ------------
Shares outstanding at December 31, 1999.......... 2,668,127 3,651,409
Shares issued.................................... -- 64,160
Shares repurchased............................... (98,000) (201,600)
--------- ---------
Shares outstanding at January 5, 2001............ 2,570,127 3,513,969
Shares issued.................................... -- 17,930
Shares repurchased............................... (3,380) (16,096)
--------- ---------
Shares outstanding at January 4, 2002............ 2,566,747 3,515,803
Shares issued.................................... -- 68,944
Shares repurchased............................... (41,700) (53,130)
--------- ---------
Shares outstanding at January 3, 2003............ 2,525,047 3,531,617
========= =========
As of January 3, 2003, January 4, 2002 and January 5, 2001, the number of
shares of Class A Common Stock and Class B Common Stock held in Treasury
were as follows:
Total
Class A Class B Class A and
Common Common Class B Common
Stock Stock Stock
----- ----- -----
January 3, 2003...............................186,080 574,726 760,806
January 4, 2002...............................144,380 521,596 665,976
January 5, 2001...............................141,000 505,500 646,500
10. Stock Options and Stock Purchase Warrants:
------------------------------------------
Under the Company's 1993 Equity Incentive Plan (Equity Incentive Plan),
approved by the Company's shareholders on May 25, 1993, 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 expires on April 7, 2003, at
which time no further options or stock awards may be granted.
The Equity Incentive Plan is administered by the Board of Directors, which,
at its sole discretion, grants options to purchase shares of Common Stock
and makes awards of restricted stock. The purchase price per share of
Common Stock shall be determined by the Board of Directors, provided,
however, that in the case of incentive stock options, the purchase price
may not be less than 100% of the fair market value of such stock at the
time of grant of the option. The terms of option agreements are established
by the Board of Directors, except in the case of incentive stock options,
the term of which may not exceed ten years, or five years for certain
principal stockholders. The vesting schedule is subject to the discretion
of the Board of Directors.
Restricted stock awards granted under the Equity Incentive Plan entitle
recipients to purchase shares of the Company's Common Stock subject to
restrictions concerning the sale, transfer and other disposition of the
shares issued until such shares are vested. The Board of Directors
determines the purchase price, which may be less than the fair market value
of the Common Stock, and the vesting schedule for such awards.
The Board of Directors has delegated its powers under the Equity Incentive
Plan to the Compensation Committee of the Board of Directors. At January 3,
2003, a total of 1,900,000 shares, in the aggregate, of Class A Common
Stock and Class B Common Stock have been reserved by the Company and may be
issued under the Plan.
The following table summarizes the awards available for grant under the
Company's 1993 Equity Incentive Plan for the three-year reporting period
ended January 3, 2003: Shares
Shares available at December 31, 1999.............. 339,460
Additional shares reserved......................... 750,000
Awards granted..................................... (239,847)
Options expired or cancelled....................... 21,300
--------
Shares available at January 5, 2001................ 870,913
Awards granted..................................... (284,801)
Options expired or cancelled....................... 72,465
--------
Shares available at January 4, 2002................ 658,577
Awards granted..................................... (160,000)
Options expired or cancelled....................... 128,621
--------
Shares available at January 3, 2003................. 627,198
========
The following table summarizes the Company's stock option activity for the
periods ended January 5, 2001, January 4, 2002 and January 3, 2003:
Weighted
Average
Exercise Option
