United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004
Commission file number: 000-05083
Saucony, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
(Address of principal executive offices, including zip code)
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 [ X ] No [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant, as of July 2, 2004, which was the last
business day of the registrant's second quarter of fiscal 2004, was
approximately $101,079,000 (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). For purposes of the immediately preceding sentence, the term
"affiliate" consists of each director and executive officer of the registrant.
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 February 28,
2005 was 2,520,647 and 4,157,376, respectively.
Portions of the registrant's Definitive Proxy Statement for its 2005 Annual
Meeting of Stockholders scheduled to be held on May 18, 2005 (the "2005 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 2004, are incorporated by reference into
Part III of this Annual Report on Form 10-K. With the exception of the portions
of the 2005 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 DECEMBER 31, 2004
Caption Page
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, Related Stockholder
Matters and Issuer Purchases of Equity Securities 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 42
Item 9A. Controls and Procedures 42
Item 9B Other Information 43
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 44
Item 13. Certain Relationships and Related Transactions 44
Item 14. Principal Accountant Fees and Services 44
PART IV
Item 15. Exhibits and Financial Statement Schedules 45
Signatures 46
Index to Consolidated Financial Statements 53
Exhibit Index 80
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, cross-training 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; and
o shoes for coaches and officials, cleated football and multi-purpose
footwear 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 19 factory outlet stores. Outside the United States our products are
sold in 53 countries through 24 independent distributors located throughout the
world and through our subsidiaries located in Canada, The Netherlands and the
United Kingdom and at our two factory outlet stores in Canada.
For the fiscal year ended December 31, 2004, we generated total sales of
$166,200,000. In March 2004 we paid a special dividend on our common stock,
amounting to $25,990,000. On August 2, 2004, we announced the retention of
Chestnut Securities, Inc., Boston, Massachusetts, to assist in our analysis and
consideration of various strategic alternatives that may be available to us,
including a possible sale of our company. As of the date of this Annual Report
on Form 10-K, we have not determined whether to pursue any particular strategic
alternative. In addition, there can be no assurance that, if any transaction is
commenced, it will be completed or as to the value that any transaction may have
to our shareholders.
We are a Massachusetts corporation, founded in 1920. Our headquarters are in
Peabody, Massachusetts.
Saucony(R), GRID(R), Hind(R), Spot-bilt(R), and Hyde(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, we use the terms "we", "us", "our", "Saucony" and
the "Company" in this Annual Report on Form 10-K to refer to Saucony, Inc. and
its consolidated subsidiaries.
Segments
Our business is organized into two operating segments, the Saucony segment and
the Other Products segment. The Saucony segment consists of Saucony technical
and Originals footwear and Saucony apparel. The Other Products segment consists
of Hind athletic apparel and Spot-bilt shoes for coaches and officials, cleated
football and multi-purpose footwear and casual leather walking and workplace
footwear, together with sales of our and other companies' products at our 21
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 2004 Fiscal 2003 Fiscal 2002
--------------------- --------------------- --------------------
$ % $ % $ %
- - - - - -
Saucony
Domestic..............$ 103,820 63% $ 81,720 60% $ 83,182 62%
International......... 36,929 22% 30,991 23% 27,647 21%
---------- ---- ---------- ---- ---------- ----
Total.................$ 140,749 85% $ 112,711 83% $ 110,829 83%
---------- ---- ---------- ---- ---------- ----
Other Products
Domestic..............$ 23,995 14% $ 21,901 16% $ 20,171 15%
International......... 1,408 1% 1,454 1% 2,196 2%
---------- ---- ---------- ---- ---------- ----
Total.................$ 25,403 15% $ 23,355 17% $ 22,367 17%
---------- ---- ---------- ---- ---------- ----
Total....................$ 166,152 100% $ 136,066 100% $ 133,196 100%
========== ==== ========== ==== ========== ====
_________________
For further financial information concerning geographic areas and our operating
segments, please see Notes 17 and 18 to our consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K.
Products
Footwear
Technical Footwear. We sell performance running, walking and outdoor trail shoes
for athletes under the Saucony brand name, which has been marketed in the United
States for over 30 years. A substantial majority of sales are in the running
shoe category. We have several different products within each Saucony brand
category. These products have different designs and features, resulting in
different cushioning, stability, support characteristics and prices.
We design and market separate lines for men and women within most technical
footwear categories. In keeping with our emphasis on performance, we market and
sell our technical footwear to athletes who have a high participation rate,
meaning they actively and regularly participate, in their sport of choice. We
address this market through our "Loyal to the Sport" advertising campaign. We
believe that consumers in this market 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 $120 per pair. During fiscal 2004, we introduced several new shoes targeted
at the mid-priced running footwear segment, which we have defined as the
"cross-over" category 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 either our Ground Reaction Inertia
Device, or GRID, system, or our Custom Ride Management technology.
Our GRID system is 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 working to
maximize shock absorption and minimize rear foot motion. We have continually
improved the GRID system since it was first introduced in 1991.
Custom Ride Management technology allows us to tailor shoes to the individual
characteristics of a runner, including height, weight, foot size, foot types and
gait cycles. By doing so, it allows athletes to select a level of cushioning or
stability based on their needs or preferences. We have incorporated Custom Ride
Management into several running models and a walking model, all of which shipped
in fiscal 2004.
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 2004, 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 72% of our fiscal 2004 consolidated net sales, 71%
of our fiscal 2003 consolidated net sales and 70% of our fiscal 2002
consolidated net sales.
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 a 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 $65 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 then
expanded the Originals product line to include color and material variations on
our initial Originals and also introduced children's models. During fiscal 2004,
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, and
expanded our offering of children's models.
Originals footwear, inclusive of full margin and closeout originals footwear,
accounted for approximately 12% of our fiscal 2004 consolidated net sales, 11%
of our fiscal 2003 consolidated net sales and 12% of our fiscal 2002
consolidated net sales.
Spot-bilt
We sell shoes for coaches and officials, cleated football and multi-purpose
footwear, casual leather walking and workplace footwear under the Spot-bilt
brand name through similar distribution channels as our Saucony brand shoes.
Athletic Apparel
Hind
We sell a full line of technical apparel under the Hind brand name for use in a
variety of sports, including 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 to
incorporate the latest available fabric technology. During fiscal 2004, we
introduced an innovative line of performance sport bras, designed for women's
fitness activities.
Saucony
We also market athletic apparel, internationally, 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 ten design and development
specialists in Peabody, Massachusetts to undertake continuing product
development.
In fiscal 2004, we spent approximately $1,956,000 on our product development
programs, compared to approximately $1,673,000 in fiscal 2003 and $1,611,000 in
fiscal 2002. 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 and full-margin sporting goods chains, but
also independent sporting goods stores, athletic footwear specialty stores,
athletic mall, fashion mall, family footwear and department stores and
off-priced value chains. One of our domestic Saucony customers accounted for
approximately 15% of our domestic Saucony segment net sales in fiscal 2004, 9%
of our domestic Saucony segment net sales in fiscal 2003 and 9% of our domestic
Saucony segment net sales fiscal 2002. We did not derive 10% or more of our
consolidated revenue from sales to one customer in any of fiscal 2004, fiscal
2003 or fiscal 2002.
We maintain a corporate sales group that is directly responsible for the sales
activity in our largest accounts. We also sell our footwear and apparel to
retail outlets in the United States through 14 independent manufacturers'
agents, whose organizations employ approximately 42 sales representatives. We
coordinate the efforts of these representatives through our field sales
management group. Our web site, saucony.com, receives thousands of "hits" weekly
from ad displays for new product information and race and event data, as well as
general Saucony information.
We sell our Saucony products outside the United States in 53 countries through
22 independent distributors located throughout the world, through our Canadian
subsidiary, in which we hold a 95% 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 "Shape", "Runner's World", "Self", "Sports
Illustrated on Campus" and "Men's Health", as well as several regional running
periodicals. We also sponsor sporting events to increase brand awareness and the
image of our technical footwear to athletes. Examples include sponsorship of the
Los Angeles Marathon and our participation as the official shoe and apparel
supplier of USA Triathlon. 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" and "Teen People".
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. During fiscal
2004, we introduced our "Saucony 26" marketing program which profiled 26
competitors, based on the individual's contributions to the running community
and society, at the Los Angeles, Boston, Chicago and New York City marathons. 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.
Our local distributors direct our advertising and promotion efforts in foreign
markets, subject to our approval of the nature and content of those efforts.
Hind
We sell our Hind products domestically at independent sporting goods stores and
athletic footwear specialty stores through 14 independent manufacturers' agents,
whose organizations employ approximately 42 sales representatives. We sell our
Hind products outside the United States in five countries, through two
independent distributors and our subsidiaries in Canada, The Netherlands and the
United Kingdom.
Spot-bilt
We market our Spot-bilt line through our Saucony brand distribution channels and
directly to customers through our website at Spotbilt.com.
Factory Stores
We currently operate 19 factory outlet stores in the United States and 2 factory
outlet stores in Canada at which we sell our Saucony, Hind and Spot-bilt
products, as well as the products of third parties. 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, special make-up footwear products and delay
the offering of first quality products offered at these stores for a period of
six months from the product introduction date. 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 2004, we opened two new
factory outlet stores. During fiscal 2005, we expect to open two new factory
outlet stores and close one factory outlet store.
Suppliers
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 do not have long-term agreements with any
of our foreign suppliers, and 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 23 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, the
majority of which is manufactured in Taiwan, Canada, Sri Lanka and Vietnam of
fabrics sourced primarily from the United States and Taiwan.
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 2004,
we purchased footwear products from five overseas suppliers. One such supplier,
located in China, accounted for approximately 33% 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 such as the 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, The Netherlands 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 only limited inventory for the majority 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 and
our Hind apparel products in the event of significant order cancellations.
Backlog
The athletic and casual footwear and athletic apparel industries in which we
compete are subject to seasonal sales fluctuations. Sales of our Saucony and
other footwear brands are generally highest in the first and second quarters.
Sales of 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 $61,350,000 at December 31,
2004 and $59,901,000 at January 2, 2004. We expect that all of our backlog at
December 31, 2004 will be shipped in fiscal 2005, subject to customer
cancellations. 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.
We did not derive 10% or more of our consolidated revenue from sales to one
customer in any of fiscal 2004, fiscal 2003 or fiscal 2002. Approximately 48% of
our gross trade receivables balance was represented by 15 customers at December
31, 2004. 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.
Trade Policy
Our practice of sourcing products overseas, with subsequent importation into the
United States, exposes us to possible product supply disruptions and increased
costs in the event of actions by United States or foreign government agencies
adverse to continued trade or the enactment of legislation that restricts trade.
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 have a material adverse effect on our sales
or profitability.
For example, we import the majority 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. 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 the cost of our products and could restrict our supply of
products from that country.
Competition
Competition is intense in the markets in which we sell our products. We compete
with a large number of other companies, both domestic and foreign. Several
competitors are large organizations with diversified product lines, well-known
brands and financial, distribution and marketing resources substantially greater
than ours. The principal competitors for our Saucony products are Nike, Asics
and Brooks. The principal competitors for our Hind products are Nike, Adidas 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, we may not be able to retain our market share or respond timely
to changing consumer preferences.
Trademarks
We use trademarks on nearly all of our products and believe that having
distinctive marks is an important factor in marketing our products. We have
registered our Saucony(R), GRID(R), Hind(R), Spot-bilt(R) and Hyde(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 December 31, 2004, we employed approximately 343 people worldwide. Of
these employees, approximately 267 were in the United States and approximately
76 were in foreign locations. We believe that our employee relations are
excellent. We have never experienced a strike or other work stoppage.
Approximately 26 employees in our Peabody, Massachusetts warehouse were
represented by a union as of December 31, 2004. The collective bargaining
agreement with the union which represents our warehouse employees expires on
April 30, 2008. None of our other employees are represented by a union or are
subject to a collective bargaining agreement.
Environmental Matters
In December 2004, we discovered environmental contamination at our facility in
East Brookfield, Massachusetts. We acquired this facility as part of an asset
purchase in March 1985. We believe the contamination is the result of
manufacturing activities that took place in the facility in the early and
mid-1900s when this facility was owned and operated by an unrelated party. We
have hired environmental consultants, engineers and attorneys to assist us in
investigating and addressing our obligations under environmental laws. We have
notified state and local environmental and health authorities and will
coordinate our further investigations with them. We will continue to investigate
the extent to which our property is affected by this contamination and what
measures we must take to address those conditions.
In fiscal 2004, we recorded a charge of $2,275,000 to address the environmental
conditions at our East Brookfield, Massachusetts facility. The environmental
charge includes the estimated direct costs to investigate and address the
conditions on the property and the associated engineering, legal and consulting
costs we expect to incur as we address the environmental conditions. Our
assessment of our liability and the associated costs is an estimate based upon
currently available information after consultation with environmental engineers,
consultants and attorneys assisting us in addressing these environmental issues.
Our actual costs to address the environmental conditions may change based on
further investigations, based on the conclusions of regulatory authorities about
information gathered in those investigations and due to the inherent
uncertainties involved in estimating conditions in the environment and the costs
of addressing such conditions.
The environmental charge is included in operating expenses for our Saucony
segment. At December 31, 2004, our accrual for environmental charges was
$2,275,000 and was included on our balance sheet under current liabilities.
However, our costs to address the environmental conditions at our East
Brookfield, Massachusetts facility could vary materially from our current
estimate. Estimated costs to address the environmental conditions range from
$1,242,000 to $4,621,000.
Available Information
We maintain a website at www.sauconyinc.com. We make available, free of charge
on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file those reports with,
or furnish them to, the Securities and Exchange Commission. We also similarly
make available, free of charge on our website, the reports filed with the SEC by
our executive officers, directors and 10% stockholders pursuant to Section 16
under the Exchange Act as soon as reasonably practicable after copies of those
filings are provided to us by those persons. 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 February 28, 2005 are as follows:
Name Age Position
- -------------------- --- ----------------------------------------
John H. Fisher 57 Chairman of the Board, President and
Chief Executive Officer
Charles A. Gottesman 54 Vice Chairman of the Board and
Executive Vice President,
Business Development
Michael Umana 42 Executive Vice President, Finance,
Chief Operating and Financial Officer,
Treasurer and Assistant Clerk
Michael Jeppesen 45 Senior Vice President, Manufacturing
and Development
Samuel S. Ward 42 Senior Vice President, Operations
and Technology
Brian J. Enge 34 Senior Vice President and General Manager,
Saucony Apparel Division
Roger P. Deschenes 46 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 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 brother-in-law of John H. Fisher, our Chairman of the
Board, President and Chief Executive Officer.
Michael Umana has served as our Executive Vice President, Finance, Chief
Operating Officer, Chief Financial Officer, Treasurer and Assistant Clerk since
May 2003, after having served as our Senior Vice President, Finance, Chief
Operating Officer, Chief Financial Officer and Treasurer from July 2001 to May
2003 and our Senior Vice President, Finance and Chief Financial Officer from May
2000 to July 2001. Mr. Umana joined us in 1999 as our Vice President, Finance
and Chief Financial Officer. From 1997 to 1999, Mr. Umana served as Vice
President and Chief Financial Officer of the Analytical Instrument Business Unit
at PerkinElmer, Inc., a high technology manufacturer. 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.
Michael Jeppesen joined us in May 2001 as Senior Vice President, Manufacturing
and Development. From 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 1996 to 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 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, Manager and Senior Manager,
which he held from 2000 to 2001, in the Business Consulting Group at Arthur
Andersen LLP, a professional services company. Mr. Ward graduated from Duke
University's Fuqua School of Business in 1994. From 1987 to 1992, Mr. Ward held
various finance and operations positions at General Electric Company and
completed General Electric's Financial Management Program.
Brian J. Enge has served as our Senior Vice President and General Manager,
Saucony Apparel Division since November 2004. Mr. Enge joined us in July 2002 as
Vice President and General Manager, Hind Apparel. From 1998 to 2002, Mr. Enge
was employed as the President of Schoffel North America, an outdoor apparel
manufacturer where he was responsible for managing the North American
operations. Mr. Enge graduated from Harvard Business School in 1998. From 1993
to 1996, Mr. Enge held various leadership positions at Cyrk, Inc., a promotion
services company, including General Manager, Retail Brands, during 1996.
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 from 1997
to December 2002 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 a division of 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 141,000 square feet, of which 107,000 square feet is warehouse
space and 1,000 square feet is used for a factory outlet store. During fiscal
2004, we expended approximately $3,325,000 for the initial phase of the
expansion and renovation of our Peabody, Massachusetts facility. During the
second and third quarters of 2005, we plan to continue the renovation at this
facility, at an estimated cost of approximately $2,750,000 to $3,050,000.
We also own a facility in East Brookfield, Massachusetts containing
approximately 109,000 square feet, which we use for warehousing and
distribution. During fiscal 2004, we recorded an environmental charge of
$2,275,000 to address previously unknown environmental conditions at this
facility.
We lease space for our retail stores at factory outlet malls and other
locations. These stores have an aggregate of approximately 39,500 square feet of
retail space at 19 locations in several states and in the Province of Ontario.
The terms of these leases range from three to ten years. The aggregate effective
annual commitment for our factory outlet store leases is approximately
$1,367,000. We also own a factory outlet store containing approximately 3,000
square feet of retail space in Bangor, Maine and operate a factory outlet store
at our Peabody, Massachusetts facility.
We also lease approximately 16,000 square feet of space in The Netherlands,
approximately 26,000 square feet of space in Canada, which we use for office and
warehouse space and approximately 4,000 square feet of office space in China.
We believe that our properties are reasonably well-maintained and are adequate
for our present requirements.
ITEM 3 - LEGAL PROCEEDINGS
We are involved in routine litigation incident to our business. We do not
believe that any of these proceedings will have a material adverse effect on our
financial position, operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended December 31, 2004, there were no matters
submitted to a vote of security holders of Saucony, through the solicitation of
proxies or otherwise.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A Common Stock trades on the NASDAQ National Market under the symbol
"SCNYA", and our Class B Common Stock trades on the NASDAQ National Market under
the symbol "SCNYB". The following table sets forth, for the periods indicated,
the actual high and low sales prices per share of the Class A Common Stock and
the Class B Common Stock as reported by the NASDAQ National Market.
Class A Class B
Common Stock Common Stock
---------------------- --------------------------
High Low High Low
-------- ---------- ---------- ---------
Fiscal Year ended December 31, 2004
-----------------------------------
First quarter.........................................$ 25.540 $ 16.560 $ 26.000 $ 16.820
Second quarter........................................ 21.240 17.700 21.650 18.260
Third quarter......................................... 25.100 19.840 24.690 19.800
Fourth quarter........................................ 27.960 22.950 27.190 22.750
Fiscal Year ended January 2, 2004
---------------------------------
First quarter.........................................$ 11.250 $ 8.500 $ 11.350 $ 8.710
Second quarter........................................ 12.320 9.800 12.340 10.100
Third quarter......................................... 15.460 12.260 15.200 12.270
Fourth quarter........................................ 17.400 13.440 17.500 13.410
On February 28, 2005, there were 220 shareholders of record of the Class A
Common Stock and 239 shareholders of record of the Class B Common Stock. In
general, only the Class A Common Stock has voting rights.