Shares Price Price Range
------ ----- -----------
Outstanding at December 31, 1999................... 488,290 $ 7.99 $ 4.00 - $ 23.63
Granted....................................... 239,847 $ 11.75 $ 9.88 - $ 14.25
Exercised..................................... (64,160) $ 4.73 $ 4.00 - $ 6.50
Forfeited..................................... (25,300) $ 12.91 $ 4.88 - $ 23.63
-------
Outstanding at January 5, 2001..................... 638,677 $ 9.59 $ 4.00 - $ 19.88
=======
Granted....................................... 284,801 $ 6.64 $ 4.50 - $ 10.50
Exercised..................................... (17,930) $ 4.67 $ 4.00 - $ 5.13
Forfeited..................................... (65,465) $ 7.63 $ 4.13 - $ 14.63
Expired....................................... (7,000) $ 4.19 $ 4.00 - $ 4.44
------
Outstanding at January 4, 2002..................... 833,083 $ 8.89 $ 4.00 - $ 19.88
=======
Granted....................................... 160,000 $ 6.67 $ 5.90 - $ 9.30
Exercised..................................... (57,650) $ 4.78 $ 4.00 - $ 7.06
Forfeited..................................... (96,771) $ 9.45 $ 4.00 - $ 14.69
Expired....................................... (35,850) $ 4.84 $ 4.44 - $ 5.36
-------
Outstanding at January 3, 2003..................... 802,812 $ 8.85 $ 4.00 - $ 19.88
=======
Options exercisable for shares of the Company's Class A and Class B Common
Stock as of January 5, 2001, January 4, 2002 and January 3, 2003 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 5, 2001................ -- 232,090 232,090 -- $ 7.89
January 4, 2002................ -- 396,209 396,209 -- $ 8.81
January 3, 2003................ -- 435,736 435,736 -- $ 9.30
The following table summarizes information about stock options outstanding
at January 3, 2003:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Shares Average Weighted Shares Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices 01/03/03 Life (Years) Price 01/03/03 Price
--------------- -------- ------------ ----- -------- -----
$ 4.00 - $ 4.88 5,250 2.73 $ 4.54 3,400 $ 4.48
$ 5.00 - $ 5.90 152,420 4.01 $ 5.46 83,176 $ 5.30
$ 6.00 - $ 6.95 163,150 7.78 $ 6.27 77,750 $ 6.25
$ 7.01 - $ 7.77 168,893 7.89 $ 7.14 82,631 $ 7.08
$ 8.06 - $ 9.88 7,500 8.56 $ 9.03 600 $ 8.67
$ 10.00 - $ 10.19 1,000 2.55 $ 10.09 400 $ 10.09
$ 11.25 - $ 11.38 136,900 6.21 $ 11.26 76,900 $ 11.26
$ 12.13 - $ 12.50 57,421 2.08 $ 12.16 23,968 $ 12.17
$ 13.38 - $ 14.69 49,028 1.95 $ 14.01 34,161 $ 14.30
$ 16.16 - $ 17.75 60,250 1.80 $ 16.53 52,150 $ 16.42
$ 19.88 1,000 1.60 $ 19.88 600 $ 19.88
------- -------
802,812 435,736
======= =======
On March 12, 2001, the Company issued common stock purchase warrants to
purchase, in the aggregate, 50,250 shares of the Company's Class B Common
Stock at a per share price of $7.00 to five footwear suppliers. The stock
purchase warrant grant was approved by the Company's Board of Directors on
February 27, 2001. The warrants were issued for no cash consideration; but
rather as an incentive to the recipients of the warrants to satisfy
specific performance criteria which support the Company's financial and
operating goals. The warrants vest in five equal annual installments,
commencing on March 12, 2002 and expire on March 12, 2006. The right to
exercise the warrants is subject to the satisfaction of specific
performance criteria by the recipients. See Note 12 for further discussion
of the stock warrant fair value and annual stock-based compensation
expense.
On February 20, 2003, the Company's Board of Directors adopted the
Company's 2003 Stock Incentive Plan (Plan). Under the Stock Incentive Plan,
the Company may grant incentive stock options and restricted stock awards
to employees and officers of the Company. The Company's directors, outside
consultants and advisors are eligible to receive non-statutory stock
options and restricted stock awards. A total of 1,750,000 shares, in the
aggregate, of Class A Common Stock and Class B Common Stock have been
reserved by the Company and may be issued under the Plan. The Plan is
subject to approval at the Company's 2003 Annual Meeting of Shareholders to
be held on May 21, 2003.