Dividend Policy
On May 21, 2003, our Board of Directors adopted a regular quarterly dividend
plan with dividends payable at an annual rate of $0.160 per share on our Class A
Common Stock and $0.176 per share on our Class B Common Stock. In 2003, the
board declared regular quarterly cash dividends on May 21, 2003, August 21, 2003
and November 6, 2003, in the amount of $0.040 per share on our Class A Common
Stock and $0.044 per share on our Class B Common Stock. Prior to May 2003, we
had never declared or paid any cash dividends on either our Class A Common Stock
or Class B Common Stock.
On February 17, 2004 our Board of Directors adopted an increase in our regular
quarterly dividend to an annual rate of $0.200 per share on our Class A Common
Stock and $0.220 per share on our Class B Common Stock. Commencing with the
quarterly dividend declared on February 17, 2004, the Board of Directors
increased the regular quarterly dividend on our Class A Common Stock to $0.050
per share and the regular quarterly dividend on our Class B Common Stock to
$0.055 per share. Following the dividends declared on February 17, 2004, the
Board of Directors declared regular quarterly dividends in 2004 on May 19, 2004,
August 2, 2004 and November 4, 2004, each in the amount announced on February
17, 2004.
Also, on February 17, 2004, our Board of Directors declared a special cash
dividend of $4.00 per share on each of our Class A Common Stock and Class B
Common Stock. The special dividend, which amounted to $25,990,000, was paid on
March 17, 2004 to stockholders of record at the close of business on March 3,
2004.
As provided in the our corporate charter, regular cash dividends paid on our
Class B Common Stock are to be in an amount equal to 110% of the amount paid on
our Class A Common Stock. This charter provision does not apply to special
dividends.
Our declaration of future cash dividends will be at the discretion of our Board
of Directors and is dependent upon, among other things, future earnings,
operations, capital requirements, our general financial position and general
business conditions. The terms of our credit facility generally restrict our
ability to pay cash dividends, together with other repurchases or redemptions
of, or other specified distributions with respect to, our capital stock, in
excess of $5,000,000 in any fiscal year. This limitation did not apply to our
special dividend declared in February 2004, which was specifically excluded from
this limitation.
Purchases of Equity Securities
In May 1998, our Board of Directors approved a stock repurchase plan authorizing
the repurchase of up to an aggregate of 750,000 shares of our outstanding common
stock, either Class A or Class B or a combination thereof. Unless terminated
earlier by a resolution of our Board of Directors, the plan will expire when we
have repurchased all shares authorized for repurchase under the plan. We
announced this plan publicly on June 4, 1998. We did not make any repurchases
under this plan during the quarter ended December 31, 2004, and as of December
31, 2004 a maximum of 168,376 shares of our outstanding common stock, either
Class A or Class B or a combination thereof, may be purchased under the plan.
ITEM 6 - SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below 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 December 31, 2004
and January 2, 2004 and for the years ended December 31, 2004, January 2, 2004
and January 3, 2003 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.
Our historical results are not necessarily indicative of our results of
operations to be expected in the future.
Year Year Year Year Year
Ended Ended Ended Ended Ended
Dec 31, Jan. 2, Jan. 3, Jan. 4, Jan. 5,
2004 2004(1) 2003 2002 2001
---- ------- ---- ---- ----
(in thousands except per share amounts)
Selected Income Statement Data
Revenues ..............................................$ 166,676 $136,445 $133,499 $132,364 $ 167,920
Operating income (loss) (2), (3), (4).................. 18,177 12,997 8,943 (269) 16,123
Net income (loss)...................................... 10,418 8,488 5,243 (940) 8,963
Earnings (loss) per common share - basic
Class A common stock................................$ 1.51 $ 1.31 $ 0.81 $ (0.15) $ 1.37
========= ======== ======== ======== =========
Class B common stock................................$ 1.66 $ 1.44 $ 0.89 $ (0.16) $ 1.51
========= ======== ======== ======== =========
Earnings (loss) per common share - diluted
Class A common stock................................$ 1.38 $ 1.26 $ 0.80 $ (0.15) $ 1.34
========= ======== ======== ======== =========
Class B common stock................................$ 1.52 $ 1.38 $ 0.88 $ (0.16) $ 1.47
========= ======== ======== ======== =========
Weighted average common shares and
equivalents outstanding
Basic:
Class A common stock ............................. 2,521 2,521 2,563 2,567 2,606
Class B common stock ............................. 3,972 3,583 3,544 3,513 3,586
--------- -------- -------- -------- ---------
6,493 6,104 6,107 6,080 6,192
========= ======== ======== ======== =========
Diluted: (5)
Class A common stock ............................. 2,521 2,521 2,563 2,567 2,606
Class B common stock.............................. 4,559 3,850 3,623 3,513 3,735
--------- -------- -------- -------- ---------
7,080 6,371 6,186 6,080 6,341
========= ======== ======== ======== =========
Cash dividends per share of common stock:
Class A common stock..............................$ 4.200 $ 0.120 -- -- --
========= ======== ======== ======== =========
Class B common stock..............................$ 4.220 $ 0.132 -- -- --
========= ======== ======== ======== =========
Selected Balance Sheet Data
Dec 31, Jan. 2, Jan. 3, Jan. 4, Jan. 5,
2004 2004 2003 2002 2001
---- ---- ---- ---- ----
(in thousands)
Current assets.........................................$ 84,637 $ 92,801 $ 80,670 $ 69,538 $ 73,531
Current liabilities.................................... 24,071 18,992 16,343 12,325 15,919
Working capital........................................ 60,566 73,809 64,327 57,213 57,612
Total assets........................................... 96,257 100,688 87,540 78,100 83,285
Capitalized lease
obligations, net of current portion................. 138 -- -- -- 34
Stockholders' equity................................... 68,691 79,054 68,696 63,162 64,620
- ---------------------------
(1) See Note 1 to our Consolidated Financial Statements regarding reporting
period.
(2) See Note 16 to our Consolidated Financial Statements regarding our Bangor,
Maine plant closing and other charges incurred in fiscal 2001.
(3) In fiscal 2000 we sold substantially all of the assets and business of our
former cycling division. In connection with the sale we recorded a pre-tax
loss of $2,661 which is included in the operating income for fiscal 2000.
(4) Includes environmental charge of $2,275 which is included in operating
income for fiscal 2004.
(5) Includes common stock and dilutive options and stock warrants, with the
exception of fiscal 2001, since the common stock equivalents were
anti-dilutive.
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 2004 fiscal year, we mean the
fiscal year ended December 31, 2004, (2) when we refer to the 2003 fiscal year,
we mean the fiscal year ended January 2, 2004, (3) when we refer to the 2002
fiscal year, we mean the fiscal year ended January 3, 2003 and (4) all amounts
are in thousands, except share and 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 85% of our consolidated net
sales for fiscal 2004 and 83% of our consolidated net sales for fiscal 2003 and
fiscal 2002, 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 in significant part upon increasing our
share of the market for athletic footwear sales.
We pursue different strategies for our two Saucony footwear product categories,
technical footwear and Originals footwear. For our technical footwear category,
we combine high quality materials and components with technical features
designed to meet the performance requirements of athletes who have a high
participation rate, meaning they actively and regularly participate, 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 a majority of our technical and mid-priced cross-over 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.
Because our primary footwear focus is in technical footwear, 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 marketing, 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, cleated football and
multi-purpose footwear, casual leather walking and workplace footwear we sell
under the Spot-bilt brand name and sales of all of our and third parties'
products at our 21 factory outlet stores. We refer to this segment as our Other
Products segment. Sales from our Other Products segment accounted for
approximately 15% our consolidated net sales for fiscal 2004 and 17% of our
consolidated net sales for each of fiscal 2003 and fiscal 2002. 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, 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. Economic
uncertainty 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 reflect
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 (SAB) No.
104, Revenue Recognition in Financial Statements. Title generally passes
upon shipment or upon receipt by the customer. We record retail store
revenues at the time of sale. We recognize royalty revenue as we earn the
royalties during the terms of our license agreements.
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
would require that we increase our reserves. This would reduce our net
sales and 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 creditworthiness, 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 our consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K, we have a credit
risk concentration due to the concentration of our domestic Saucony
footwear sales within 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, we would be required to record additional allowances to our
provision for doubtful accounts. This would increase our general and
administrative expenses and could have a material adverse effect on our
results of operations and cash flows.
- - Cooperative Advertising
We engage in cooperative advertising programs whereby our retailers are
allowed to receive a set percentage of their purchases of our products as
reimbursement for their advertising or marketing costs in jointly promoting
our products within their businesses. The purpose of our cooperative
advertising programs is to encourage advertising and promotions for the
sale of our products. We acquire costs as selling expense on the basis of
sales to qualifying retailers at the time of the revenue recognition. Our
retailers will develop specific marketing programs, subject to our
approval, to utilize the funds in a manner intended to best promote both
themselves and our products. On a quarterly basis, we evaluate the adequacy
of our cooperative advertising accrual. Further, we evaluate the
classification of these costs in accordance with Emerging Issues Task Force
Issue 01-09, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)." We account for
cooperative advertising costs as a selling expense provided that the
cooperative advertising costs meet the requirements defined in EITF 01-09.
EITF 01-09 requires that we account for consideration given to a retailer
as a reduction of revenue unless we receive an identifiable benefit, which
is separable from the retailer's original purchase and can reasonably
estimate the fair value of this benefit. For the arrangements that do not
meet these requirements, we account for the cooperative advertising costs
as a reduction of net sales.
At December 31, 2004, our cooperative advertising accruals totaled $1,281,
compared to $1,002 at January 2, 2004. The increase in the cooperative
advertising reserves at December 31, 2004 was due primarily to increased
participation by our retailers in fiscal 2004. As part of our reserve
valuation, we must make estimates for retailer participation and determine
the income statement classification of the cooperative advertising
allowances. Our estimates are based primarily on our past experience with
the retailers. When possible, we base these estimates on past experience
with the specific retailers, as well as our experience with retailers
generally. If retailer participation were to increase, selling costs and
cooperative advertising accruals would increase.
- - Volume Incentive Reserves
We utilize volume incentive rebates whereby certain retailers receive a
volume incentive rebate equal to a specified percentage of shipments to the
retailer provided that the retailer achieves a cumulative level of revenue
transactions with us. The purpose of our volume incentive rebates programs
is to encourage our retailers to increase the amount of their purchases of
our products. We recognize the rebate obligation as a reduction of net
sales based on a systematic and rational allocation of the cost of honoring
the rebates earned and claimed to each of the underlying revenue
transactions that results in progress by the retailer toward earning the
rebate. During fiscal 2004 and fiscal 2003 we recorded $1,442 and $522 of
volume incentive rebates, respectively, as a reduction of net sales.
At December 31, 2004, our volume incentive rebate reserve totaled $843,
compared to $442 at January 2, 2004. The increase in the volume incentive
rebates reserve at December 31, 2004 was due primarily to offering volume
incentive rebates to additional domestic retailers in fiscal 2004. As part
of our reserve valuation, we must make estimates for anticipated cumulative
revenue transactions with our retailers. We estimate cumulative revenue
levels by adding period-to-date net sales and expected future net sales
based on our order backlog, as well as our past experience with specific
retailers and our experience with retailers generally. If net sales were to
exceed our estimated net sales, we would be required to record adjusting
entries to increase our volume incentive rebate reserves. This would reduce
our net sales and could have a material adverse effect on our results of
operation, financial position 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. We record the
provision as a charge to cost of sales. If actual future demand or market
conditions are less favorable than those we project, the estimated market
value of our inventory would decrease and additional provisions to write
down inventory may be required. This could materially reduce our amount of
current assets and increase our cost of goods sold and could have a
material adverse effect on 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 would increase general and administrative
expenses and could have a material adverse effect on our results of
operations and financial position.
- - Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets (property, plant and
equipment and deferred charges) 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 cash flows. We measure an impairment loss as the
difference between the carrying amount of the asset and its estimated fair
value. During both fiscal 2004 and fiscal 2003, we recorded impairment
charges of $15 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 future cash flows. The charge is included in general and
administrative expenses. Should future events and circumstances 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 increase our general and administrative
expenses and could have a material adverse effect on our results of
operations and financial position.
We no longer amortize goodwill and other indefinite-lived intangible
assets. Rather, we review them for impairment. We would record an
impairment if the carrying value of the asset exceeds 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 December 31, 2004
and determined that goodwill was not impaired. At December 31, 2004, the
carrying value of goodwill was $912. Our estimates of 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 future cash flows. Such a charge could have a significant
adverse effect on 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
2003, we reversed $613 of deferred tax valuation allowances on loss
carryforwards that we expect to realize, decreasing our tax expense in the
period we made that reversal. At December 31, 2004, we have provided
valuation allowances in an amount equal to our long-term deferred tax
assets which have resulted from net operating losses in certain foreign and
state tax jurisdictions.
In evaluating exposures associated with various tax filing positions, we
have accrued $951 for probable tax contingencies as of December 31, 2004.
In 2004, we provided an additional $235 related to 2004 tax filing
positions. We believe that our tax contingencies have been adequately
provided for in the accompanying financial statements. To the extent the we
prevail in matters for which accruals have been established or are required
to pay amounts in excess of these accruals, our effective tax rate in a
given financial statement period could be materially affected.
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
December 31, 2004, we had approximately $9,522 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.
In December 2004, the FASB issued FASB Staff Position No. 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004. FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 should
be accounted for as a special deduction in accordance with SFAS 109 and not
as a tax rate reduction. The adoption of FSP 109-1 will have no impact on
our results of operations or financial position for fiscal 2005 because the
manufacturer's deduction is not available to us until fiscal year 2006. We
are evaluating the effect that the manufacturer's deduction will have in
subsequent years.
The FASB also issued FASB Staff Position No. 109-2, Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004. The AJCA introduces a special
one-time dividends received deduction on the repatriation of foreign
earnings to a U.S. taxpayer, provided specified criteria are met. FSP 109-2
provides accounting and disclosure guidance with respect to this deduction.
Until the Treasury Department or Congress provides additional clarifying
guidance on key elements, the amount of foreign earnings to be repatriated
by us, if any, cannot be determined; however, the presumption that such
unremitted earnings will be repatriated cannot be overcome. FSP 109-2
grants an enterprise additional time beyond the year ended December 31,
2004, in which the AJCA was enacted, to evaluate the effects of the AJCA on
its plan for reinvestment or repatriation of unremitted earnings.
- - 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 common 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 common stock purchase warrants over the vesting
period of the stock grant, option term or the warrant term. Amortization of
stock-based compensation amounted to $0 for 2004, $37 for 2003 and $43 for
2002, respectively. In fiscal 2003, we accelerated the vesting of the
common stock purchase warrants which required us to record $416 of
stock-based compensation expense. 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 our reported net income would have been
reduced by $1,400 in fiscal 2004, $1,138 in fiscal 2003 and $684 in fiscal
2002.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123R, "Share-Based Payment". This statement is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS 123R requires all
share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values. The provisions of this statement are effective for interim or
annual periods beginning after June 15, 2005. We are evaluating the
provisions of this revision to determine its effect on our consolidated
financial statements. We expect that the adoption of this statement will
have a material adverse effect on our results of operations.
- - 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 of our foreign operations. 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 December 31, 2004. At December 31, 2004,
the notional value of our foreign currency exchange contracts to purchase
U.S. dollars was $8,570. The fair value of our foreign currency exchange
contracts at December 31, 2004 was $8,150. We recorded a charge in 2004 of
$420 against earnings to adjust our derivatives to their fair value. Since
December 31, 2004, the value of the U.S. dollar has strengthened against
the Canadian dollar, the Euro and the Pound Sterling. If the U.S. dollar
were to weaken in comparison to the Pound Sterling, the Canadian dollar or
the Euro, we would record additional charges in fiscal 2005 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 December 31,
2004 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 adverse effect on our future results of operations,
financial position and cash flows.
- - Environmental Costs
We accrue for costs associated with environmental obligations when these
costs are probable and reasonably estimable in accordance with American
Institute of Certified Public Accountants Statement of Position 96-1,
"Environmental Remediation Liabilities (Including Auditing Guidance)". We
generally recognize accruals to address estimated costs for environmental
obligations no later than the date when we learn what cleanup measures, if
any, are likely to occur to address the environmental conditions at issue.
In the year ended December 31, 2004, we recorded a charge of $2,275 to
address environmental conditions at our East Brookfield, Massachusetts
distribution facility. SoP 96-1 defines the costs to be included among
environmental liabilities. In accordance with SoP 96-1, the environmental
charge includes the estimated direct costs to investigate and address the
conditions on the East Brookfield, Massachusetts property and the
associated engineering, legal and consulting costs we expect to incur as we
address those environmental conditions. We discovered the conditions
resulting in this accrual in December 2004. Our investigation is in its
early stage. Our assessment of our liability and the associated costs is an
estimate based upon currently-available information after consultation with
environmental consultants, engineers and attorneys assisting us in
addressing these environmental issues. Our actual costs to address the
environmental conditions may change based on further investigations, based
on the conclusions of regulatory authorities about information gathered in
those investigations and due to the inherent uncertainties involved in
estimating conditions in the environment and the costs of addressing such
conditions. We do not discount costs of expenditures for environmental
obligation to their present value. At December 31, 2004 our accrual for
environmental charges was $2,275. Our costs to address the environmental
conditions at our East Brookfield, Massachusetts could vary materially from
our current estimate. Estimated costs to address the environmental
conditions range from $1,242 to $4,621. If, based upon additional
investigation and study, our actual costs to address the environmental
conditions were to exceed our estimate, we would be required to record
additional environmental charges, which could have a material adverse
effect on our results of operations and cash flows. As of December 31,
2004, we have not identified or made a claim against parties that caused or
are otherwise responsible for the conditions at our facility, and we have
not determined whether such parties exist; nor does our accrual include
legal costs to investigate or pursue potential recoveries from such
parties.
Highlights
Increase (Decrease)
---------------------------------------
2004 vs. 2003 2003 vs. 2002
------------- -------------
Net sales..............................$ 30,086 22.1% $ 2,870 2.2%
Gross profit........................... 15,490 29.5 6,607 14.4
Selling, general and
administrative expenses.............. 7,816 19.4 2,921 7.8
$ Change
------------------------------------------
2004 vs. 2003 2003 vs. 2002
------------- -------------
Operating income.......................$ 5,180 $ 4,054
Income before income taxes
and minority interest................ 4,185 4,293
Net income............................. 1,930 3,245
Percent of Net Sales
------------------------------------
2004 2003 2002
---- ---- ----
Gross profit........................... 40.9% 38.5% 34.4%
Selling, general and
administrative expenses.............. 28.9 29.5 28.0
Operating income ...................... 10.9 9.6 6.7
Income before income taxes
and minority interest................ 10.7 10.0 7.0
Net income ............................ 6.3 6.2 3.9
Consolidated Net Sales
Net sales increased $30,086, or 22%, to $166,152 in fiscal 2004 from $136,066 in
fiscal 2003. Net sales increased $2,870, or 2%, to $136,066 in fiscal 2003 from
$133,196 in fiscal 2002.
On a geographic basis, domestic sales increased $24,194, or 23%, to $127,815 in
fiscal 2004 from $103,621 in fiscal 2003. International sales increased $5,892,
or 18%, to $38,337 in fiscal 2004 from $32,445 in fiscal 2003. $2,623 of our
international sales increase in fiscal 2004 is attributable to favorable changes
in foreign exchange rates, as compared to fiscal 2003. Domestic sales increased
$268, to $103,621 in fiscal 2003 from $103,353 in fiscal 2002. International
sales increased $2,602, or 9%, to $32,445 in fiscal 2003 from $29,843 in fiscal
2002. $2,925 of our international sales increase in fiscal 2003 is attributable
to favorable changes in foreign exchange rates, as compared to fiscal 2002.
Saucony Segment
2004 2003
Total / Change Total / Change 2002
from Prior Year from Prior Year Total
--------------- --------------- -----
Net Sales $140,749 / 25% $112,711 / 2% $110,829
Net Sales: 2004 Compared to 2003
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $28,038, or 25%, to $140,749 in fiscal 2004 from $112,711 in fiscal
2003, due to $27,942 of increased sales of Saucony footwear and $96 of increased
sales of Saucony apparel. In addition, favorable changes in foreign exchange
rates resulting from a weaker U.S. dollar against European and Canadian
currencies in fiscal 2004, as compared to fiscal 2003, increased Saucony
footwear sales by $2,503. The increase in sales of Saucony footwear was due
primarily to a 20% increase in footwear unit volumes partially offset by a 3%
decrease in average wholesale per pair footwear selling prices. The volume of
footwear sold in fiscal 2004 increased 29%, to 4,841 pair from 3,761 pair in
fiscal 2003, primarily due to increased domestic mid-priced cross-over footwear
unit volumes and increased domestic Originals footwear unit volumes and, to a
lesser extent, increased domestic closeout footwear unit volumes, increased
domestic technical footwear unit volumes, increased international technical
footwear unit volumes and increased special makeup footwear unit volumes,
partially offset by lower international Originals footwear unit volumes. Average
domestic and international wholesale per pair footwear selling prices in fiscal
2004 decreased 3%, compared to fiscal 2003. The increase in sales of Saucony
apparel was due primarily to favorable currency exchange, resulting from a
weaker U.S. dollar against European and Canadian currencies, partially offset by
lower domestic apparel sales and decreased apparel sales at our Dutch and
Canadian subsidiaries.
Domestic net sales increased $22,100, or 27%, to $103,820 from $81,720 in fiscal
2003, due primarily to $11,312 of increased sales of mid-priced cross-over
footwear, $5,791 of increased sales of Originals footwear, $2,926 of increased
sales of technical footwear and $2,700 of increased sales of closeout footwear,
offset partially by $598 of decreased sales of special makeup footwear and $31
of decreased sales of Saucony apparel. The volume of domestic footwear sold in
fiscal 2004 increased 36% to 3,857 pair from 2,833 pair in fiscal 2003,
including a 66% increase in mid-priced cross-over footwear unit volumes to 1,130
pair, a 57% increase in Originals footwear unit volumes to 904 pair, an 11%
increase in technical footwear unit volumes to 864 pair, a 151% increase in
closeout footwear unit volumes to 243 pair and a 2% increase in special makeup
footwear unit volumes to 715 pair. The cross-over footwear volume increase was
due primarily to the introduction of several mid-priced models in 2004,
including the Grid T4 and the Grid Aura TR6, along with additional color
variations of the Grid Aura TR5, which we introduced in 2003, sold into the
athletic mall, fashion mall, sporting goods and value channels. The Originals
footwear volume increase was due primarily to our introduction of color
variations of the Jazz Original and Shadow Original models, for both adults and
children, sold into the athletic mall, sporting goods and value channels. The
average domestic wholesale per pair footwear selling price in fiscal 2004
decreased 4%, as compared to fiscal 2003. The lower average wholesale selling
price per pair was due to a change in the product mix of our cross-over,
technical, Originals and special makeup footwear sold to lower price products
and increased cross-over, special makeup and Originals footwear unit volumes,
both of which sell at prices below our first quality technical footwear. Also
contributing to the decreased domestic wholesale per pair selling price decrease
in fiscal 2004 were a $923 increase in volume rebates provided to domestic
customers and a $434 increase in cooperative advertising allowances that did not
meet the requirements of EITF 01-09, which costs are accounted for as a
reduction of net sales.
During the fourth quarter of fiscal 2004, our sales into the athletic and
fashion mall channels of our cross-over footwear decreased 11% and our Originals
footwear decreased 6% from the comparable period in fiscal 2003. We expect
further significant declines in sales of cross-over and Originals footwear into
these channels through the first half of fiscal 2005.
Sales of closeout footwear accounted for approximately 4%, or $4,394, of
domestic Saucony net sales in fiscal 2004 compared to 2%, or $1,694, in fiscal
2003. The increase in closeout footwear sales in fiscal 2004 was primarily due
to increased closeout unit volume sold in the fourth quarter of 2004 to reduce
excess inventory supply of cross-over footwear.
Originals footwear accounted for approximately 23% of fiscal 2004 domestic
footwear unit volume versus 20% in fiscal 2003. The unit volume increase in
Originals footwear in fiscal 2003 was primarily due to increased unit volume of
Jazz Originals and Shadow Originals, for both adults and children, sold into the
athletic mall, sporting goods and value channels.
Our domestic order cancellation rate for fiscal 2004 was comparable with our
historical averages.
International net sales increased $5,938, or 19%, to $36,929 in fiscal 2004 from
$30,991 in fiscal 2003, due to $2,503 attributable to favorable currency
exchange, primarily resulting from a weaker U.S. dollar against European and
Canadian currencies, $2,225 of increased footwear sales at our subsidiaries due
primarily to higher footwear unit volume and, to a lesser extent, higher average
wholesale per pair footwear selling prices, and a $1,291 increase in footwear
sales at our international distributor business due to higher average wholesale
per pair footwear selling prices and a $127 increase in Saucony apparel sales at
our Canadian and British subsidiaries due to favorable currency exchange. The
volume of international footwear sold in fiscal 2004 increased 6%, to 984 pair,
from 928 pair in fiscal 2003. Footwear unit volumes increased 8%, to 620 pair,
from 571 pair, sold at our subsidiaries in fiscal 2004 compared to fiscal 2003.
Our international distributor footwear unit volume increased 2%, to 364 pair,
from 356 pair in fiscal 2004, compared to fiscal 2003. The footwear unit volume
increase at our subsidiaries was due primarily to increased technical footwear
unit volume at our Canadian subsidiary and, to a lesser extent, increased
technical footwear unit volume sold at our Dutch subsidiary, partially offset by
a decrease in special makeup footwear unit volume sold at our British
subsidiary. The international footwear average wholesale per pair selling price
increased due to a change in the product mix to higher priced technical footwear
and decreased unit volume of special makeup footwear sold at our British
subsidiary and a change in the international distributors product mix for
technical footwear to higher priced product.
The footwear unit volume increase at our international distributor business in
fiscal 2004 was due primarily to the expansion by three new distributors of
distribution into China, Taiwan and Russia and increased technical unit volume
sold to European distributors. Footwear unit volume sold into Japan decreased
12% due to a 77% decrease in Originals footwear unit volume, partially offset by
an increase in technical footwear unit volume. Distributor sales into the
Japanese footwear market accounted for $1,364, or 4%, of international sales in
fiscal 2004, compared to $1,357, or 4%, in fiscal 2003.
Net Sales: 2003 Compared to 2002
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $1,882, or 2%, to $112,711 in fiscal 2003 from $110,829 in fiscal
2002, due to $1,073 of increased sales of Saucony footwear and, $809 of
increased sales of Saucony apparel. The increase in sales of Saucony footwear
was due to $2,859 attributable to favorable currency exchange, resulting
primarily from a weaker U.S. dollar against European and Canadian currencies,
partially offset by a $1,456 decrease in domestic footwear sales. The volume of
footwear sold in fiscal 2003 increased 1%, to 3,761 pair from 3,707 pair in
fiscal 2002, primarily due to increased domestic technical footwear unit
volumes, increased domestic Originals footwear unit volumes and increased
special makeup footwear unit volumes, partially offset by lower international
technical and lower international Originals footwear unit volumes. Average
domestic and international wholesale per pair footwear selling prices in 2003
decreased 3% as compared to 2002. The increase in sales of Saucony apparel was
due primarily to sales of new products by our Canadian and British subsidiary.
Domestic net sales decreased $1,462, or 2%, to $81,720 from $83,182 in fiscal
2002, due primarily to $2,565 of decreased sales of closeout footwear, $168 of
decreased sales of special makeup footwear and $6 of decreased sales of Saucony
apparel, offset partially by $995 of increased sales of technical footwear and
$284 of increased sales of Originals footwear. The volume of domestic footwear
sold in fiscal 2003 increased 2% to 2,833 pair from 2,775 pair in fiscal 2002,
including a 12% increase in technical footwear unit volumes to 1,460 pair, an 8%
increase in Originals footwear unit volumes to 578 pair and a 2% increase in
special makeup footwear unit volumes to 698 pair, partially offset by a 61%
decrease in closeout footwear unit volumes to 97 pair. The technical footwear
volume increase was due primarily to our introduction of the Grid Aura TR 5, a
mid-priced model, in 2003. The average domestic wholesale per pair footwear
selling price in 2003 decreased 7% in fiscal 2003, as compared to fiscal 2002.
The lower average wholesale selling price per pair was due to a change in the
product mix of our technical, Originals and special makeup footwear sold to
lower price products and increased special makeup footwear and increased
Originals footwear unit volumes, both of which sell at prices below our first
quality technical footwear.
Sales of closeout footwear accounted for approximately 2%, or $1,694, of
domestic Saucony net sales in fiscal 2003 compared to 5%, or $4,249, in fiscal
2002. The decrease in closeout footwear sales was due to lower inventory
quantities of past season footwear available for sale in fiscal 2003 due to
improvements in our supply chain.
Originals footwear accounted for approximately 20% of fiscal 2003 domestic
footwear unit volume versus 19% in fiscal 2002. The unit volume increase in
Originals footwear was primarily due to increased unit volume of Jazz Originals
sold into the mall channel.
Our domestic order cancellation rate for fiscal 2003 was comparable with our
historical averages.
International net sales increased $3,344, or 12%, to $30,991 in fiscal 2003 from
$27,647 in fiscal 2002, due to $2,859 attributable to favorable currency
exchange, primarily resulting from a weaker U.S. dollar against European and
Canadian currencies, $815 of increased sales of Saucony apparel and $13 of
increased footwear sales at our subsidiaries due to higher footwear unit volume,
partially offset by a $343 decrease in footwear sales at our international
distributor business. Our international Saucony apparel sales increased
primarily due to sales of new products by our Canadian and British subsidiaries.
The footwear unit volume increase at our subsidiaries was due primarily to
increased special makeup footwear unit volume sold by our British subsidiary,
partially offset by decreased technical footwear unit volume at our Canadian
subsidiary and, to a lesser extent, decreased technical footwear unit volume
sold at our Dutch subsidiary. The overall volume of international footwear sold
in fiscal 2003 decreased to 928 pair from 932 pair in fiscal 2002. Footwear unit
volumes decreased 3%, to 357 pair, at our international distributor business,
partially offset by a 1% increase in footwear unit volume, to 571 pair, sold at
our subsidiaries in fiscal 2003 compared to fiscal 2002. Footwear unit volume at
our international distributor business decreased in fiscal 2003 due primarily to
a 5% decrease in Originals footwear unit volume sold in the Japanese footwear
market partially offset by a 29% increase in technical footwear unit volumes
sold in Australia, Israel and Sweden. Distributor sales into the Japanese
footwear market accounted for $1,357, or 4%, of international sales in fiscal
2003, compared to $2,494, or 9%, in fiscal 2002. The international footwear
average wholesale per pair selling price decreased due to a change in the
product mix to lower priced technical footwear and increased unit volume of
special makeup footwear sold at our British subsidiary and by a change in the
international distributors product mix for technical footwear to lower priced
product.
Other Products Segment
2004 2003
Total / Change Total / Change 2002
from Prior Year from Prior Year Total
--------------- --------------- -----
Net Sales $25,403 / 9% $23,355 / 4% $22,367
The Other Products segment consists of our Hind athletic apparel, twenty-one
factory outlet stores, Spot-bilt coaches' and officials' shoes, cleated football
and multi-purpose footwear, casual walking and workplace footwear and sales of
our Hyde Authentic casual footwear, the distribution of which we discontinued in
fiscal 2002. Each of the businesses represented less than 10% of total revenues.
In the aggregate, these businesses represented 15% of consolidated net sales in
fiscal 2004.
Net Sales: 2004 Compared to 2003
Worldwide sales of Other Products increased $2,048, or 9%, to $25,403 in fiscal
2004 from $23,355 in fiscal 2003 due primarily to $2,250 of increased sales at
our factory outlet division, $135 of increased domestic sales of our Hind brand
apparel and, to a lesser extent, $133 of increased sales of our Spot-bilt brand
footwear and $120 attributable to favorable currency exchange, primarily
resulting from a weaker U.S. dollar against European and Canadian currencies,
partially offset by $583 of decreased international sales of our Hind brand
apparel and $7 of decreased sales due to the discontinuance of our Hyde
Authentics footwear line.
Domestic net sales of Other Products increased $2,094, or 10%, to $23,995 in
fiscal 2004 from $21,901 in fiscal 2003 due primarily to a 22% increase in sales
at our factory outlet division, to $10,152 in 2004, compared to $8,318 in 2003,
resulting primarily from the addition of two outlet stores in fiscal 2004 and,
to a lesser extent, a 1% increase in Hind brand apparel sales, to $12,861 in
2004, compared to $12,726 in 2003. Hind apparel sales increased $135 due
primarily to a 1% increase in the average wholesale unit selling price of our
Hind apparel brand. Unit volumes of our Hind apparel decreased to 874 units in
fiscal 2004, compared to 877 units in fiscal 2003. The increase in the average
wholesale per item selling price for our Hind apparel brand was due primarily to
increased special makeup unit volumes sold in fiscal 2003, which products we
sell at unit prices below our first quality apparel, and increased unit volume
in our running and fitness product categories, which carry lower selling prices
than our cycling category. The decreased Hind apparel unit volume was due
primarily to decreased special makeup unit volumes sold in fiscal 2004. Both the
decrease in Hind apparel unit volume and the increase in the average wholesale
per item selling price of our Hind apparel are due to lower special makeup unit
volumes sold in fiscal 2004, compared to fiscal 2003. Sales of special makeup
apparel accounted for approximately 10% of Hind apparel domestic net sales in
fiscal 2004, compared to 23% of Hind domestic net sales in fiscal 2003. The
decrease in special makeup sales in fiscal 2004 is due to the production and
sale during fiscal 2003 of surplus special makeup closeout apparel from
remaining raw materials in connection with our change in product sourcing.
Domestic sales at our factory outlet stores open for more than one year
increased 6%, or $497, in fiscal 2004, compared to fiscal 2003. Spot-bilt brand
sales increased 16% in fiscal 2004 to $982, compared to $850 in fiscal 2003, due
primarily to a 42% increase in footwear unit volumes, primarily due to increased
cleated and walking/duty footwear unit volumes, partially offset by a 19%
decrease in wholesale per pair selling prices due to closing out certain
walking/duty styles.
International net sales of Other Products decreased $46, or 3%, to $1,408 in
fiscal 2004 compared to $1,454 in fiscal 2003, due primarily to $583 of
decreased Hind apparel sales, due primarily to discontinuing Hind apparel
distribution at our Dutch subsidiary and decreased Hind apparel sales at our
Canadian and British subsidiaries, partially offset by $416 of increased sales
at our Canadian factory outlet stores and, to a lesser extent, $120 attributable
to favorable currency exchange primarily resulting from a weaker U.S. dollar
against European and Canadian currencies.
Net Sales: 2003 Compared to 2002
Worldwide sales of Other Products increased $988, or 4%, to $23,355 in fiscal
2003 from $22,367 in fiscal 2002 due primarily to $1,439 of increased sales at
our factory outlet division, $599 of increased domestic sales of our Hind brand
apparel and, to a lesser extent, $89 of increased sales of our Spot-bilt brand
footwear and $66 attributable to favorable currency exchange, primarily
resulting from a weaker U.S. dollar against European and Canadian currencies.
These effects were partially offset by $808 of decreased international sales of
our Hind brand apparel and $397 of decreased sales due to the discontinuance of
our Hyde Authentics footwear line.
Domestic net sales of Other Products increased $1,730, or 9%, to $21,901 in
fiscal 2003 from $20,171 in fiscal 2002, due primarily to a 21% increase in
sales at our factory outlet division, to $8,318 in 2003, compared to $6,879 in
2002, resulting primarily from the addition of five outlet stores in fiscal 2003
and, to a lesser extent, a 5% increase in Hind brand apparel sales, to $12,726
in 2003, compared to $12,127 in 2002. Hind apparel sales increased $599 due
primarily to an 18% increase in unit volume of our Hind apparel, partially
offset by an 11% decrease in the average wholesale unit selling price of our
Hind apparel brand. The increased Hind apparel unit volume was due primarily to
increased special makeup unit volumes and increased volume of our running and
fitness product categories. The decrease in the average wholesale unit selling
price for our Hind apparel brand was due primarily to increased special makeup
unit volumes sold in fiscal 2003, which products we sell at unit prices below
our first quality apparel, and increased unit volume in our running and fitness
product categories, which carry lower selling prices than our cycling category.
2003 results also reflect $397 of decreased sales of Hyde Authentics footwear as
a result of our discontinuing this product line. Partially offsetting the sales
increase at our factory outlet stores were a $124, or 2%, decrease in 2003, as
compared to 2002, in sales at our factory outlet stores open for more than one
year and $203 of decreased sales as a result of closing a factory outlet store
in May 2002. Spot-bilt brand sales increased 12% in fiscal 2003 to $850,
compared to $760 in fiscal 2002, due primarily to increased wholesale per pair
selling prices, partially offset by a decrease in footwear unit volumes.
International net sales of Other Products decreased $742, or 34%, to $1,454 in
fiscal 2003 compared to $2,196 in fiscal 2002, due primarily to $808 of
decreased Hind apparel sales at our European and Canadian subsidiaries,
partially offset by $66 attributable to favorable currency exchange primarily
resulting from a weaker U.S. dollar against European and Canadian currencies.
Cost and Expenses
2004 Compared to 2003
Our gross margin percentage increased 2.4% to 40.9% in fiscal 2004 from 38.5% in
fiscal 2003 due primarily to a reduction in our product costs. Our product costs
decreased primarily due to a $2.973 decrease in international footwear product
costs due to favorable currency exchange reflecting the impact of a weaker U.S.
dollar against European and Canadian currencies, a $929 decrease in Saucony
domestic footwear product costs reflecting negotiated price reductions and lower
mold costs, $639 of volume rebates provided by two of our Saucony footwear
suppliers, a $287 decrease in Hind product costs reflecting a change in our
product sourcing to finished goods, a $193 decrease in our factory outlet
product costs reflecting increased factory direct footwear purchases, and a $179
decrease in Spot-bilt inventory provisions taken in fiscal 2004. Other factors
contributing to our gross margin increase in fiscal 2004 are a 57% increase in
lower margin Hind special makeup closeout apparel sales and a 27% increase in
Saucony domestic footwear at once shipments, which carry lower discounts.