11. Earnings Per Share
The following table sets forth the computation of basic earnings per common
share and diluted earnings per common share:
2002 2001 2000
---- ---- ----
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
Net income (loss) available for
common shares and
assumed conversions...............$ 5,243 $ 5,243 $ (940) $ (940) $ 8,963 $ 8,963
======== ======== ======= ======= ======== ========
Weighted-average common shares
and equivalents outstanding:
Weighted-average shares
outstanding...................... 6,107 6,107 6,080 6,080 6,192 6,192
Effect of dilutive securities:
Stock options..................... -- 76 -- -- -- 149
Stock purchase warrants........... -- 3 -- -- -- --
-------- -------- ------- ------- -------- --------
6,107 6,186 6,080 6,080 6,192 6,341
======== ======== ======= ======= ======== ========
Earnings per share:
Net income (loss).................$ 0.86 $ 0.85 $ (.15) $ (.15) $ 1.45 $ 1.41
======== ======== ======= ======= ======== ========
Options to purchase 312,000 and 833,000 shares of common stock were
outstanding at January 3, 2003 and January 4, 2002, respectively, but were
not included in the computations of earnings per share since the options
were anti-dilutive. Stock warrants to purchase 47,000 and 50,000 shares of
common stock were outstanding at January 3, 2003 and January 4, 2002,
respectively, but were not included in the computations of earnings per
share since the warrants were anti-dilutive.
12. Accounting for Stock-Based Compensation
---------------------------------------
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", "APB 25". Accordingly, compensation cost for stock options and
restricted stock awards is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the
exercise price an employee must pay to acquire the stock.
The Company recognizes stock-based compensation arising from the issuance
of restricted stock warrants and below market options over the vesting
period of the stock grant or option term. Stock-based compensation amounted
to $1, $7 and $6 for 2002, 2001 and 2000, respectively.
The Company issued common stock purchase warrants to purchase, in the
aggregate, 50,250 shares of the Company's Class B Common Stock at a per
share price of $7.00 to five footwear suppliers. Fair value at date of
grant for the warrants was $3.93 per share issuable upon exercise of each
warrant. Amortization of stock-based compensation resulting from the stock
purchase warrants amounted to $42 and $31 for 2002 and 2001, respectively,
and is recorded as a component of cost of goods sold.
The weighted average fair value at date of grant for options granted in
2002, 2001 and 2000 was $3.18, $3.57 and $6.45 per share issuable upon
exercise of each option, respectively. The weighted-average fair value of
these options at the date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for
2002, 2001 and 2000, respectively: risk-free interest rates of 3.7%, 5.0%
and 6.5%; dividend yields of 0%, 0% and 0%; volatility factors of the
expected market price of the Company's common stock of 67.3%, 71.9% and
70.0%; and a weighted-average expected life of the options of 3.3, 3.5 and
3.7 years.
13. Income Taxes:
-------------
The provision for income taxes was based on pre-tax income (loss) from
operations before minority interest which was subject to taxation by the
following jurisdictions:
2002 2001 2000
---- ---- ----
Pre-tax income (loss):
United States.....................................$ 7,502 $ (1,261) $ 14,660
Foreign........................................... 1,779 897 853
---------- ---------- ---------
Total.............................................$ 9,281 $ (364) $ 15,513
========== ========== =========
The provision for income taxes consists of the following:
2002 2001 2000
---- ---- ----
Current:
Federal...........................................$ 2,293 $ 426 $ 4,129
State............................................. 686 165 1,129
Foreign........................................... 795 540 525
---------- ---------- ---------
3,774 1,131 5,783
========== ========== =========
Deferred:
Federal........................................... 144 (828) 523
State............................................. (81) (176) 132
Foreign........................................... (66) (39) (62)
---------- ---------- ---------
(3) (1,043) 593
========== ========== =========
Change in valuation allowance......................... 94 387 85
---------- ---------- ---------
Total.............................................$ 3,865 $ 475 $ 6,461
========== ========== =========
The net deferred tax asset or liability reported on the consolidated
balance sheet consists of the following items as of January 3, 2003 and
January 4, 2002:
2002 2001
---- ----
Net current deferred tax assets:
Allowance for doubtful accounts and discounts..............................$ 753 $ 785
Deferred compensation........................................................ 568 549
Inventory allowances and tax costing adjustments........................... 392 287
Other accrued expenses..................................................... 203 514
Unrealized gain on marketable securities................................... -- (37)
--------- ---------
Total...................................................................$ 1,916 $ 2,098
--------- ---------
Foreign loss carryforwards.................................................$ 612 $ 570
State loss carryforward.................................................... 52 0
Valuation allowance........................................................ (664) (570)
--------- ---------
Total...................................................................$ 0 $ 0
--------- ---------
Net long-term deferred tax liabilities:
Investment in limited partnership..........................................$ 1,195 $ 1,210
Property, plant and equipment.............................................. 664 739
--------- ---------
Total...................................................................$ 1,859 $ 1,949
--------- ---------
Net deferred tax asset ......................................................$ 57 $ 149
========= =========
The foreign loss carryforwards relate to operating losses of approximately
$1,935, which may be carried forward indefinitely. At January 3, 2003, the
Company has determined that it is more likely than not that all of the
deferred tax assets resulting from foreign and state operating losses will
not be realized.
The Company has not recorded deferred income taxes on the undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in
foreign operations. These earnings amounted to approximately $4,055 at
January 3, 2003.
A reconciliation of the expected tax computed at the U.S. statutory federal
income tax rate to the total provision for income taxes follows:
2002 2001 2000
---- ---- ----
Expected tax at 34%.................................................$ 3,155 $ (124) $ 5,275
State income tax, net of federal benefit............................ 399 (7) 833
Non-deductible expenses and tax-exempt income....................... 121 40 100
International tax rate differences.................................. 100 124 174
Valuation allowance relating to foreign and state
operating losses.................................................. 94 387 85
Low-income housing tax credits...................................... (4) (5) (6)
Adjustment of prior years' estimated tax liabilities................ -- 60 --
--------- --------- --------
Provision for income taxes..........................................$ 3,865 $ 475 $ 6,461
========= ========= ========
14. Sale of Cycling Division:
-------------------------
On June 29, 2000, the Company sold substantially all of the assets and
business of its cycling division, consisting of inventory, prepaid
expenses, equipment and tradenames, to QR Merlin Acquisition LLC for $1,350
in cash and the assumption of $39 in liabilities. In connection with the
sale, the Company recorded a pre-tax loss of $2,661, inclusive of $1,012 of
expenses associated with the transaction and resulting from the exit of the
cycling business. As a result of the transaction, a majority of the cycling
division employees were severed and certain long-lived assets used
exclusively in the cycling business were deemed impaired. Expenses
associated with the sale and exit of the cycling division are as follows:
Transaction costs............................................$ 358
Costs to exit facility and equipment leases and other
non-cancelable contractual commitments..................... 142
Employee severance and termination benefits.................. 210
Writeoff leasehold improvements.............................. 84
Writeoff goodwill and other deferred charges................. 218
--------
Total........................................................$ 1,012
========
Net sales from the cycling division, which are included in our Other
Products segment, represented approximately 1.9% of consolidated net sales
for fiscal year 2000. The loss on the sale of the cycling division is
included in the income before tax for the Other Products segment. As of
January 3, 2003, the Company has no remaining reserves related to the
cycling division sale.
15. Plant Closing and Other Charges:
--------------------------------
On November 9, 2001, the Company announced the cessation of manufacturing
at and closing of its Bangor, Maine facility. During the fourth quarter of
fiscal 2001, the Company relocated the Asian sourcing and quality control
office to China, resulting in the closure of its Taiwan office. In
addition, in the fourth quarter of 2001, the Company negotiated an early
termination and exit of a retail store lease. As a result of these actions,
the Company recorded pre-tax charges of $2,108. The closing of the Bangor,
Maine facility in January 2002 resulted in the termination of 101
employees, of which 61 were terminated subsequent to January 4, 2002.