Offsetting these decreases in cost of sales were a $923 increase in volume
rebates provided to Saucony domestic customers in 2004, a $732 increase in sales
discounts at our International subsidiaries, due primarily to increased
incentives offered by our British and Dutch subsidiaries to increase sales, and
a $434 increase in cooperative advertising allowances which were accounted for
as a reduction of net sales. Other factors offsetting the increase in gross
margin in fiscal 2004 were increased footwear unit volume of mid-priced
cross-over footwear sold into the athletic mall, sporting goods and value
channels at lower gross margins and increased closeout footwear unit volume sold
in the fourth quarter of fiscal 2004 at lower gross margins. Included in our
fiscal 2003 gross margin is a charge of $416 recorded in cost of sales due to
accelerating the vesting on common stock purchase warrants held by five footwear
suppliers.
Selling, general and administrative expenses as a percentage of net sales
decreased to 28.9% in fiscal 2004 compared to 29.5% in fiscal 2003. The decrease
in the percentage resulted from net sales increasing at higher rate than the
increased advertising, selling and administrative expenses in fiscal 2004.
Selling, general and administrative expenses increased to $48,015, or 19%, from
$40,199 in fiscal 2003, due primarily to a $1,854 increase in professional fees,
$1,095 increase in administrative and selling payroll and related fringe
benefits due to increased staffing, $881 increase in bad debt expense, $702
increase in incentive compensation, $550 increase in advertising, primarily in
print media, $440 of operating expenses associated with the factory outlet
division expansion, $432 increase in variable selling expenses, $400 increase in
marketing communication costs, $380 increase in promotion costs due to increased
participation at running and triathlon events and a $197 increase in
depreciation. The effects of foreign exchange rate changes increased selling and
administrative expenses by $575 in fiscal 2004, compared to fiscal 2003.
Included in professional fees in fiscal 2004 were $1,119 of professional fees
associated with our assessment of internal controls as required under Section
404 of the Sarbanes-Oxley Act of 2002 and $592 of legal and professional fees
related to our review of strategic alternatives and related matters. Bad debt
expense increased primarily due to the favorable litigation settlement which
reduced bad debt expense by $566 in fiscal 2003 and the bankruptcy filings by
two accounts.
2003 Compared to 2002
Our gross margin percentage increased 4.1% to 38.5% in fiscal 2003 from 34.4% in
fiscal 2002 due primarily to a reduction in our product costs. Our product costs
decreased primarily due to a $1,930 decrease in international footwear product
costs reflecting favorable currency exchange due to the impact of a weaker U.S.
dollar against European and Canadian currencies, a $1,311 decrease in Hind
product costs, reflecting a change in our product sourcing to finished goods, a
$996 decrease in Saucony domestic footwear product costs, reflecting negotiated
price reductions and lower mold costs, a $395 reduction in Hind inventory
reserve provisions taken in 2003 and a $225 decrease in our factory outlet
product costs, reflecting increased factory direct footwear purchases.
Offsetting these decreases in cost of sales were a pre-tax charge of $416
recorded in cost of sales due to accelerating the vesting on common stock
purchase warrants held by five footwear suppliers, a $139 increase in Spot-bilt
inventory reserve provisions taken on slow-moving Spot-bilt brand inventory and
a $300 increase in volume incentive rebates provided to Saucony domestic
customers in 2003.
Selling, general and administrative expenses as a percentage of net sales
increased to 29.5% in fiscal 2003 compared to 28.0% in fiscal 2002. The increase
in the percentage resulted from increased advertising, selling and
administrative expenses in fiscal 2003. Selling, general and administrative
expenses increased to $40,199, or 8%, from $37,278 in fiscal 2002, due primarily
a $1,636 increase in administrative and selling payroll and related employment
taxes, a $480 increase in employee healthcare costs, $426 in increased incentive
compensation, $424 of increased operating expenses associated with the factory
outlet division expansion, $363 in increased print media advertising, $217
increase in severance costs, $220 in increased professional fees and $175 in
increased business insurance costs. The effects of foreign exchange rate changes
increased selling and administrative expenses by $674 in fiscal 2003, compared
to fiscal 2002. These increases were partially offset by lower provisions for
bad debt expense, due to the favorable litigation settlement which reduced bad
debt expense by $566, and, to a lesser extent, a $300 reduction in variable
selling expense, $260 in lower depreciation expense and a $257 decrease in
account specific advertising and promotion expense.
Environmental Charge
In fiscal 2004, we recorded a charge of $2,275 to address environmental
conditions at our East Brookfield, Massachusetts distribution facility. We
acquired this facility as part of an asset purchase in March 1985. We believe
the contamination is the result of manufacturing activities that took place in
the facility in the early and mid-1900s when this facility was owned and
operated by an unrelated party. In accordance with SoP 96-1, the environmental
charge includes the estimated direct costs to investigate and address the
conditions on the East Brookfield, Massachusetts property and the associated
engineering, legal and consulting costs we expect to incur as we address the
environmental conditions. The following table summarizes the estimated expenses
associated with our environmental charge:
Environmental response costs................$ 1,538
Engineering and risk assessment............. 375
Legal....................................... 352
Post-remedy monitoring...................... 10
---------
Total.......................................$ 2,275
=========
Our assessment of our liability and the associated costs is an estimate based
upon currently available information after consultation with environmental
engineers, consultants and attorneys assisting us in addressing these
environmental issues. Estimated costs to address the environmental conditions
range from $1,242 to $4,621. Our actual costs to address the environmental
conditions may change based on further investigations, based on the conclusions
of regulatory authorities about information gathered in these investigations and
due to the inherent uncertainties involved in estimating conditions in the
environment and the costs of addressing those conditions. We do not discount
costs of expenditures for environmental obligations their present value. The
environmental charge is included in operating expenses for the Saucony segment.
At December 31, 2004 our accrual for environmental charges was $2,275 and was
included on our balance sheet under current liabilities.
Plant Closing and Other Credits
On November 9, 2001 we announced the cessation of manufacturing and the 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 in fiscal 2001.
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.
A pre-tax benefit of $35 was recorded in fiscal 2003 to terminate the
plant-closing accrual. The benefits recorded for the Bangor, Maine plant closing
was included in income before tax for the Saucony segment, and the retail store
closing charge was included in income before tax for the Other Products segment.
Gain on Sale of Former Manufacturing Facility
On November 7, 2003, we completed the sale of our Bangor, Maine real property
which had previously been used in the assembly of domestic Saucony footwear. The
following table summarizes the sale of the Bangor, Maine real property:
Gross proceeds..............................$ 763
Transaction expenses........................ 77
------
Net proceeds................................ 686
Net book value of facility.................. 357
------
Gain on sale................................$ 329
======
We recorded the gain realized from the sale in operating income for the Saucony
segment.
Non-Operating Income (Expense)
Interest income increased to $314 in fiscal 2004 from $245 in fiscal 2003, due
to higher interest rates earned on cash balances and short-term investments.
Interest income decreased to $245 in fiscal 2003 from $332 in fiscal 2002, due
to lower interest rates on invested cash balances and short-term investments.
Interest expense increased to $8 in fiscal 2004 from $5 in fiscal 2003, due to
interest expense recorded on capital lease obligations. Interest expense
remained constant at $5 in fiscal 2003 and fiscal 2002.
Foreign currency (losses) gains decreased to an expense of $734 in fiscal 2004,
compared to income of $288 in fiscal 2003. Foreign currency gains increased to
$288 in fiscal 2003 from $20 in fiscal 2002. The changes in fiscal 2004, as
compared to fiscal 2003, and in fiscal 2003, as compared to fiscal 2002, were
primarily due to gains and losses on forward foreign currency contracts.
Income (Loss) Before Taxes and Minority Interest
Segment 2004 2003 2002
Saucony........................$ 15,373 $ 11,910 $ 10,288
Other Products................. 2,386 1,664 (1,007)
-------- -------- --------
Consolidated...................$ 17,759 $ 13,574 $ 9,281
======== ======== ========
We evaluate segment performance and the performance of key managers based on
profit or loss before income taxes and minority interest. Income before tax and
minority interest increased $4,185 in fiscal 2004 to $17,759 compared to $13,574
in fiscal 2003 due primarily to increased pre-tax income realized by our Saucony
segment and, to a lesser extent, increased pre-tax income realized by our Other
Products segment. The improvement in pre-tax income at our Saucony segment
reflected increased domestic and international net sales, due primarily to
increased footwear unit volume and increased gross margins due to favorable
currency exchange and lower product costs, both of which improved gross margins.
The improvement in our Other Products segment income before tax and minority
interest was due primarily to improved profitability at our Hind apparel brand
due to increased sales, improved gross margins and lower operating expenses and,
to a lesser extent, improved profitability at our factory outlets stores due to
increased sales and improved gross margins.
Income before tax and minority interest increased $4,293 in fiscal 2003 to
$13,574 compared to $9,281 in fiscal 2002 due primarily to increased pre-tax
income realized by our Other Products segment and, to a lesser extent, increased
pre-tax income realized by our Saucony segment. The improvement in our Other
Products segment income before tax and minority interest was due primarily to
improved profitability at our Hind apparel brand due to increased sales,
improved gross margins and lower operating expenses and, to a lesser extent,
improved profitability at our factory outlets stores due to increased sales and
improved gross margins. Pre-tax income at our Saucony segment increased due to
lower product costs and favorable currency exchange, both of which improved
gross margins.
Income Taxes
The provision for income taxes increased to $7,237 in fiscal 2004 from $4,940 in
fiscal 2003 due primarily to increased domestic and international pre-tax
income. The effective tax rate increased to 40.8% in fiscal 2003, compared to
36.4% in fiscal 2003, due primarily to a shift in the composition of domestic
and international pre-tax income, higher marginal domestic tax rates and the
reversal of valuation allowances on foreign loss carryforwards recorded in
fiscal 2003, which reduced the fiscal 2003 tax provision by 2.4%. We credited
income tax benefit of options exercised of $1,394 during fiscal 2004 and $162
during fiscal 2003 to additional paid-in capital. Therefore that benefit did not
impact our provision for income taxes or the effective tax rate in either
period. The increase in the income tax benefit of options credited to additional
paid-in capital in fiscal 2004 is due to the significant increase in the
exercise of stock options prior to the record date for our special cash dividend
paid on our common stock in the first quarter of fiscal 2004.
During fiscal 2004, we provided $235, for probable tax contingencies.
The provision for income taxes increased to $4,940 in fiscal 2003 from $3,865 in
fiscal 2002 due primarily to increased domestic and international pre-tax
income. The effective tax rate decreased to 36.4% in fiscal 2003, compared to
41.6% in fiscal 2002, due primarily to the reversal of valuation allowances on
foreign loss carryforwards that we expect to realize in fiscal 2004. We credited
income tax benefit of options exercised of $162 during fiscal 2003 and $21
during fiscal 2002 to additional paid-in capital. Therefore that benefit did not
impact our provision for income taxes or the effective tax rate in either
period. During fiscal 2003, we provided $250 for probable tax contingencies.
Minority Interest in Income of Consolidated Subsidiary
Minority interest expense represents a minority shareholders' allocable share of
our Canadian subsidiary's earnings after deducting for income tax. In July 2003,
we entered into a Share Purchase Agreement with the minority shareholder of
Saucony Canada, Inc. whereby we increased our ownership percentage of Saucony
Canada, Inc. to 95% from 85% effective as of July 4, 2003. The purchase price of
$547 equaled the net book value of Saucony Canada, Inc. as of July 4, 2003.
Minority interest decreased to $104 in fiscal 2004 from $146 in fiscal 2003 due
primarily to increasing our ownership in Saucony Canada, Inc. Minority interest
decreased to $146 in fiscal 2003 from $173 in fiscal 2002 due primarily to
increasing our ownership in Saucony Canada, Inc.
Net Income
Net income for fiscal 2004 was $10,418, or $1.38 per Class A share and $1.52 per
Class B share on a diluted basis, compared to $8,488, or $1.26 per Class A share
and $1.38 per Class B share on a diluted basis for 2003. We used weighted
average common shares and common stock equivalents of 2,521,000 Class A and
4,559,000 Class B shares for fiscal 2004 and 2,521,000 Class A and 3,850,000
Class B shares for fiscal 2003 to calculate diluted earnings per share.
Net income for fiscal 2003 was $8,488, or $1.26 per Class A share and $1.38 per
Class B share on a diluted basis, compared to $5,243, or $0.80 per Class A share
and $0.88 per Class B share on a diluted basis for 2003. We used weighted
average common shares and common stock equivalents of 2,521,000 Class A and
3,850,000 Class B shares for fiscal 2004 and 2,563,000 Class A and 3,623,000
Class B shares for fiscal 2002 to calculate diluted earnings per share.
Liquidity and Capital Resources
Fiscal 2004
As of December 31, 2004, our cash and cash equivalents totaled $12,042, a
decrease of $29,739 from January 2, 2004. The decrease was due primarily to the
payment of a special cash dividend of $25,990 in March 2004 and regular
quarterly cash dividends of $1,299, an increase in short term investments of
$14,948, cash outlays for capital assets of $4,541, due primarily to the
expansion of our corporate offices, and $59 expended in payment of capital lease
obligations. This decrease in cash was offset in part by the receipt of $3,966
of cash from the issuance of shares of our common stock as a result of option
and common stock purchase warrant exercises and cash provided by operations of
$12,580.
Our accounts receivable at December 31, 2004 increased $3,014, net of the
provision for bad debts and discounts, as compared to at January 2, 2004, due
primarily to increased net sales of our Saucony and Other products in the fourth
quarter of fiscal 2004. Our days' sales outstanding for our accounts receivable
decreased to 49 days in fiscal 2004 from 51 days in fiscal 2003. 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. Our days' sales
outstanding decreased in fiscal 2004 due to increased at-once footwear shipments
which involve shorter payment terms. The provision for bad debts and doubtful
accounts increased to $6,019 in fiscal 2004 from $4,453 in fiscal 2003 due to an
increase in the provision for doubtful accounts and increased sales discounts,
both domestically and at our international subsidiaries in fiscal 2004. The
increase in the provision for doubtful accounts in fiscal 2004 was due primarily
to a favorable litigation settlement that reduced the provision in fiscal 2003
and the fiscal 2004 bankruptcy filings by two significant accounts.
Inventories increased $2,702, at December 31, 2004, as compared to January 2,
2004, due primarily to increased levels of domestic Saucony cross-over footwear,
which we expect to ship at discounted margins in fiscal 2005, and higher levels
of domestic Saucony special makeup footwear and Hind apparel which we expect to
ship in fiscal 2005 at customary margins. Our inventory turns ratio increased to
4.1 turns in fiscal 2004 from 3.4 turns in fiscal 2003. The number of days'
sales in inventory decreased to 95 days in fiscal 2004 from 98 days in fiscal
2003. 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.
Other factors affecting our operating cash flows in fiscal 2004, included a
$1,009 increase in accrued expenses due primarily to increased accruals for
freight and inventory importation and higher levels of operating expenses, an
increase of $1,179 in accounts payable due to the timing of footwear purchases
in the fourth quarter of fiscal 2004 and a $340 increase in accrued income taxes
payable on higher pre-tax income.
Since May 2003, we have paid regular quarterly dividends on our Class A and
Class B Common Stock. In February 2004, our Board of Directors announced an
increase in our regular quarterly dividends from $0.040 to $0.050 per Class A
Common share and from $0.044 to $0.055 per Class B Common share. During 2004, we
paid regular quarterly dividends of a total of $0.19 per Class A Common share
and $0.209 per Class B Common share, for aggregate regular dividend payments of
$1,299. These payments included one dividend payment in January 2004 of $0.040
per Class A Common share and $0.044 per Class B Common share, prior to the
February 2004 announced increase in the dividend rates.
On February 17, 2004, our Board of Directors declared a special cash dividend of
$4.00 per share on each of our Class A Common Stock and Class B Common Stock.
The special dividend was paid on March 17, 2004 to stockholders of record at the
close of business on March 3, 2004. The aggregate dividend payout for the
special dividend amounted to approximately $25,990.
As of December 31, 2004, we recorded $351 in current liabilities, under accrued
expenses, representing the dividend liability for the January 13, 2005 dividend.
Our corporate charter provides that regular cash dividends paid on our Class B
Common Stock are to be in an amount equal to 110% of the amount paid on our
Class A Common Stock. This charter provision does not apply to special
dividends.
In January 2004, we amended our credit facility to reduce the restrictions in
the facility on our ability to pay cash dividends, make other distributions on
our common stock and repurchase or redeem our capital stock. As amended, the
credit facility permits us to pay cash dividends, and make repurchases or
redemptions of, or other specified distributions with respect to, our capital
stock, in a total amount of up to $5,000 in any fiscal year. This limitation did
not apply to our special dividend declared in February 2004, which was
specifically excluded from this limitation.
Our declaration of future cash dividends will be at the discretion of our Board
of Directors and is dependent upon, among other things, future earnings,
operations, capital requirements, our general financial position and general
business conditions.
During fiscal 2004, we did not make any repurchases of our common stock. In
fiscal 2003, we repurchased 12,000 shares of our common stock for a total
expenditure of $126. Since the approval of our stock repurchase program by our
Board of Directors in May 1998, we have repurchased a total of 574,000 shares of
our common stock for a total expenditure of $5,370. As of December 31, 2004, we
remained authorized to repurchase up to 168,376 shares under the May 1998 stock
repurchase program.
Fiscal 2003
As of January 2, 2004, our cash and cash equivalents totaled $41,781, an
increase of $7,298 from January 3, 2003. The increase was due primarily to the
generation of $15,045 of cash from operations and, to a lesser extent, the
receipt of $686 from the sale of our former manufacturing facility in Bangor,
Maine and the receipt of $644 from the issuance of shares of our common stock as
a result of option exercises, partially offset by the purchase of $5,769 of
short-term investments, cash outlays for purchases of capital assets of $1,667,
the purchase of additional common shares of Saucony Canada, Inc. of $547, the
payment of cash dividends of $518 on our common stock and the repurchase of
shares of our common stock of $126.
Our accounts receivable at January 2, 2004 increased $3,075, net of the
provision for bad debts and discounts (which was reduced by $566 due to a
litigation settlement), as compared to at January 3, 2003, due primarily to
increased net sales of our Saucony products in the fourth quarter of fiscal 2003
and an increase in our days' sales outstanding for our accounts receivable. Our
days' sales outstanding for our accounts receivable increased to 51 days in
fiscal 2003 from 42 days in fiscal 2002. 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. Our days' sales outstanding increased
in fiscal 2003 due to the timing of our shipments in the fourth quarter of 2003,
much of which shipped in December 2003. The provision for bad debts and doubtful
accounts decreased to $4,453 in fiscal 2003 from $4,752 in fiscal 2002 due to a
decrease in the provision for doubtful accounts and was partially offset by an
increase in discounts in fiscal 2003. The decrease in the provision for doubtful
accounts in fiscal 2003 was due primarily to the favorable litigation settlement
with a former customer.
Inventories decreased $6,163, at January 2, 2004, as compared to at January 3,
2003, due primarily to continued improvements in our supply chain intended to
reduce on hand inventory and lower Hind brand apparel inventory due to sourcing
changes. Our inventory turns ratio increased to 3.4 turns in fiscal 2003 from
3.1 turns in fiscal 2002. The number of days' sales in inventory decreased to 98
days in fiscal 2003 from 113 days in fiscal 2002. 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.