Assets used extensively by the Bangor, Maine manufacturing facility, the
Taiwan office and the retail store have been written down to fair market
value. Expenses associated with the plant closing and other charges are as
follows:
Bangor Taiwan Retail
Plant Office Store Total
----- ------ ----- -----
Employee severance and termination benefits.....................$ 1,121 $ 150 $ 4 $ 1,275
Facility and equipment lease exit costs and
other non-cancelable contractual commitments.................. 228 -- 200 428
Writedown of machinery and equipment
to fair market value.......................................... 248 25 77 350
Professional fees and other transaction costs................... 47 -- 8 55
------- ------ ------- --------
Total.........................................................$ 1,644 $ 175 $ 289 $ 2,108
======= ====== ======= ========
During fiscal 2002, we recorded a pre-tax net benefit of $214 to reduce
expenses accrued in the fourth quarter of fiscal 2001, associated with the
closing of our Bangor, Maine manufacturing facility and the early
termination and exit of a retail store lease. Partially offsetting this
pre-tax benefit was a pre-tax charge of $142 to close an underperforming
retail store. Expenses associated with the store closing included lease
termination and other contractual costs of $51 and $91 to write-off
leasehold improvements.
Included in accrued expenses at January 3, 2003 and January 4, 2002 are $36
and $1,461 of costs associated with the plant closing and other charges.
The charge recorded for the Bangor, Maine plant closing and the Taiwan
office closing are included in income before tax for the Saucony segment,
while the retail store closing is included in income before tax for the
Other Products segment.
The following table summarizes the activity in the plant closing and other
charge accruals for the fiscal years ended January 4, 2002 and January 3,
2003:
Employee Facility Writedown
Severance and Closure and of Equipment Professional
Termination Contractual and Disposal Fees and
Benefits Commitments Costs Other Costs Total
-------- ----------- ----- ----------- -----
Company Total
Charge $ 1,275 $ 428 $ 350 $ 55 $ 2,108
Payments / utilization (382) -- (260) (5) (647)
-------- ------- -------- ------
Balance, January 4, 2002 893 428 90 50 1,461
Payments / utilization (787) (320) (89) (15) (1,211)
Expense reversal (79) (99) (1) (35) (214)
-------- ------- -------- ------ --------
Balance, January 3, 2003 $ 27 $ 9 $ 0 $ 0 $ 36
======== ======= ======== ====== ========
16. Geographic Segment Data:
------------------------
The following table summarizes the Company's operations by geographic area
for the years ended January 3, 2003, January 4, 2002 and January 5, 2001
and assets as of January 3, 2003, January 4, 2002 and January 5, 2001:
2002 2001 2000
---- ---- ----
Revenues:
United States...................................................$ 103,444 $ 106,450 $ 145,744
Canada.......................................................... 11,700 8,464 7,194
Other international............................................. 18,355 17,450 14,982
----------- ----------- -----------
$ 133,499 $ 132,364 $ 167,920
=========== =========== ===========
International revenues:
United States - sales to foreign distributors................... 7,048 8,164 5,119
Canada.......................................................... 11,700 8,464 7,194
Other international............................................. 11,307 9,286 9,863
----------- ----------- -----------
$ 30,055 $ 25,914 $ 22,176
=========== =========== ===========
Inter-area revenues:
United States...................................................$ 247 $ 1,228 $ 870
Canada.......................................................... 6,386 5,363 4,222
Other international............................................. 5,191 4,211 5,077
----------- ----------- -----------
$ 11,824 $ 10,802 $ 10,169
=========== =========== ===========
Total revenues:
United States...................................................$ 103,691 $ 107,678 $ 146,614
Canada.......................................................... 18,086 13,827 11,416
Other international............................................. 23,546 21,661 20,059
Less: Inter-area eliminations.................................. (11,824) (10,802) (10,169)
----------- ----------- -----------
$ 133,499 $ 132,364 $ 167,920
=========== =========== ===========
Operating income (loss):
United States...................................................$ 5,531 $ (2,565) $ 13,855
Canada.......................................................... 1,931 1,304 1,080
Other international............................................. 1,659 1,151 1,332
Less: Inter-area eliminations.................................. (178) (159) (144)
----------- ----------- -----------
$ 8,943 $ (269) $ 16,123
=========== =========== ===========
Assets:
United States...................................................$ 81,538 $ 78,942 $ 78,130
Canada.......................................................... 6,906 5,222 4,119
Other international............................................. 9,396 7,403 9,346
Less: Inter-area eliminations.................................. (10,300) (13,467) (8,310)
----------- ----------- -----------
$ 87,540 $ 78,100 $ 83,285
=========== =========== ===========
Revenues are classified based on customer location. Other revenue consists
primarily of royalty income. Inter-area revenues consist primarily of
inventory shipments to the Company's international subsidiaries. These
inter-area sales are generally priced to recover cost plus an appropriate
mark-up for profit and are eliminated in the determination of consolidated
net sales and cost of sales. Operating income consists of revenue, less
cost of sales, selling expenses, general and administrative expenses, plant
closing and other charges, and the loss on the sale of the cycling
division.
17. Operating Segment Data:
-----------------------
The Company's operating segments are organized based on the nature of
products. The operating segments of the Company are as follows:
Saucony Segment
---------------
Performance running, walking and outdoor trail footwear and multi-sport and
triathlon athletic apparel sold under the Saucony brand name.
Other Products Segment
----------------------
The Other Products segment aggregates several product lines, none of which
individually meets the criteria as defined in SFAS 131 for a reportable
segment. Included in Other Products are: Hind multi-sport athletic apparel;
Spot-bilt coaches, official, leather walking and workplace footwear; Hyde
Authentics casual footwear; the Company's retail factory outlet stores; and
the Company's former cycling division.
The following table summarizes the results of the Company's operating
segments for the years ended January 3, 2003, January 4, 2002 and January
5, 2001 and identifiable assets as of January 3, 2003, January 4, 2002 and
January 5, 2001:
2002 2001 2000
---- ---- ----
Revenues:
Saucony...........................................$ 111,035 $ 110,393 $ 146,596
Other Products.................................... 22,464 21,971 21,324
----------- ---------- -----------
Total.............................................$ 133,499 $ 132,364 $ 167,920
=========== ========== ===========
Pre-tax income (loss):
Saucony...........................................$ 10,288 $ (296) $ 18,507
Other Products.................................... (1,007) (68) (2,994)
Total segment pre-tax income (loss)............... 9,281 (364) 15,513
Provision for income taxes........................ 3,865 475 6,461
Minority interest................................. 173 101 89
----------- ---------- -----------
Net income (loss)....................................$ 5,243 $ (940) $ 8,963
=========== ========== ===========
Assets:
Saucony...........................................$ 75,918 $ 62,488 $ 68,268
Other Products.................................... 11,622 15,612 15,017
----------- ---------- -----------
Total.............................................$ 87,540 $ 78,100 $ 83,285
=========== ========== ===========
Depreciation and amortization:
Saucony...........................................$ 1,332 $ 1,668 $ 1,701
Other Products.................................... 265 301 257
----------- ---------- -----------
Total.............................................$ 1,597 $ 1,969 $ 1,958
=========== ========== ===========
Goodwill, net:
Saucony...........................................$ 19 $ 19 $ 30
Other Products.................................... 893 893 1,013
----------- ---------- -----------
Total.............................................$ 912 $ 912 $ 1,043
=========== ========== ===========
Interest, net income (expense):
Saucony...........................................$ 327 $ (28) $ (276)
Other Products.................................... -- (49) (341)
----------- ---------- -----------
Total.............................................$ 327 $ (77) $ (617)
=========== ========== ===========
Components of interest, net
Interest expense..................................$ (5) $ (213) $ (695)
Interest income................................... 332 136 78
----------- ---------- -----------
Interest, net...................................$ 327 $ (77) $ (617)
=========== ========== ===========
18. Concentration of Credit Risk:
----------------------------
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash, cash equivalents and trade receivables.
The Company maintains cash and cash equivalents with various major
financial institutions. Cash equivalents include investments in commercial
paper of companies with high credit ratings, investments in money market
securities and securities backed by the U.S. Government. At times such
amounts may exceed the Federal Deposit Insurance Corporation 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 42% and 45% of the
Company's gross trade receivables balance was represented by 18 customers
and 16 customers, respectively, at January 3, 2003 and January 4, 2002,
respectively, which exposes the Company to a concentration of credit risk.