Other factors affecting our operating cash flows in fiscal 2003, included an
increase of $638 in accounts payable due to extended payment terms provided by
our footwear suppliers, a $121 decrease in accrued income taxes payable due to
the timing of tax payments and a $1,567 increase in accrued expenses due
primarily to increased accruals for incentive compensation.
On May 21, 2003, our Board of Directors adopted a regular quarterly dividend
plan with dividends payable at an annual rate of $0.160 per share on our Class A
Common Stock and $0.176 per share on our Class B Common Stock. In 2003, the
board declared regular quarterly cash dividends on May 21, 2003, August 21, 2003
and November 6, 2003, in the amount of $0.040 per share on our Class A Common
Stock and $0.044 per share on our Class B Common Stock. We paid a total of $518
in dividends in 2003. On January 15, 2004, we paid the regular quarterly cash
dividends declared by the Board on November 6, 2003. As of January 2, 2004, we
recorded $260 in current liabilities, under accrued expenses, representing the
dividend liability for the January 15, 2004 dividend.
Credit Facility
In August 2002, we entered into a revolving credit agreement under the terms of
which a bank committed up to a maximum of $15,000 to us for cash borrowings and
letters of credit. On August 31, 2004, we amended our revolving credit
agreement, pursuant to the amendment, the term of the credit agreement was
extended to August 31, 2005. 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 our election 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 equipment financing and
capital lease indebtedness and limits on repurchases of our common stock. The
credit facility permits us to pay cash dividends, and make repurchases or
redemptions of, or other specified distributions with respect to, our capital
stock, in a total amount of up to $5,000 in any fiscal year. This limitation did
not apply to our special dividend declared in February 2004, which was
specifically excluded from this limitation. Furthermore, for any fiscal quarter
during the term of the credit facility, any consolidated pre-tax loss may not
exceed $2,500, and for any two consecutive fiscal quarters, consolidated pre-tax
loss may not exceed $1,000.
The terms of our primary credit facility expires on August 31, 2005. Upon its
expiration, we intend either to extend this facility or enter into a new,
similar facility. However, we will evaluate our liquidity needs again around the
time the facility is scheduled to terminate, and we may elect not to extend or
replace the facility or to delay any extension or replacement of the facility.
In addition, we may not be able to extend or replace the facility or similar
terms or on terms acceptable to us.
We were in compliance with all covenants of the credit facility at December 31,
2004. As of December 31, 2004 we had open commitments under letters of credit of
$2,022. As of December 31, 2004, $12,978 was 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 $1,251. At December 31, 2004, $1,251 was
available for borrowing under the facility.
Capital Expenditures
We anticipate capital expenditures to range between $3,500 to $4,000 in fiscal
2005. Of this amount, we expect to expend approximately $2,750 to $3,050 to
expand and renovate our Peabody, Massachusetts facility, $600 to $750 on
computer hardware and software and $150 to $200 to open two factory outlet
stores.
Contractual Obligations
Below is a table which presents our contractual obligations and commitments at
December 31, 2004.
Payments due by period
------------------------------------------------------------------
Less One Three More
Contractual than one to three to five than
Obligations Total year years years five years
----------- ----- ---- ----- ----- ----------
Operating leases............................$ 4,071 $ 1,275 $ 1,906 $ 648 $ 242
Capital leases.............................. 213 69 138 6 --
Other long-term obligations (1)............. 1,298 1,203 90 5 --
Purchase obligations (2).................... 20,355 20,355 -- -- --
--------- --------- -------- -------- -------
Total contractual obligations...............$ 25,937 $ 22,902 $ 2,134 $ 659 $ 242
========= ========= ======== ======== =======
_______________
(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 and consist of $98 for less
than one year and $40 for one to three years. 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. Maximum
aggregate bonus payments to athletes are as follows: less than one year,
$103 and one to three years, $85.
(2) Purchase order obligations consist of open purchase orders for sourced
footwear and apparel and open purchase orders for U.S. operating expenses
ordered in the normal course of business.
Off-Balance Sheet Arrangements
We had letters of credit outstanding of $2,022 at December 31, 2004 and $747 at
January 2, 2004. All of the letters of credit were issued for the purchase of
inventory. We had forward foreign exchange contracts of $8,570 at December 31,
2004 and $7,448 at January 2, 2004, all of which are due to settle within the
next 12 months (see Note 20 to the consolidated financial statements included in
Item 8 to this Annual Report Form 10-K).
Amounts
Committed
December 31, 2004
-----------------
Letters of credit...............................$ 2,022
Forward foreign exchange contracts.............. 8,570
---------
Total...........................................$ 10,592
=========
We use letters of credit to facilitate a limited number of supplier arrangements
for our Hind apparel inventory. We do not believe our use of letters of credit
materially affects our liquidity. If we did not use letters of credit we would
make alternative arrangements with these Hind apparel inventory suppliers. Our
primary market risk is the risk of exposure to unfavorable movements in exchange
rates between the U.S. dollar and the Canadian dollar, the British Pound
Sterling and the Euro. We use 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, the loss of which
would expose us to increased market risk and fluctuations in our liquidity.
Overall Liquidity
Our liquidity is contingent upon a number of factors, principally our future
operating results. Our liquidity fluctuates during the course of a fiscal year.
For instance, we generally use cash from operations in the first quarter, due to
working capital requirements, but generate cash from operations for the balance
of the fiscal year. We believe that our current cash and cash equivalents,
credit facilities and internally generated funds will be adequate to meet our
working capital requirements and other operating expenses and to fund our
capital investment needs and dividend payments for at least the next 12 months
and for the foreseeable future. During fiscal 2004 we generated $12,580 in cash
from operating cash flows due to our operating profit and an increase in accrued
expenses and in accounts payable. In 2003, we generated $15,045 in cash from
operating cash flows, due primarily to our operating profit, an increase in our
accrued expenses and accounts payable.
As of December 31, 2004, we had $12,042 in cash, $20,694 in short-term
investments, $22,484 in accounts receivable and $25,645 in inventories.
At December 31, 2004, we had $201 in capital lease obligations outstanding and
had no borrowings outstanding and $14,229 available under our credit facilities.
Our short-term liquidity could potentially be adversely impacted should demand
for our products decline significantly, which, among other things, 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 fluctuations 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 2004 the gross margins of
our European and Canadian subsidiaries increased 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
In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151, "Inventory Costs", an amendment of ARB
No. 43, Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. SFAS 151 is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. We do not believe the adoption of SFAS 151 will have a material effect
on its financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment". This
statement is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values. The provisions of this statement are
effective for interim or annual periods beginning after June 15, 2005. We are
currently evaluating the provisions of this revision to determine the impact on
our consolidated financial statements. We expect the adoption of this statement
to have a negative effect on consolidated net income.
In December 2004, the FASB decided to defer the issuance of their final standard
on earnings per share entitled "Earnings per Share - an Amendment to FAS 128."
The final standard will be effective in 2005 and will require retrospective
application for all prior periods presented. The significant proposed changes to
the EPS computation are changes to the treasury stock method and contingent
share guidance for computing year-to-date diluted EPS, removal of the ability to
overcome the presumption of share settlement when computing diluted EPS when
there is a choice of share or cash settlement and inclusion of mandatorily
convertible securities in basic EPS. We are currently evaluating the proposed
provisions of this amendment to determine the impact on our consolidated
financial statements.
In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004. FSP 109-1 clarifies that the manufacturer's deduction provided for under
the American Jobs Creation Act of 2004 should be accounted for as a special
deduction in accordance with SFAS 109 and not as a tax rate reduction. The
adoption of FSP 109-1 will have no impact on our results of operations or
financial position for fiscal 2005 because the manufacturer's deduction is not
available to us until fiscal year 2006. We are evaluating the effect that the
manufacturer's deduction will have in subsequent years.
The FASB also issued FASB Staff Position No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004. The AJCA introduces a special one-time dividends
received deduction on the repatriation of foreign earnings to a U.S. taxpayer,
provided specified criteria are met. FSP 109-2 provides accounting and
disclosure guidance with respect to this deduction. Until the Treasury
Department or Congress provides additional clarifying guidance on key elements,
the amount of foreign earnings to be repatriated by us, if any, cannot be
determined; however, the presumption that such unremitted earnings will be
repatriated cannot be overcome. FSP 109-2 grants an enterprise additional time
beyond the year ended December 31, 2004, in which the AJCA was enacted, to
evaluate the effects of the AJCA on its plan for reinvestment or repatriation of
unremitted earnings.
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 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, Asics and
Brooks. The principal competitors of our Hind products are Nike, Adidas 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 and harm our business.
We depend on foreign suppliers
A number of manufacturers located in Asia, primarily in China, supply products
to us. During fiscal 2004, one of our suppliers, located in China, accounted for
approximately 33% 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, import quotas, administrative trade cases, trade limitations
imposed by the United States or foreign governments and political and labor
instability, as well as potential disruptions in our supply chain due to
transportation, geographic and other factors. 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 costs of addressing environmental conditions;
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 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 second quarters for our Saucony brand and the first
and third quarters for our Hind brand. 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 key customers
Approximately 48% of our gross trade receivables balance was represented by 15
customers at December 31, 2004. 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.
Declines in revenue in our retail stores could adversely affect profitability
We have made significant capital investments in opening retail stores and incur
significant expenditures in operating these stores. The higher level of fixed
costs related to our retail organization can adversely affect profitability,
particularly in the first half of the year, as our revenue historically has been
more heavily weighted to the second half of the year. Our ability to recover the
investment in and expenditures of our retail organization can be adversely
affected if sales at our retail stores are lower than anticipated. Our gross
margin could be adversely affected if off-price sales increase as a percentage
of revenue.
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. Our
primary market risk is the risk of exposure to unfavorable movements in exchange
rates between the U.S. dollar and the Canadian dollar, the British Pound
Sterling and the Euro. Our functional currency is the U.S. dollar. We have
international operations resulting in receipts and payments that differ from our
functional currency. We attempt to reduce foreign currency exchange risks by
using financial instruments, including derivatives pursuant to our hedging
policy. We enter into forward exchange contracts to hedge firm and anticipated
purchase and sale commitments denominated in currencies other than our
subsidiaries' local currencies. We do not enter into forward exchange contracts
for speculation or trading purposes. 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. Generally these contracts have maturities that
do not exceed one year. Our forward exchange contracts function as effective
hedges of our underlying exposure; however, we are required to record changes in
the fair value of these foreign currency contracts against earnings in the
period of the change in other income and expense. We include all gains and
losses related to foreign exchange contracts in cash flows from operating
activities in our consolidated statement of cash flows. Our losses on forward
exchange contracts in 2004 were $690 and in 2003 were $368. While we have a
policy of selectively hedging foreign currency risks, this program may not fully
insulate us against short-term fluctuations in financial results.
Foreign Exchange Risk
We conduct operations in various international countries, which exposes us to
changes in foreign exchange rates. The financial results of our foreign
subsidiaries may be materially impacted by exposure to fluctuating exchange
rates. Reported sales and costs and expenses at our foreign subsidiaries, when
translated into U.S. dollars for financial reporting purposes, can fluctuate due
to exchange rate movement. While exchange rate fluctuations can have a material
impact on reported revenues and earnings, this impact is principally the result
of the translation effect and does not materially impact our short-term cash
flows.
Currency Risk
In the ordinary course of business, we enter into forward foreign exchange
contracts to hedge firm and anticipated intercompany purchase and sale
commitments denominated in currencies other than our subsidiaries' local
currencies. Our foreign subsidiaries footwear inventory purchases are
denominated in U.S. dollars, which exposes us to changes in foreign exchange
rates. The purpose of our currency hedging is to protect our local currency cash
flows related to these commitments from fluctuations in foreign currency
movements. Transactions covered by hedge contracts include intercompany
payables. The principal currencies we hedge are the Canadian dollar, British
Pound Sterling and Euro. The contracts have no cash requirements until maturity
and we record them at fair value on our consolidated balance sheet. Credit risk
is minimal as the foreign exchange contracts are with major banking
institutions. 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 2, 2004, the fair value of our forward exchange contracts was $8,150,
and as of January 3, 2003, the fair value of our forward exchange contracts was
$7,028. We have calculated the effect of a 10% depreciation in the year-end
currency exchange rates related to the forward exchange contracts as of January
2, 2004 and January 3, 2003. This depreciation would result in an increase in
the unrealized losses on forward exchange contracts of approximately $781 at
December 31, 2004 and $684 at January 2, 2004, which would materially affect our
results of operations and financial position. The increase in the fair value of
our forward exchange contracts at December 31, 2004, as compared to at January
2, 2004, was due primarily to the amount of foreign currency contracts held at
December 31, 2004, compared with January 2, 2004. 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. The
calculations of the hypothetical 10% depreciation in the year-end exchange rates
assume that each rate changed in the same direction at the same time relative to
the U.S. dollar. The calculations reflect only those differences resulting from
mechanically replacing on exchange rate for another and do not factor in any
potential effects that changes in currency rates may have on the translation of
the statement of income, sales volume and prices and on local currency costs.
Interest Risk
At December 31, 2004, we had $201 in capitalized lease obligations outstanding.
We did not have any debt outstanding at January 2, 2004. At December 31, 2004,
we had available unsecured committed lines of credit as sources for financing
our working capital needs. Borrowings under these credit agreements bear
interest at variable rates, which would subject us to credit based interest rate
risks. 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 are also subject to interest rate risks
on our current cash, cash equivalents and short-term investments. We minimize
credit risk associated with our short-term investments by using investment
grade, highly liquid securities. We have classified all of our short-term
investments as available for sale securities. Our short-term investments consist
primarily of obligations of United States governmental agencies and state and
municipal bonds with original maturities of 91 days to one year. Cash and cash
equivalents include all short-term deposits with an original maturity of three
months or less.
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
these 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 Annual Report on Form 10-K following the signature page and incorporated
herein by this reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2004. The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of December 31, 2004, our chief executive officer and
chief financial officer concluded that, as of such date, our disclosure controls
and procedures were effective at the reasonable assurance level.
Management's Annual Report on Internal Control Over Financial Reporting
We are not including in this Annual Report on Form 10-K at this time
"Management's annual report on internal control over financial reporting",
required by Item 308(a) of Regulation S-K, and the related "Attestation report
of the registered public accounting firm", required by Item 308(b) of Regulation
S-K, as permitted by paragraph (b) of the conditions of the Order Under Section
36 of the Securities Exchange Act of 1934 Granting an Exemption from Specified
Provisions of Exchange Act Rules 13a-1 and 15d-1 (Release No. 34-50754, November
30, 2004). We expect to file the management report and the attestation report
described above by amendment to this Annual Report on Form 10-K not later than
May 2, 2005, in accordance with paragraph (e) of the conditions of Release No.
34-50754 and applicable SEC rules.
Changes in internal control over financial reporting
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter
ended December 31, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
ITEM 9B - OTHER INFORMATION
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be disclosed by this Item pursuant to Item 401 of
Regulation S-K with respect to our executive officers is contained in Part I of
this Annual Report on Form 10-K under the caption, "Executive Officers of the
Registrant." The remaining information required to be disclosed by this Item
pursuant to Item 401 of Regulation S-K will be contained in our proxy statement
for our 2005 Annual Meeting of Stockholders under the caption, "Election of
Directors," and is incorporated in this Annual Report on Form 10-K by reference.
The information required to be disclosed by this Item pursuant to Item 405 of
Regulation S-K will be contained in our proxy statement for our 2005 Annual
Meeting of Stockholders under the caption, "Section 16(a) Beneficial Ownership
Reporting Compliance," and is incorporated in this Annual Report on Form 10-K by
reference.
We have adopted a Code of Business Conduct and Ethics that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. The text of our
Code of Business Conduct and Ethics is posted in the "Corporate Governance"
section of our website, www.sauconyinc.com. We intend to disclose on our website
any amendments to, or waivers from, our Code of Business Conduct and Ethics that
are required to be disclosed pursuant to the disclosure requirements of Item 10
of Form 8-K.
ITEM 11 - EXECUTIVE COMPENSATION
The information required to be disclosed by this Item pursuant to Item 402 of
Regulation S-K will be contained in our proxy statement for our 2005 Annual
Meeting of Stockholders under the captions, "Compensation of Executive Officers"
and "Election of Directors--Compensation of Directors," and is incorporated in
this Annual Report on Form 10-K by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required to be disclosed by this Item pursuant to Item 403 of
Regulation S-K will be contained in our proxy statement for our 2005 Annual
Meeting of Stockholders under the caption, "Stock Ownership of Certain
Beneficial Owners and Management," and is incorporated in this Annual Report on
Form 10-K by reference.
The information required to be disclosed by this Item pursuant to Item 201(d) of
Regulation S-K will be contained in our proxy statement for our 2005 Annual
Meeting of Stockholders under the caption, "Compensation of Executive
Officers--Equity Compensation Plan Information," and is incorporated in this
Annual Report on Form 10-K by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be disclosed by this Item pursuant to Item 404 of
Regulation S-K will be contained in our proxy statement for our 2005 Annual
Meeting of Stockholders under the captions, "Compensation of Executive
Officers--Other Executive Compensation," "--Employment Contracts" and "--Related
Party Transactions," and is incorporated in this Annual Report on Form 10-K by
reference.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required to be disclosed by this Item pursuant to Item 9(e) of
Schedule 14A will be contained in our proxy statement for our 2005 Annual
Meeting of Stockholders under the caption, "Ratification of Appointment of
Independent Auditors--Independent Auditor's Fees," and "--Pre-Approval Policy
and Procedures," and is incorporated in this Annual Report on Form 10-K by
reference.
PART IV
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. Index to Consolidated Financial Statements
The following consolidated financial statements of Saucony, Inc. and its
subsidiaries are included in this report immediately following the
signature page:
- Report of Independent Registered Public Accounting Firm -
Deloitte & Touche LLP
- Consolidated balance sheets at December 31, 2004 and January 2,
2004
- Consolidated statements of income for the years ended December
31, 2004, January 2, 2004 and January 3, 2003
- Consolidated statements of stockholders' equity for the years
ended December 31, 2004, January 2, 2004 and January 3, 2003
- Consolidated statements of cash flows for the years ended
December 31, 2004, January 2, 2004, and January 3, 2003 - Notes
to the Consolidated Financial Statements
2. Index to Consolidated Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
not required, or because the required information is included in
the consolidated financial statements or notes thereto included
in this Annual Report on Form 10-K.
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SAUCONY, INC.
(Registrant)
By: /s/ John H. Fisher
----------------------
John H. Fisher
President and Chief Executive Officer
Date: March 16, 2005
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, March 16, 2005
John H. Fisher President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Charles A. Gottesman Vice Chairman of the Board, March 16, 2005
Charles A. Gottesman and Executive Vice President,
Business Development
/s/ Michael Umana Executive Vice President, March 16, 2005
Michael Umana Chief Operating and Financial Officer
(Principal Financial Officer)
/s/ Roger P. Deschenes Vice President, Controller and March 16, 2005
Roger P. Deschenes Chief Accounting Officer
(Principal Accounting Officer)
/s/ Jonathan O. Lee Director March 16, 2005
Jonathan O. Lee
/s/ Robert J. LeFort, Jr. Director March 16, 2005
Robert J. LeFort, Jr.
/s/ John J. Neuhauser Director March 16, 2005
John J. Neuhauser
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Saucony, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheets of Saucony, Inc.
and subsidiaries (the "Company") as of December 31, 2004 and January 2, 2004,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2004.