The Company did not derive more that 10% of its consolidated revenue from
one customer in 2002, 2001 or 2000.
19. Financial Instruments:
----------------------
The carrying value of cash, cash equivalents, receivables, and liabilities
approximates fair value. The fair value of marketable securities is
estimated based upon quoted market prices for these securities.
The Company enters into forward currency exchange contracts to hedge
intercompany liabilities denominated in currencies other than the
functional currency. The fair value of the Company's foreign currency
exchange contracts is estimated based on foreign exchange rates as of
January 3, 2003. At January 3, 2003 and January 4, 2002, the notional value
of the Company's foreign currency exchange contracts to purchase U.S.
dollars was $5,685 and $2,300, respectively. At January 4, 2002, the
notional value of the Company's foreign currency exchange contracts to buy
and sell Euros was $100 Euros and $96 Euros, respectively. At January 4,
2002, the national value of the Company's foreign exchange contracts to buy
British pounds sterling was $25. There were no outstanding foreign currency
exchange contracts involving Euros or British Pounds Sterling at January 3,
2003. Consistent with the provisions of SFAS 133, all derivatives must be
recognized on the balance sheet at their then fair value and adjustments to
the fair value of derivatives that are not hedges must be recognized
currently in earnings when they occur.
The Company believes that these contracts economically function as
effective hedges of the underlying exposures but, the foreign currency
contracts do not meet the specific criteria as defined in SFAS 133 thus
requiring the Company to record all changes in the fair value in earnings
in the period of the change. The Company recorded charges of $181 and $35,
at January 3, 2003 and January 2, 2002, respectively, against fiscal 2003
and fiscal 2001 earnings, to record the unrealized loss on certain foreign
currency contracts outstanding as of those dates. The charges are recorded
in non-operating expenses. At January 3, 2003 and January 4, 2002, the fair
value of derivatives in a loss position are recorded in accrued expenses.
20. Quarterly Information: (Unaudited)
2002 Quarter 1 Quarter 2 Quarter 3 Quarter 4
---- --------- --------- --------- ---------
Net sales.........................................$ 34,787 $ 36,453 $ 33,745 $ 28,211
Gross profit...................................... 11,899 12,407 12,062 9,478
Net income........................................ 1,301 1,549 1,587 806
Earnings per share:
Basic........................................... 0.21 0.25 0.26 0.13
Diluted......................................... 0.21 0.25 0.26 0.13
2001 Quarter 1 Quarter 2 Quarter 3 Quarter 4 (1)
---- --------- --------- --------- -------------
Net sales.........................................$ 43,693 $ 35,491 $ 31,488 $ 21,589
Gross profit...................................... 13,699 11,853 10,307 6,284
Net income........................................ 1,346 176 362 (2,824)
Earnings per share:
Basic........................................... 0.22 0.03 0.06 (0.46)
Diluted......................................... 0.22 0.03 0.06 (0.46)
______________
(1) The Company closed its Bangor, Maine manufacturing facility, terminated and
exited a retail store lease, closed its Taiwan office and incurred other
reorganization related expenses. See Note 15 for further information
relating to these transactions
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 2002 and 2001.