Our audits also included the 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 financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Saucony, Inc. and subsidiaries as
of December 31, 2004 and January 2, 2004, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 16, 2005
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND JANUARY 2, 2004
(in thousands, except share and per share amounts)
ASSETS
December 31, January 2,
2004 2004
---- ----
Current assets:
Cash and cash equivalents...........................................................$ 12,042 $ 41,781
Short-term investments ............................................................. 20,694 5,788
Accounts receivable, net of allowance for doubtful accounts
and discounts (2004,$1,181; 2003,$1,108).......................................... 22,485 19,167
Inventories ........................................................................ 25,645 22,421
Deferred income taxes............................................................... 2,455 2,126
Prepaid expenses and other current assets........................................... 1,316 1,518
---------- ---------
Total current assets.............................................................. 84,637 92,801
---------- ---------
Property, plant and equipment, net .................................................... 9,570 6,201
---------- ---------
Other assets:
Goodwill............................................................................ 912 912
Deferred charges, net............................................................... 91 124
Other .............................................................................. 1,047 650
---------- ---------
Total other assets................................................................$ 2,050 $ 1,686
========== =========
Total assets...........................................................................$ 96,257 $ 100,688
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations....................................$ 63 $ --
Accounts payable.................................................................... 10,484 9,259
Accrued expenses and other current liabilities...................................... 11,249 9,733
Environmental accrual............................................................... 2,275 --
---------- ---------
Total current liabilities....................................................... 24,071 18,992
---------- ---------
Long-term obligations:
Capitalized lease obligations, net of current portion............................... 138 --
Other............................................................................... 932 520
Deferred income taxes............................................................... 1,964 1,802
---------- ---------
Total long-term obligations..................................................... 3,034 2,322
---------- ---------
Commitments and contingencies
Minority interest in consolidated subsidiary........................................... 461 320
---------- ---------
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 2004, 2,520,647 and 2003, 2,711,129).................................... 840 904
Class B, $.333 par value per share; authorized 20,000,000 shares
(issued 2004, 4,094,445 and 2003, 4,210,560).................................... 1,365 1,403
Additional paid-in capital.......................................................... 18,049 19,010
Retained earnings................................................................... 46,693 63,655
Accumulated other comprehensive income.............................................. 1,744 505
Common stock held in treasury, at cost
(January 2, 2004, Class A, 190,480, Class B, 582,326)............................. -- (6,423)
---------- ---------
Total stockholders' equity...................................................... 68,691 79,054
---------- ---------
Total liabilities and stockholders' equity.............................................$ 96,257 $ 100,688
========== =========
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 DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003
(in thousands, except per share amounts)
2004 2003 2002
---- ---- ----
Net sales................................................................$ 166,152 $ 136,066 $ 133,196
Other revenue............................................................ 524 379 303
---------- ---------- ----------
Total revenue............................................................ 166,676 136,445 133,499
---------- ---------- ----------
Costs and expenses:
Cost of sales......................................................... 98,209 83,613 87,350
Selling expenses...................................................... 21,695 18,574 17,790
General and administrative expenses................................... 26,320 21,625 19,488
Environmental charge.................................................. 2,275 -- --
Plant closing and other credits ...................................... -- (35) (72)
Gain on sale of former manufacturing facility......................... -- (329) --
---------- ---------- ----------
Total costs and expenses.............................................. 148,499 123,448 124,556
---------- ---------- ----------
Operating income......................................................... 18,177 12,997 8,943
Non-operating income (expense):
Interest income....................................................... 314 245 332
Interest expense...................................................... (8) (5) (5)
Foreign currency (losses) gains....................................... (734) 288 20
Other................................................................. 10 49 (9)
---------- ---------- ----------
Income before income taxes and minority interest......................... 17,759 13,574 9,281
Provision for income taxes............................................... 7,237 4,940 3,865
Minority interest in income of consolidated subsidiary................... 104 146 173
---------- ---------- ----------
Net income............................................................... 10,418 8,488 5,243
========== ========== ==========
Earnings per share:
Basic:
Class A common stock................................................$ 1.51 $ 1.31 $ 0.81
========== ========== ==========
Class B common stock................................................$ 1.66 $ 1.44 $ 0.89
========== ========== ==========
Diluted:
Class A common stock................................................$ 1.38 $ 1.26 $ 0.80
========== ========== ==========
Class B common stock................................................$ 1.52 $ 1.38 $ 0.88
========== ========== ==========
Weighted-average shares outstanding:
Basic:
Class A common stock................................................ 2,521 2,521 2,563
Class B common stock................................................ 3,972 3,583 3,544
---------- ---------- ----------
Total............................................................... 6,493 6,104 6,107
========== ========== ==========
Diluted:
Class A common stock................................................ 2,521 2,521 2,563
Class B common stock................................................ 4,559 3,850 3,623
---------- ---------- ----------
Total............................................................... 7,080 6,371 6,186
========== ========== ==========
Cash dividends per share of common stock:
Class A common stock..................................................$ 4.200 $ 0.120 $ 0.000
========= ========== ==========
Class B common stock..................................................$ 4.220 $ 0.132 $ 0.000
========= ========== ==========
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 DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003
(in thousands, except share amounts)
Additional
Common Stock Paid-in Retained Treasury Stock
Class A Class B Capital Earnings Shares Amount
------- ------- ------- -------- ------ ------
Balance, January 4, 2002.............................$ 904 $ 1,346 $ 17,398 $50,702 665,976 $(5,417)
Issuance of 68,944 shares of common stock upon
exercise of stock options and the employee
stock purchase plan............................... -- 23 306 -- -- --
Stock compensation on stock warrants................. -- -- 44 -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Tax benefit related to stock options................. -- -- 21 -- -- --
Repurchase of 94,830 shares of common stock,
at cost........................................... -- -- -- -- 94,830 (880)
Interest income on notes receivable.................. -- -- -- -- -- --
Payment of principal and interest on notes
receivable........................................ -- -- -- -- -- --
Net income........................................... -- -- -- 5,243 -- --
Foreign currency translation adjustments............. -- -- -- -- -- --
------ ------- -------- ------- ------- -------
Balance, January 3, 2003.............................$ 904 $ 1,369 $ 17,769 $55,945 760,806 $(6,297)
Issuance of 104,217 shares of common stock upon
exercise of stock options and the employee
stock purchase plan............................... -- 34 610 -- -- --
Stock compensation on stock warrants................. -- -- 469 -- -- --
Amortization of unearned compensation................ -- -- -- -- -- --
Tax benefit related to stock options................. -- -- 162 -- -- --
Repurchase of 12,000 shares of common stock,
at cost........................................... -- -- -- -- 12,000 (126)
Net income........................................... -- -- -- 8,488 -- --
Dividends ........................................... -- -- -- (778) -- --
Foreign currency translation adjustments............. -- -- -- -- -- --
------ ------- -------- ------- ------- -------
Balance, January 2, 2004.............................$ 904 $ 1,403 $ 19,010 $63,655 772,806 $(6,423)
Issuance of 423,179 shares of common stock upon
exercise of stock options and the employee
stock purchase plan............................... -- 141 3,615 -- -- --
Issuance of 50,250 shares of common stock upon
exercise of warrants.............................. -- 17 335 -- -- --
Treasury stock retirement............................ (64) (196) (6,305) -- (780,024) 6,565
Tax benefit related to stock options................. -- -- 1,394 -- -- --
Repurchase of 7,218 shares of common stock,
at cost........................................... -- -- -- -- 7,218 (142)
Net income........................................... -- -- -- 10,418 -- --
Dividends ........................................... -- -- -- (27,380) -- --
Foreign currency translation adjustments............. -- -- -- -- -- --
------ ------- -------- ------- ------ ------
Balance, December 31, 2004...........................$ 840 $ 1,365 $ 18,049 $46,693 $ -- $ --
====== ======= ======== ======= ====== ======
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 DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003
(in thousands, except share amounts)
Accumulated
Other Total
Note Unearned Comprehensive Stockholders' Comprehensive
Receivable Compensation Income (Loss) Equity Income (Loss)
---------- ------------ ------------- ------ -------------
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 and the employee
stock purchase plan............................. -- -- -- 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 on
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
Issuance of 104,217 shares of common stock upon
exercise of stock options and the employee
stock purchase plan............................. -- -- -- 644 --
Stock compensation on stock warrants............... -- -- -- 469 --
Amortization of unearned compensation.............. -- 124 -- 124 --
Tax benefit related to stock options............... -- -- -- 162 --
Repurchase of 12,000 shares of common stock,
at cost......................................... -- -- -- (126) --
Net income......................................... -- -- -- 8,488 8,488
Dividends.......................................... -- -- -- (778) --
Foreign currency translation adjustments .......... -- -- 1,375 1,375 1,375
------- ------- ------- ------- --------
Balance, January 2, 2004...........................$ -- $ -- $ 505 $79,054 $ 9,863
Issuance of 423,179 shares of common stock upon
exercise of stock options and the employee
stock purchase plan............................. -- -- -- 3,756 --
Issuance of 50,250 shares of common stock upon
exercise of warrants............................ -- -- -- 352 --
Treasury stock retirement.......................... -- -- -- -- --
Tax benefit related to stock options............... -- -- -- 1,394 --
Repurchase of 7,218 shares of common stock,
at cost......................................... -- -- -- (142) --
Net income......................................... -- -- -- 10,418 10,418
Dividends ......................................... -- -- -- (27,380) --
Foreign currency translation adjustments........... -- -- 1,239 1,239 1,239
------- ------- ------- ------- ---------
Balance, December 31, 2004.........................$ -- $ -- $ 1,744 $68,691 $ 11,657
======= ======= ======= ======= ========
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 DECEMBER 31, 2004, JANUARY 2, 2004 AND JANUARY 3, 2003
(in thousands)
2004 2003 2002
---- ---- ----
Cash flows from operations:
Net income .............................................................$ 10,418 $ 8,488 $ 5,243
Adjustments to reconcile net income to net cash
provided by operating activities:
Plant closing and other credits ...................................... -- (35) (123)
Depreciation and amortization......................................... 1,534 1,337 1,597
Provision for bad debt and discounts.................................. 6,014 5,019 4,752
Environmental charge.................................................. 2,275 -- --
Deferred income tax (benefit) provision............................... (167) (267) 91
Compensation from stock grants and options............................ -- 593 87
Tax benefit from stock options........................................ 1,394 162 --
Litigation settlement benefit......................................... -- (566) --
Minority interest in income of consolidated subsidiaries.............. 104 146 173
Gain on sale of former manufacturing facility......................... -- (329) --
Other................................................................. (8) 3 (20)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable..................................................... (9,028) (7,528) (5,374)
Inventories............................................................. (2,702) 6,163 1,848
Prepaid expenses and other current assets............................... 218 (225) 45
Increase (decrease) in liabilities:
Accounts payable........................................................ 1,179 638 1,862
Accrued expenses........................................................ 1,009 1,567 1,295
Income taxes............................................................ 340 (121) 1,754
--------- -------- --------
Total adjustments.......................................................... 2,162 6,557 7,987
--------- -------- --------
Net cash provided by operating activities.................................. 12,580 15,045 13,230
--------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment.............................. (4,541) (1,667) (777)
Change in deposits and other............................................ (58) (159) 193
Purchases of short-term investments..................................... (31,648) (5,769) --
Sales of short-term investments......................................... 16,699 -- --
Proceeds from the sale of property, plant and equipment................. 28 686 90
Share purchase - Saucony Canada, Inc.................................... -- (547) --
Proceeds from the sale of marketable securities......................... -- -- 197
--------- ------- --------
Net cash used by investing activities...................................... (19,520) (7,456) (297)
--------- ------- --------
Cash flows from financing activities:
Repayment of long-term debt and capital lease obligations............... (59) -- (88)
Common stock repurchased................................................ -- (126) (880)
Issuances of common stock, stock option exercises....................... 3,614 644 329
Issuances of common stock, warrant exercises............................ 352 -- --
Dividends on common stock............................................... (27,289) (518) --
Debt financing costs.................................................... -- -- (87)
Receipt of payment on notes receivable.................................. -- -- 312
Net cash used by financing activities...................................... (23,382) -- (414)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents............... 583 (291) (263)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents....................... (29,739) 7,298 12,256
Cash and cash equivalents at beginning of period........................... 41,781 34,483 22,227
--------- --------- ---------
Cash and cash equivalents at end of period.................................$ 12,042 $ 41,781 $ 34,483
========= ========= =========
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 December 31, 2004, January 2, 2004 and January 3, 2003
(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 2004, 2003 and 2002 represent the fiscal
years ended December 31, 2004, January 2, 2004 and January 3, 2003,
respectively. There were 52 weeks in each of fiscal 2004, fiscal 2003 and
fiscal 2002.
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
-------------------
Revenue is recognized 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. 104,
"Revenue Recognition in Financial Statements", are met. Sales 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. Title passes upon
shipment or upon receipt by the customer. Retail store revenues are
recorded at the time of sale. Royalty revenue is recognized as earned for
the terms of our license agreements.
The Company records a provision for defective product returns and other
allowances related to current period product revenue based upon past
experience and the receipt of notification of pending returns.
Co-operative Advertising
------------------------
The Company engages in cooperative advertising programs with retailers
whereby retailers receive reimbursement for the cost of advertising and
promoting the Company's products. In accordance with Emerging Issues Task
Force ("EITF") Issue 01-09, "Accounting for Consideration Given by a Vendor
to a Customer (Including a Reseller of the Vendor's Products)", cooperative
advertising costs are accounted for as a selling expense provided that the
cooperative advertising costs meet the requirements defined in EITF 01-09.
EITF 01-09 requires the Company to account for consideration given to a
retailer as a reduction of revenue unless the Company receives an
identifiable benefit, which is separable from the retailer's original
purchase, in exchange for the consideration and can reasonably estimate the
fair value of this benefit and receives documentation from the retailer to
support the amounts spent. For the arrangements that do not meet these
requirements, the cooperative advertising costs are accounted for as a
reduction of net sales. During fiscal 2004, 2003 and 2002 the Company
recorded $1,105, $1,160 and $1,469 respectively, of cooperative advertising
expense in selling expenses and recorded $738, $303 and $0, respectively of
cooperative advertising as a reduction of net sales. As of December 31,
2004 and January 2, 2004, the Company accrued $1,281 and $1,002,
respectively, for cooperative advertising not reimbursed to retailers.
Volume Incentive Rebate Programs
--------------------------------
The Company provides volume incentive rebates to certain retailers.
Retailers receive a volume incentive rebate equal to a specified percentage
of shipments to the retailer provided that the retailer achieves a
cumulative level of revenue transactions with the Company. In accordance
with EITF Issue 01-09, the Company recognizes the rebate obligation as a
reduction of net sales based on a systematic and rational allocation of the
cost of honoring the rebates earned and claimed to each of the underlying
revenue transactions that results in progress by the retailer toward
earning the rebate. During fiscal 2004 and 2003 the Company recorded $1,442
and $522, respectively of volume incentive rebates as reduction of net
sales. As of December 31, 2004 and January 2, 2004, our volume incentive
rebate reserves totaled $843 and $442, respectively. The Company did not
provide volume incentive rebates in fiscal 2002.
Vendor Allowances
-----------------
The Company receives funds from footwear manufacturers associated with
volume purchase rebates. The allowances have underlying contractual
commitments and are recognized by the Company as they are earned. In
accordance with EITF Issue 02-16, vendor allowances are earned as related
inventory is sold and over the contractual term of the allowance. The
Company recognizes vendor allowances as a reduction in cost of sales.
During fiscal 2004 and 2003, the Company recorded $639 and $60,
respectively, of vendor allowances as a reduction of cost of goods sold.
Shipping and Handling Revenues and Expenses
-------------------------------------------
Shipping and handling costs are accounted for in accordance with EITF Issue
00-10, "Accounting for Shipping and Handling Fees and Costs." Amounts
billed to customers for shipping and handling are recorded in net sales and
the related costs are included in cost of sales.
Revenues of $1,363, $1,196 and $1,117 from customers for shipping and
handling are included in net sales in the accompanying consolidated
statements of income for fiscal year 2004, 2003 and 2002, respectively.
Related costs of $1,280, $1,055 and $1,059 are included in cost of sales
for fiscal year 2004, 2003, and 2002, respectively.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include all short-term deposits with an original
maturity of three months or less.
Short-Term Investments
----------------------
Short-term investments consist primarily of obligations of United States
governmental agencies, state and municipal bonds, and commercial paper with
original maturities of 91 days to one year. The securities are classified
as available for sale securities, which are carried at fair value based
upon the quoted market prices of those investments at December 31, 2004.
Net realized gains and losses are included in the determination of net
income and are reported in non-operating income.
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 recorded 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 three to
fifteen 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. Gains or
losses resulting from the retirement or disposition of property, plant and
equipment are included in income from operations.
Deferred Charges
----------------
Deferred charges consist primarily of acquired software licenses,
trademarks and debt financing costs. Software licenses and trademarks are
amortized over five years. Debt financing costs are amortized over the two
year term of the financing agreement, using the effective interest rate
method.
Deferred charges 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 deferred
charges when indications of potential impairment exist, such as a
significant reduction in cash flows associated with the assets. Deferred
charges as of December 31, 2004 and January 2, 2004 are as follows:
2004 2003
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Software licenses................$ 1,135 $ (1,057) $ 78 $ 1,060 $ (992) $ 68
Capitalized debt
financing costs............... 87 (87) -- 87 (76) 11
Other............................ 444 (431) 13 444 (399) 45
-------- --------- ------ -------- --------- -------
Total............................$ 1,666 $ (1,575) $ 91 $ 1,591 $ (1,467) $ 124
======== ========= ====== ======== ========= =======
Amortization of deferred charges was $108, $149 and $117, respectively, in
fiscal 2004, fiscal 2003 and fiscal 2002.
The estimated future amortization expense of deferred charges is as
follows:
2005................................$ 44
2006................................ 16
2007................................ 15
2008................................ 15
2009 and thereafter................. 1
-------
Total...............................$ 91
=======
Goodwill
--------
Goodwill represents the excess of the purchase price over the estimated
fair value of the net assets of the acquired business.
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", (SFAS 142), on January 5, 2002.
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
estimates the fair value of its reporting units by using forecasts of
discounted cash flows.
The Company completed annual tests for impairment at December 31, 2004 and
January 2, 2004 and determined that goodwill was not impaired.
Cost of Sales
-------------
Cost of sales includes costs related to the manufacture of the Company's
products including the product costs, import duties, inbound freight costs,
receiving, inspection, procurement, production planning, operations
management, warehousing costs, freight to customers, internal transfer
freight costs and other distribution costs.
Selling Expenses
----------------
Selling expenses include advertising costs, sales commissions, sales and
marketing administration costs (including payroll and related benefits),
product samples, travel and entertainment related expenses, athlete
sponsorship costs, cooperative advertising programs, account specific
promotion costs and costs to participate at expositions and trade shows,
public relations, product literature, package design expense and market
research costs.
General and Administrative Expenses
-----------------------------------
General and administrative expenses include administration payroll costs
and related benefits, depreciation and amortization, insurance,
professional and other consulting fees, legal fees, bad debt expense and
costs related to temporary administrative staff.
Retail Store Construction Allowances and Pre-operating Costs
------------------------------------------------------------
Commencing in fiscal 2004 construction allowances received upon entering
into certain store leases are recognized on a straight-line basis as a
reduction to rent expense over the original lease term. Prior years have
not been restated due to its immateriality. The Company expenses all of the
costs that are incurred prior to the opening of new retail stores as they
occur.
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 December
31, 2004 and January 2, 2004 reflect the estimated future tax effects
attributable to temporary differences and carryforwards based on the
provisions of enacted tax law. See Note 14 for further discussion on income
taxes.
Earnings per Share
------------------
The Company presents basic and diluted earnings per share using the
two-class method. The two-class method is an earnings allocation formula
that determines earnings per share for each class of common stock according
to dividends declared and participation rights in undistributed earnings.
Basic earnings per share for the Company's Class A and Class B common stock
is calculated by dividing net income by the weighted average number of
shares of Class A and Class B common stock outstanding. Diluted earnings
per share for the Company's Class A and Class B common stock is calculated
similarly, except that the calculation includes the dilutive effect of the
assumed exercise of options issuable under the Company's stock incentive
plans and the assumed exercise of stock warrants.
Net income available to the Company's common stockholders is allocated
among our two classes of common stock, Class A common stock and Class B
common stock. The allocation among each class was based upon the two-class
method. Under the two-class method, earnings per share for each class of
common stock are presented. See Note 12 for the calculation of basic and
diluted earnings per share under the two-class method.
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 shareholders' 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 Income (Loss), a component of shareholders' equity.
Foreign currency translation adjustments amounted to $1,239 and $1,375,
respectively, for 2004 and 2003. Losses from foreign currency translation
adjustments amounted to $431 in 2002 and is recorded in Accumulated Other
Comprehensive Income (Loss).
Stock-Based Compensation
------------------------
The Company accounts for employee stock options and share awards under the
intrinsic-value method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", "APB 25", as
interpreted, with pro-forma disclosures of net earnings and earnings per
share, as if the fair value method of accounting defined in Statement of
Financial Accounting Standards No. 123, "SFAS 123". SFAS 123 establishes a
fair value based method of accounting for stock-based employee compensation
plans. Under the fair value method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for
stock option awards, consistent with the provisions of SFAS 123, the
Company's net income (loss) and net income (loss) per share in 2004, 2003
and 2002 would have been reduced to the pro forma amounts indicated below.
Pro forma net income available to the Company's common shareholders is
allocated among our two classes of common stock, Class A common stock and
Class B common stock. The allocation among each class was based upon the
two-class method. Under the two-class method, pro forma earnings per share
for each class of common stock is determined according to dividends
declared.
Pro forma net income allocated to Class A common stockholders and Class B
common shareholders and the calculation of pro forma basic and diluted
earnings per share are as follows:
2004 2003 2002
---- ---- ----
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
Net income:
As reported.........................$ 10,418 $ 10,418 $ 8,488 $ 8,488 $ 5,243 $ 5,243
Add: Stock-based compensation
expense included in reported net
income (loss), net of related tax
benefit............................ -- -- 23 23 26 26
Less: Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax benefit......... (1,400) (1,400) (1,161) (1,161) (710) (710)
====== ====== ====== ====== ==== ====
Pro forma net income ............... 9,018 9,018 $ 7,350 $ 7,350 $ 4,559 $ 4,559
===== ===== ======= ======= ======== ========
Pro forma net income allocated:
Class A common stock..............$ 3,301 $ 3,021 $ 2,868 $ 2,743 $ 1,808 $ 1,784
Class B common stock.............. 5,717 5,997 4,482 4,607 2,751 2,775
----- ----- ----- ----- ----- -----
$ 9,018 $ 9,018 $ 7,350 $ 7,350 $ 4,559 $ 4,559
======== ======== ======= ======= ======== ========
Pro forma earnings per share:
Class A common stock
As reported.........................$ 1.51 $ 1.38 $ 1.31 $ 1.26 $ 0.81 $ 0.80
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 awards,
net of related tax benefit......... (0.20) (0.19) (0.17) (0.17) (0.10) (0.10)
----- ----- ----- ----- ----- -----
Pro forma net income
per share..........................$ 1.31 $ 1.19 $ 1.14 $ 1.09 $ 0.71 $ 0.70
======== ======== ======= ======= ======== =======
Class B common stock
As reported.........................$ 1.66 $ 1.52 $ 1.44 $ 1.38 $ 0.89 $ 0.88
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 awards,
net of related tax benefit......... (0.22) (0.20) (0.19) (0.18) (0.11) (0.11)
----- ----- ----- ----- ----- -----
Pro forma net income (loss)
per share..........................$ 1.44 $ 1.32 $ 1.25 $ 1.20 $ 0.78 $ 0.77
======== ======== ======= ======== ======= =======
See Note 13 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
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 Income (Loss)" in the
statement of shareholders' equity.
Advertising and Promotion
-------------------------
Advertising and promotion costs, including print media production costs,
are expensed as incurred. Advertising and promotion expense amounted to
$8,741, $7,308 and $7,313 for 2004, 2003 and 2002, respectively.
Impairment Accounting
---------------------
The Company reviews the recoverability of its long-lived assets (property,
plant and equipment and deferred charges) 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. During fiscal 2004 and
2003 we determined that certain of our factory outlet division assets were
impaired and resulted in a charge of $15, each fiscal year, to reduce the
assets to their estimated realizable value.
Research and Development Expenses
---------------------------------
Expenditures for research and development of products are expensed as
incurred. Research and development expenses amounted to approximately
$1,956, $1,673 and $1,611 for 2004, 2003 and 2002, respectively.
Environmental Accrual
---------------------
The Company accrues for costs associated with environmental obligations
when such costs are probable and reasonably estimable in accordance with
SoP 96-1, "Environmental Remediation Liabilities (Including Auditing
Guidance)". Accruals to address estimated costs for environmental
obligations generally are recognized no later than the date when the
Company learns what cleanup measures, if any, are likely to occur to
address the environmental conditions at issue. In accordance with SoP 96-1,
included in such obligations are the estimated direct costs to investigate
and address the conditions on Company property and the associated
engineering, legal and consulting costs. Such accruals are adjusted as
further information develops or circumstances change. Cost of future
expenditures for environmental remediation obligations are not discounted
to their present value.
Related Party Transactions
--------------------------
On July 24, 2003, the Company entered into a Share Purchase Agreement with
the minority shareholder of Saucony Canada, Inc. whereby the Company
increased its ownership percentage of Saucony Canada, Inc. to 95% from 85%
effective as of July 4, 2003. The purchase price of $547 equaled the net
book value of Saucony Canada, Inc., as of July 4, 2003. The net book value
approximated the fair value of the assets acquired.
Reclassifications
-----------------
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform with current year presentation.
Recent Accounting Pronouncements
--------------------------------
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4 "SFAS 151". SFAS 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company
does not believe the adoption of SFAS 151 will have a material effect on
its financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
"SFAS 123R". This statement is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS 123R requires all share-based payments
to employees, including grants of employee stock options, to be recognized
in the financial statements based on their fair values. The provisions of
this statement are effective for interim or annual periods beginning after
June 15, 2005. The Company is currently evaluating the provisions of this
revision to determine the impact on its consolidated financial statements.
The adoption of this statement is expected to have a negative effect on
consolidated net income.
In December 2004, the FASB decided to defer the issuance of their final
standard on earnings per share (EPS) entitled "Earnings per Share - an
Amendment to FAS 128." The final standard will be effective in 2005 and
will require retrospective application for all prior periods presented. The
significant proposed changes to the EPS computation are changes to the
treasury stock method and contingent share guidance for computing
year-to-date diluted EPS, removal of the ability to overcome the
presumption of share settlement when computing diluted EPS when there is a
choice of share or cash settlement and inclusion of mandatorily convertible
securities in basic EPS. The Company is currently evaluating the proposed
provisions of this amendment to determine the impact on its consolidated
financial statements.
In December 2004, the FASB issued FASB Staff Position No. 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004. FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 should
be accounted for as a special deduction in accordance with SFAS 109 and not
as a tax rate reduction. The adoption of FSP 109-1 will have no impact on
the Company's results of operations or financial position for fiscal 2005
because the manufacturer's deduction is not available to the Company until
fiscal year 2006. The Company is evaluating the effect that the
manufacturer's deduction will have in subsequent years.
The FASB also issued FASB Staff Position No. 109-2, Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004. The AJCA introduces a special
one-time dividends received deduction on the repatriation of foreign
earnings to a U.S. taxpayer, provided specific criteria are met. FSP 109-2
provides accounting and disclosure guidance with respect to this deduction.
Until the Treasury Department or Congress provides additional clarifying
guidance on key elements with respect to this deduction, the amount of
foreign earnings to be repatriated by the Company, if any, cannot be
determined; however, the presumption that such unremitted earnings will be
repatriated cannot be overcome. FSP 109-2 grants an enterprise additional
time beyond the year ended December 31, 2004, in which the AJCA was
enacted, to evaluate the effects of the AJCA on its plan for reinvestment
or repatriation of unremitted earnings.
2. Short-Term Investments
- -- ----------------------
As of December 31, 2004, the Company's holdings in short-term investments
consisted primarily of obligations of United States governmental agencies,
state and municipal bonds, and commercial paper with original maturities of
91 days to one year, which are classified as available for sale securities.
The following table summarizes the fair market value and cost of short-term
investments as of December 31, 2004 and January 2, 2004:
2004 2003
--------------------------------------- ---------------------------------
Fair Fair
Market Gain Market Gain
Value Cost (Loss) Value Cost (Loss)
----- ---- ------ ----- ---- ------
U.S. government and
agencies...................$ 11,829 $ 11,805 $ 24 $ 4,988 $ 4,969 $ 19
State and municipal
governments................ 8,638 8,682 (44) -- -- --
U.S. corporate............... 227 231 (4) 800 800 --
--------- ---------- ------- ------- ------- -------
Total........................$ 20,694 $ 20,718 $ (24) $ 5,788 $ 5,769 $ 19
========= ========== ======= ======= ======= =======
Included in the determination of net income for the year ended December 31,
2004 were net realized losses of $48 and for the year ended January 2,
2004, realized gains of $74.
3. Inventories
Inventories at December 31, 2004 and January 2, 2004 consisted of the
following:
2004 2003
---- ----
Finished goods.......................$ 25,503 $ 22,322
Raw materials and supplies........... 142 34
Work-in-process...................... -- 65
--------- ----------
Total................................$ 25,645 $ 22,421
========= ==========
4. Property, Plant and Equipment
Major classes of property, plant and equipment at December 31, 2004 and
January 2, 2004 were as follows: 2004 2003
Land and improvements................$ 695 $ 494
Buildings and improvements........... 8,798 6,068
Machinery and equipment.............. 13,441 11,796
Leasehold improvements............... 845 719
--- ---
$ 23,779 $ 19,077
========= ==========
Less accumulated depreciation
and amortization..................... (14,546) (13,352)
-------- --------
9,233 5,725
Construction in progress............. 337 476
--- ---
Total................................$ 9,570 $ 6,201
========= ==========
5. Accrued Expenses
- -- ----------------
Accrued expenses at December 31, 2004 and January 2, 2004 consisted of the
following:
2004 2003
---- ----
Payroll and incentive compensation..............$ 2,620 $ 3,244
Income taxes.................................... 1,228 856
Inventory freight and duty...................... 2,191 891
Professional fees............................... 857 316
Sales commissions............................... 333 370
Selling and advertising......................... 105 356
Dividends....................................... 351 260
Forward contracts - fair value adjustment....... 420 420
Other........................................... 3,144 3,020
----- -----
Total...........................................$ 11,249 $ 9,733
========= =========
6. Capital Lease Obligations
- -- -------------------------
The following is a schedule of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as
of December 31, 2004:
2005....................................................$ 69
2006.................................................... 69
2007.................................................... 69
2008.................................................... 6
2009 and thereafter..................................... --
------
Total minimum lease payments............................ 213
Less amounts representing interest...................... 12
------
Present value of minimum lease payments................. 201
Less current portion.................................... 63
------
Long-term portion.......................................$ 138
======
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 $232,
$197 and $155 for 2004, 2003 and 2002, respectively.
The Company has a deferred compensation plan "DCP" to provide key
executives and highly compensated employees with supplemental retirement
benefits. This plan allowed these employees to defer a portion of their
salary and bonus until retirement or termination of their employment.
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 representing a certain
percentage of the participant's contributions. Participants may elect to
have their deferred compensation invested in selected money market and
mutual funds. The Company's contributions made to the plan were $12, $16
and $17 for 2004, 2003 and 2002, respectively. As of December 31, 2004, the
deferred compensation liability was $934, which has been included in
long-term liabilities and as of January 2, 2004, the deferred compensation
liability was $709, of which $189 has been included in other current
liabilities and $520 has been included in long-term liabilities. The assets
under the plan are invested in money market and mutual funds. As of
December 31, 2004, $934 is included in other assets and as of January 2,
2004, $189 is included in other current assets and $520 is included in
other assets.
The Company has a 2001 Employee Stock Purchase Plan "Employee Stock
Purchase Plan", under which 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, of which a total of 198,752
shares remained available for issuance as of December 31, 2004. 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 purchase
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 Employee Stock Purchase Plan. Employee payroll
deductions associated with the Employee Stock Purchase Plan began in
September 2001. There were 15,005, 24,949 and 11,294 shares of common stock
purchased under the plan, respectively, in 2004, 2003, and 2002. There were
no purchases of common stock made under the plan in 2001.
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 2004,
2003 and 2002 were $1,881, $1,715 and $1,602, respectively.
Future minimum equipment and rental payments:
2005 ..............................$ 1,275
2006 ..............................$ 1,052
2007...............................$ 854
2008...............................$ 523
2009 and thereafter................$ 367
For lease contracts that contain step-rent provisions, the aggregate rent
obligation is expensed on the straight-line basis over the base lease term.
Capital improvement funding provided by lessors is accounted for as a
reduction of the rental expense over the base lease term.
Lease payments that depend on existing index or rate, such as the consumer
price index or prime interest rate, are included in minimum lease payments
based on the index or rate existing at the inception of the lease and
recognized on a straight-line basis over the minimum lease term.
Short-Term Borrowing Arrangements
---------------------------------
The Company has a revolving credit agreement, as amended, under the terms
of which a bank committed up to a maximum of $15,000 to the Company for
cash borrowings and letters of credit. In August 2004, the Company amended
the existing credit agreement, extending the term, to expire on August 31,
2005. 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 our election 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 and restrictions on the annual
amount of equipment financing and capital lease indebtedness. As amended in
January 2004, the credit facility permits the Company to pay cash
dividends, and make repurchases or redemptions of, or other specified
distributions with respect to, its capital stock, in a total amount of up
to $5,000 in any fiscal year. The Company was in compliance with all
covenants of the credit facility at December 31, 2004. At December 31,
2004, there were no borrowings outstanding under the facility. We had open
commitments under letters of credit in the amount of $2,022 at December 31,
2004.
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 December 31, 2004,
there were no borrowings or letters of credit outstanding under this credit
facility.
Employment Agreements
---------------------
The Company has entered into employment agreements with two key executives.
The employment agreements provide for minimum aggregate annual base
salaries of $1,004, 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 were originally
scheduled to expire in August 2003, but were extended 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 these executives of $1,005, $681 and
$511 in general and administrative expenses for 2004, 2003 and 2002,
respectively. The Compensation Committee of the Company's Board of
Directors excluded the effects of the environmental charge recorded by the
Company in the fourth quarter of 2004 in the determination of cash bonuses
for 2004. Included in accrued expenses at December 31, 2004 and January 2,
2004, are accrued bonus expense of $349 and $681, respectively.
Retention Agreements
--------------------
In September 2004 in conjunction with the Company's analysis and
consideration of various strategic alternatives, the Company entered into
retention agreements with thirteen officers. The agreements generally
provide that: (1) if the officer remains continuously employed full-time by
the Company and the Company completes a change in control on or prior to
June 30, 2005 (or December 31, 2005 for certain officers), the Company will
pay the officer an initial retention bonus (amounts range from $31 to $150)
and (2) if the officer remains continuously employed full-time by the
Company during the period ending six months after the change in control, or
if the officer's employment at Saucony is terminated during that period by
the Company without cause or by the officer for good reason, the Company
will pay the officer an additional retention bonus (amounts range from $31
to $150). Agreements for four of the officers provide that if a change in
control occurs on or after December 31, 2005, fifty percent of the
respective officer's unvested stock options will become fully vested.
Further, the Company entered into a severance agreement with an officer
that provides a $300 severance payment if the officer's employment is
terminated by the Company without cause or after a change in control by the
officer for good reason.
Litigation
----------
The Company is involved in routine litigation incident to its business. 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. See Note 15 for discussion of the Company's favorable
litigation settlement in fiscal 2003.
Environmental Charge
--------------------
In the year ended December 31, 2004, the Company recorded a charge of
$2,275 to address environmental conditions at a Company owned distribution
facility. The assessment of the liability and the associated costs is an
estimate based upon currently available information after consultation with
environmental engineers, consultants and attorneys assisting the Company in
addressing these environmental issues. The following table summarizes the
estimated expenses associated with our environmental charge:
Environmental response costs................$ 1,538
Engineering and risk assessment............. 375
Legal....................................... 352
Post-remedy monitoring...................... 10
---------
Total.......................................$ 2,275
=========
Actual costs to address the environmental conditions may change based on
further investigations, based on the conclusions of regulatory authorities
about information gathered in those investigations and due to the inherent
uncertainties involved in estimating conditions in the environment and the
costs of addressing such conditions. Estimated costs to address the
environmental conditions range from $1,242 to $4,621. Costs of expenditures
for environmental obligation are not discounted to their present value due
to uncertainty of when the recorded amounts will be paid. At December 31,
2004, $2,275 was included as a short term liability in the accompanying
consolidated balance sheet.
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 regular cash dividends equal to 110% of the regular
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 3, 2003, January 2,
2004 and December 31, 2004:
Class A Class B
Common Stock Common Stock
------------ ------------
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
Shares issued................................ -- 104,217
Shares repurchased........................... (4,400) (7,600)
------ ------
Shares outstanding at January 2, 2004........ 2,520,647 3,628,234
Shares issued................................ -- 473,429
Shares repurchased........................... -- (7,218)
------- ------
Shares outstanding at December 31, 2004...... 2,520,647 4,094,445
========= =========
Effective July 1, 2004, companies incorporated in Massachusetts became
subject to the Massachusetts Business Corporation Act, Chapter 156D.
Chapter 156D provides that shares that are reacquired by a company become
authorized but unissued shares. As a result, Chapter 156D eliminates the
concept of "treasury shares" and provides that shares reacquired by a
company become "authorized but unissued" shares. Accordingly, at October 1,
2004, the Company retired the existing treasury shares, at an aggregate
cost of $6,565, as authorized but unissued and allocated this amount to the
common stock's par value and additional paid in capital.
10. Dividends
- --- ---------
Commencing with the quarterly dividend declared on February 17, 2004, the
Board of Directors increased the regular quarterly dividend on our Class A
Common Stock to $0.050 per share and the regular quarterly dividend on our
Class B Common Stock to $0.055 per share. The Board declared regular
quarterly cash dividends on February 17, 2004, May 19, 2004, August 2, 2004
and November 4, 2004, in the amount of $0.050 per share on our Class A
Common Stock and $0.055 per share on our Class B Common Stock.