21. Supplemental Cash Flow Disclosure
---------------------------------
The following table summarizes additional disclosure of cash flow
information for the years ended January 3, 2003, January 4, 2002 and
January 5, 2001:
2002 2001 2000
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds.................................$ 2,036 $ 857 $ 6,695
========= ========= =========
Interest.....................................................$ 4 $ 205 $ 605
========= ========= =========
Non-cash Investing and Financing Activities:
Property purchased under capital leases......................$ -- $ 102 $ --
========= ========= =========
Plant closing and other related charges..........................$ (72) $ 2,108 --
Cash received................................................ -- 3 --
Severance and other payments................................. (51) (386) --
--------- --------- ---------
$ (123) $ 1,725 --
--------- --------- ---------
Non-cash portion:
Accrued expenses.............................................$ (214) $ 1,461 --
Property, plant and equipment................................ 91 264 --
--------- --------- ---------
$ (123) $ 1,725 --
========= ========= =========
22. Subsequent Event
----------------
On March 11, 2003, the Company was notified by counsel representing the
trustee appointed to oversee the liquidation of assets of a former customer
of the Company, which filed for bankruptcy protection on November 4, 1999,
that the trustee had agreed to settle all claims for preferential
transfers. Under the terms of the settlement agreement, which is contingent
upon approval by the bankruptcy court, the Company will pay $530 to settle
all preferential transfer claims. Furthermore, the trustee will allow an
unsecured claim by the Company for $1,358. As a consequence of this
settlement, the Company, upon formal approval by the bankruptcy court, will
record a pre-tax benefit of $566 to reduce the amount accrued as of January
3, 2003. The benefit will be recorded in general and administrative
expenses.
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHER ANDERSEN LLP.
Report of Independent Public Accountants
On Schedules
To Saucony, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the accompanying consolidated financial statements of Saucony,
Inc. for the year ended January 4, 2002 included in this Form 10-K and have
issued our report thereon dated February 14, 2002.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. The schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
February 14, 2002
SAUCONY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 3, 2003, January 4, 2002 and January 5, 2001
(in thousands)
Additions
Balance charged to Deductions Balance
beginning costs and from end
of year expenses reserve of year
------- -------- ------- -------
Year ended January 3, 2003:
Allowance for doubtful accounts and discounts...................$ 2,457 $ 4,752 $ 4,803 $ 2,406
Year ended January 4, 2002:
Allowance for doubtful accounts and discounts...................$ 2,047 $ 5,767 $ 5,357 $ 2,457
Year ended January 5, 2001:
Allowance for doubtful accounts and discounts...................$ 3,534 $ 5,525 $ 7,012 $ 2,047
Exhibit Index
Exhibit
Number Description
3.1 Restated Articles of Organization, as amended, of the Registrant are
incorporated herein by reference to Exhibits 3.1 and 3.2 to the
Registrant's Current Report on Form 8-K dated May 21, 1998.
3.2 By-Laws, as amended.
10.1 Amended and Restated Credit Agreement, dated August 30, 2002, between
Saucony, Inc. and State Street Bank and Trust Company, is incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended October 4, 2002.
10.2*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.
10.3* Amendment No. 3 to 1993 Equity Incentive Plan, as amended, is incorporated
herein by reference to Exhibit 10.5 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
10.4* Amendment No. 4 to 1993 Equity Incentive Plan, as amended, is incorporated
by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2000.
10.5* VP Bonus Plan is incorporated herein by reference to Exhibit 10.19 to the
Form S-2.
10.6* 2001 Employee Stock Purchase Plan is incorporated herein by reference to
Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 (File
No. 333-65974).
10.7* Employment Agreement dated as of August 17, 2000, by and between the
Registrant and John H. Fisher, is incorporated herein by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 29, 2000.
10.8* Executive Retention Agreement dated as of August 17, 2000, by and between
the Registrant and John H. Fisher, is incorporated herein by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 29, 2000.
10.9* Employment Agreement dated as of August 17, 2000, by and between the
Registrant and Charles A. Gottesman, is incorporated herein by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 29, 2000.
10.10* Executive Retention Agreement dated as of August 17, 2000, by and between
the Registrant and Charles A. Gottesman, is incorporated herein by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 29, 2000.
10.11* Severance Agreement as of January 31, 2002 by and between the Registrant
and Arthur E. Rogers incorporated by reference to Exhibit 10.20 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended January
2, 2002.
10.12* Saucony, Inc. Non-Qualified Retirement Plan
21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Limitation of Remedies Against Arthur Andersen LLP. Please see Item 9 of
this Annual Report on Form 10-K.
23.3 Consent of PricewaterhouseCoopers LLP.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
____________________
* Management contract or compensatory plan or arrangement filed herewith in
response to Item 14(a)(3) of the instructions to Form 10-K.