On February 17, 2004, our Board of Directors declared a special cash
dividend of $4.00 per share on each of our Class A Common Stock and Class B
Common Stock. The special dividend was paid on March 17, 2004 to
shareholders of record at the close of business on March 3, 2004.
We paid $25,990 in a special cash dividend and $1,299 of regular quarterly
cash dividends in 2004. On January 13, 2005, we paid the regular quarterly
cash dividends declared by the Board on November 4, 2004. As of December
31, 2004, the Company had accrued $351 in current liabilities, under
accrued expenses, representing the dividend liability for the January 13,
2005 dividend.
The Company's corporate charter provides that regular cash dividends paid
on the Company's Class B common stock are to be in an amount equal to 110%
of the dividend amount paid on the Company's Class A common stock. This
charter provision does not apply to special dividends.
11. Stock Options and Stock Purchase Warrants
- --- -----------------------------------------
On February 17th, the Company declared a special dividend of $4.00 per
share on its outstanding shares of Class A and Class B Common Stock to its
shareholders of record on March 1, 2004. The special dividend payout of
$25,990 was a substantial restructuring of the Company's equity. As a
result of this restructuring the Company made customary adjustments to both
the exercise price and the number of shares of outstanding stock subject to
the Company's outstanding stock options to give effect to the special
dividend. The adjustments to the stock options awards ensured that both the
aggregate intrinsic value of the award immediately after the change was not
greater than the aggregate intrinsic value of the award before the change
and that the ratio of the exercise price per share to the market value per
share was not reduced. The option information presented reflects the
adjustment to the number of shares and the exercise price as a result of
the restructuring.
1993 Equity Incentive Plan
Under the Company's 1993 Equity Incentive Plan "Equity Incentive Plan",
approved by the Company's stockholders on May 25, 1993, the Company may
grant stock options and restricted stock awards to officers, key employees
and Directors of, and consultants and advisors to, the Company.
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 (or less than 100% of the fair market value for
certain significant shareholders). 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 significant shareholders. 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 the
Company's right to repurchase such shares and 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 December
31, 2004, 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 December 31, 2004:
Shares
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
Awards granted........................................ (157,750)
Options expired or cancelled.......................... 39,112
------
Shares available at January 2, 2004................... 508,560
Conversion adjustment................................. (140,968)
--------
Shares available at December 31, 2004................. 367,592
========
The Equity Incentive Plan expired on April 7, 2003 and no further new
awards may be made under the plan. However, awards outstanding under the
plan remain outstanding in accordance with their terms.
2003 Equity Plan
On May 21, 2003 the Company's stockholders approved the 2003 Stock
Incentive Plan "Stock Incentive Plan", which had been adopted by the Board
of Directors on February 20, 2003. Under the Stock Incentive Plan, the
Company may grant stock options and restricted stock awards to officers,
key employees and Directors of, and advisors to, the Company.
The Stock 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 (or less
than 110% of the fair market value for certain significant shareholders) 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 significant shareholders). The vesting schedule is subject to
the discretion of the Board of Directors.
Restricted stock awards granted under the Stock Incentive Plan entitle
recipients to purchase shares of the Company's Common Stock subject to the
Company's right to repurchase such shares and 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 Stock Incentive
Plan to the Compensation Committee of the Board of Directors. At January 2,
2004, 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 Stock Incentive Plan. No award may be made under the Stock
Incentive Plan after February 19, 2013.
The following table summarizes the awards available for grant under the
Stock Incentive Plan for the period ended December 31, 2004:
Shares
------
Shares reserved..................................... 1,750,000
Awards granted...................................... (602,785)
Options expired or cancelled........................ --
---------
Shares available at January 2, 2004................. 1,147,215
Conversion adjustment, prior awards granted......... (147,276)
Awards granted...................................... (55,250)
Options expired or cancelled........................ 3,574
---------
Shares available at December 31, 2004............... 948,263
=========
The following table summarizes the Company's stock option activity for the
periods ended January 3, 2003, January 2, 2004 and December 31, 2004:
Weighted
Average
Exercise Option
Shares Price Price Range
------ ----- -----------
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
Granted....................................... 760,535 $ 14.67 $ 5.50 - $ 17.88
Exercised..................................... (79,268) $ 6.52 $ 4.13 - $ 12.50
Forfeited..................................... (37,212) $ 11.39 $ 4.13 - $ 19.88
Expired....................................... (1,900) $ 4.71 $ 4.44 - $ 6.50
---------
Outstanding at January 2, 2004..................... 1,444,967 $ 11.98 $ 4.00 - $ 17.88
Granted....................................... 55,250 $ 20.08 $ 17.39 - $ 24.26
Conversion adjustment......................... 288,244 $ 10.58 $ 4.38 $ 15.88
Exercised..................................... (408,174) $ 8.85 $ 4.00 - $ 14.69
Forfeited..................................... (5,300) $ 10.88 $ 5.54 - $ 18.45
Expired....................................... (27,978) $ 5.50 $ 4.78 - $ 11.69
---------
Outstanding at December 31, 2004................... 1,347,009 $ 10.86 $ 4.38 - $ 24.26
=========
The conversion adjustment in the table above represents the impact of the
special dividend declared on February 17, 2004.
Options exercisable for shares of the Company's Class A and Class B Common
Stock as of January 2, 2004 and December 31, 2004 are as follows:
Options Exercisable
--------------------------------------------------------------------
Weighted Average
Exercise Price
Class A Class B Class A Class B
Common Common Common Common
Stock Stock Total Stock Stock
----- ----- ----- ----- -----
January 2, 2004................ -- 513,123 513,123 -- $ 9.60
December 31, 2004.............. -- 473,305 473,305 -- $ 10.76
The following table summarizes information about stock options outstanding
at December 31, 2004:
Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Shares Weighted Shares
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 2004 Life (Years) Price 2004 Price
--------------- ---- ------------ ----- ---- -----
$ 4.38 - $ 4.93 88,892 6.93 $ 4.74 18,408 $ 4.66
$ 5.25 - $ 7.97 113,972 5.49 $ 5.85 50,177 $ 5.72
$ 8.08 $ 8.96 320,543 6.18 $ 8.54 159,058 $ 8.80
$ 9.36 - $ 11.54 101,632 4.10 $ 10.33 61,955 $ 10.06
$ 12.94 - $ 12.94 650,278 8.80 $ 12.94 137,659 $ 12.94
$ 13.02 - $ 24.26 71,692 8.15 $ 18.56 46,048 $ 19.92
--------- -------
1,347,009 473,305
========= =======
Stock Purchase Warrants
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 warrants vest in five equal annual installments, commencing on
March 12, 2002. 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. On December 31, 2003, the Board of
Directors amended the terms of the stock purchase warrants to provide that
the warrants vested in full as of December 31, 2003. See Note 13 for
further discussion of the stock warrant fair value and annual stock-based
compensation expense. On March 2, 2004, all of the common stock purchase
warrants were exercised for proceeds of $352.
12. Earnings Per Share
- --- ------------------
The following table sets forth the computation of basic earnings per common
share and diluted earnings per common share for the years ended December
31, 2004, January 2, 2004 and January 3, 2003:
2004 2003 2002
---------------------- ---------------------- ---------------------
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
Net income available for
common shares and
assumed conversions...............$ 10,418 $ 10,418 $ 8,488 $ 8,488 $ 5,243 $ 5,243
======== ======== ======= ======= ======== ========
Weighted-average common shares
and equivalents outstanding:
Weighted-average shares
outstanding...................... 6,493 6,493 6,104 6,104 6,107 6,107
Effect of dilutive securities:
Stock options..................... -- 587 -- 245 -- 76
Stock purchase warrants........... -- -- -- 22 -- 3
-------- -------- ------- ------- -------- --------
6,493 7,080 6,104 6,371 6,107 6,186
===== ===== ===== ===== ===== =====
Net income allocated:
Class A common stock..............$ 3,812 $ 3,485 $ 3,312 $ 3,168 $ 2,080 $ 2,052
Class B common stock.............. 6,606 6,933 5,176 5,320 3,163 3,191
----- ----- ----- ----- ----- -----
$ 10,418 $ 10,418 $ 8,488 $ 8,488 $ 5,243 $ 5,243
======== ======== ======= ======= ======== ========
Weighted-average common shares
and equivalents outstanding:
Class A common stock............. 2,521 2,521 2,521 2,521 2,563 2,563
Class B common stock ............ 3,972 4,559 3,583 3,850 3,544 3,623
----- ----- ----- ----- ----- -----
6,493 7,080 6,104 6,371 6,107 6,186
===== ===== ===== ===== ===== =====
Earnings per share:
Class A common stock..............$ 1.51 $ 1.38 $ 1.31 $ 1.26 $ 0.81 $ 0.80
======== ======== ======= ======= ======= ========
Class B common stock..............$ 1.66 $ 1.52 $ 1.44 $ 1.38 $ 0.89 $ 0.88
======== ======== ======= ======= ======= ========
Options to purchase 336,000 shares of common stock were outstanding at
January 2, 2004 were not included in the computations of earnings per share
since the options were anti-dilutive. All of the options to purchase shares
of common stock outstanding at December 31, 2004 were included in the
computation of diluted earnings per share. Stock warrants to purchase
47,000 shares of common stock outstanding at January 2, 2004, were not
included in the computation of earnings per share since the warrants were
anti-dilutive.
13. 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 below market options over the vesting period of the stock grant or
option term. Stock-based compensation related to below market options
granted amounted to $0, $0 and $1 for 2004, 2003 and 2002, 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. Stock-based compensation resulting from the stock purchase
warrants amounted to $0, $603 and $86 for 2004, 2003 and 2002,
respectively, and is recorded as a component of cost of goods sold. The
2003 stock-based compensation expense includes $416 of stock-based
compensation expense recorded as a result of accelerating the vesting on
the common stock purchase warrants. On March 2, 2004, all of the common
stock purchase warrants were exercised for $352 of proceeds.
The weighted average fair value at date of grant for options granted in
2004, 2003 and 2002 was $8.00, $7.53 and $3.18 per share issuable upon
exercise of each option, respectively. The weighted-average fair value of
these options at the date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for
2004, 2003 and 2002, respectively:
2004 2003 2002
---- ---- ----
Weighted-average expected life (years)............ 5.0 5.0 3.3
Risk free interest rate........................... 3.0% 3.0% 3.7%
Expected volatility............................... 45.8% 62.8% 67.3%
Expected dividend yield........................... 0.8% 1.0% 0.0%
14. Income Taxes
- --- ------------
The provision for income taxes was based on pre-tax income from operations
before minority interest which was subject to taxation by the following
jurisdictions:
2004 2003 2002
---- ---- ----
Pre-tax income:
United States...............$ 13,143 $ 10,316 $ 7,502
Foreign..................... 4,616 3,258 1,779
----- ----- -----
Total.......................$ 17,759 $ 13,574 $ 9,281
======== ======== =======
The provision (benefit) for income taxes consists of the following:
2004 2003 2002
---- ---- ----
Current:
Federal.................$ 4,508 $ 3,442 $ 2,293
State................... 1,122 770 686
Foreign................. 1,819 999 795
----- --- ---
7,449 5,211 3,774
----- ----- -----
Deferred:
Federal................. (261) 101 144
State................... (133) 36 (81)
Foreign................. 206 205 (66)
--- --- ---
(188) 342 (3)
---- --- --
Change in valuation
allowance................. (24) (613) 94
--- ---- --
Total.....................$ 7,237 $ 4,940 $ 3,865
======= ======= =======
The net deferred tax asset or liability reported on the consolidated
balance sheet consists of the following items as of December 31, 2004 and
January 2, 2004:
2004 2003
---- ----
Net current deferred tax assets:
Allowance for doubtful accounts and discounts..............................$ 523 $ 373
Inventory allowances and tax costing adjustments........................... 365 516
Other accrued expenses..................................................... 1,361 242
Deferred compensation...................................................... 206 671
Foreign loss carryforwards................................................. -- 324
----- ---
Total...................................................................$ 2,455 $ 2,126
--------- ---------
Net long-term deferred tax assets:
Deferred compensation......................................................$ 315 $ 214
Foreign loss carryforwards................................................. 157 166
State loss carryforward.................................................... 47 49
Valuation allowance........................................................ (204) (215)
---- ----
Total...................................................................$ 315 $ 214
========= =========
Net long-term deferred tax liabilities:
Investment in limited partnership..........................................$ 1,331 $ 1,246
Property, plant and equipment.............................................. 948 770
--- ---
Total...................................................................$ 2,279 $ 2,016
--------- ---------
Net deferred tax asset ......................................................$ 491 $ 324
========= =========
The foreign loss carryforwards relate to operating losses of approximately
$384, which may be carried forward indefinitely. At December 31, 2004 the
Company has determined that it is more likely than not that the deferred
tax assets resulting from foreign and state operating losses will not be
realized against future taxable income.
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 $9,522 at
December 31, 2004.
A reconciliation of the expected tax computed at the U.S. statutory federal
income tax rate to the total provision for income taxes follows:
2004 2003 2002
---- ---- ----
Expected tax at 35% (34% for 2003 and 2002).........................$ 6,216 $ 4,615 $ 3,155
Federal rate credit................................................. (100) -- --
State income tax, net of federal benefit............................ 643 532 399
Non-deductible expenses and tax-exempt income....................... 171 78 121
International tax rate differences, net............................. 94 81 100
Valuation allowance relating to foreign and state
operating losses.................................................. (24) (613) 94
Other............................................................... 2 (3) (4)
Adjustment of tax reserves.......................................... 235 250 --
--------- --------- --------
Provision for income taxes..........................................$ 7,237 $ 4,940 $ 3,865
========= ========= ========
In evaluating exposures associated with various tax filing positions, the
Company has accrued $951 for probable tax contingencies as of December 31,
2004. In 2004 and 2003, the Company provided $235 and $250, respectively,
related to exposures on tax filing positions. Management believes that the
Company's tax contingencies have been adequately provided for in the
accompanying financial statements. To the extent the Company prevails in
matters for which accruals have been established or are required to pay
amounts in excess of these accruals, the Company's effective tax rate in a
given financial statement period could be materially affected.
15. Litigation Settlement
- --- ---------------------
On May 6, 2003, the United States Bankruptcy Court for the District of
Delaware, upon consideration of the Trustee's Motion for Entry of Order
Approving Settlement with Saucony, Inc., ordered that the proposed
settlement entered into on March 11, 2003, between 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, and the Company
was approved. On May 16, 2003, the Company paid $530 to settle all
preferential claims. As a consequence of the court's approval of the
settlement, the Company recorded a pre-tax benefit of $566 in 2003 to
reduce the amount accrued as of January 2, 2004. The benefit was recorded
in general and administrative expenses under the Saucony segment.
16. Plant Closing, Other Charges and Gain on Sale
- --- ---------------------------------------------
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. A pre-tax benefit of $35 was recorded in fiscal
2003 to eliminate the plant-closing accrual.
The charge recorded for the Bangor, Maine plant closing is included in
income before tax for the Saucony segment, while the retail store closing
is included in income before tax for the Other Products segment.
The following table summarizes the activity in the plant closing and other
charge accruals:
Employee Facility Writedown
Severance and Closure and of Equipment Professional
Termination Contractual and Disposal Fees and
Benefits Commitments Costs Other Costs Total
-------- ----------- ----- ----------- -----
Balance, January 4, 2002........$ 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 $ -- $ -- $ 36
Payments / utilization........ (1) -- -- -- (1)
Expense reversal.............. (26) (9) -- -- (35)
----- ------- -------- ------ --------
Balance, January 2, 2004........$ -- $ -- $ -- $ -- $ --
======= ======= ======== ====== ========
On November 7, 2003, the sale of the Bangor, Maine real property was
completed. The following table summarizes the sale of the real property:
Gross proceeds...................................$ 763
Transaction expenses............................. 77
--------
Net proceeds..................................... 686
Net book value of facility....................... 357
--------
Gain on sale.....................................$ 329
========
The gain realized from the sale was recorded in operating income for the
Saucony segment for the year ending January 3, 2003.
17. Geographic Segment Data
- --- -----------------------
The following table summarizes the Company's operations by geographic area
for the years ended December 31, 2004, January 2, 2004 and January 3, 2003
and assets as of December 31, 2004, January 2, 2004 and January 3, 2003:
2004 2003 2002 Revenues:
United States...................................................$ 127,917 $ 103,718 $ 103,444
Canada.......................................................... 15,340 12,745 11,700
Other international............................................. 23,419 19,982 18,355
------ ------ ------
$ 166,676 $ 136,445 $ 133,499
=========== =========== ===========
International revenues:
United States - sales to foreign distributors...................$ 8,245 $ 6,813 $ 7,048
Canada.......................................................... 15,340 12,745 11,700
Other international............................................. 15,174 13,169 11,307
------ ------ ------
$ 38,759 $ 32,727 $ 30,055
=========== =========== ===========
Inter-area revenues:
United States...................................................$ 253 $ 253 $ 247
Canada.......................................................... 6,915 5,419 6,386
Other international............................................. 4,778 5,399 5,191
----- ----- -----
$ 11,946 $ 11,071 $ 11,824
=========== =========== ===========
Total revenues:
United States...................................................$ 128,170 $ 103,971 $ 103,691
Canada.......................................................... 22,255 18,164 18,086
Other international............................................. 28,197 25,381 23,546
Less: Inter-area eliminations.................................. (11,946) (11,071) (11,824)
------- ------- -------
$ 166,676 $ 136,445 $ 133,499
=========== =========== ===========
Operating income:
United States...................................................$ 9,846 $ 8,303 $ 5,531
Canada.......................................................... 3,522 2,323 1,931
Other international............................................. 4,831 2,473 1,659
Less: Inter-area eliminations.................................. (22) (102) (178)
--- ---- ----
$ 18,177 $ 12,997 $ 8,943
=========== =========== ===========
Assets:
United States...................................................$ 86,031 $ 92,643 $ 81,538
Canada.......................................................... 12,728 9,117 6,906
Other international............................................. 11,071 9,668 9,396
Less: Inter-area eliminations.................................. (13,573) (10,740) (10,300)
------- ------- -------
$ 96,257 $ 100,688 $ 87,540
=========== =========== ===========
Purchases of property, plant and equipment:
United States...................................................$ 4,374 $ 1,361 $ 717
Canada.......................................................... 81 48 27
Other International............................................. 86 258 32
-- --- --
$ 4,541 $ 1,667 $ 777
=========== =========== ===========
Long-lived assets:
United States...................................................$ 11,226 $ 7,469 $ 6,751
Canada.......................................................... 146 107 27
Other international............................................. 248 311 92
--- --- --
$ 11,620 $ 7,887 $ 6,870
=========== =========== ===========
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 credits, environmental charge and the gain on the sale of
our former manufacturing facility.
18. 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
---------------
Consists of Saucony technical running, walking, outdoor trail and Originals
footwear and athletic apparel.
Other Products Segment
----------------------
Consists of Hind athletic apparel, Spot-bilt shoes for coaches and
officials, cleated football and multi-purpose footwear and casual leather
walking and workplace footwear, together with sales of the Company's and
other company's products at the factory outlet stores.
The following table summarizes the results of the Company's operating
segments for the years ended December 31, 2004, January 2, 2004 and January
3, 2003 and identifiable assets as of December 31, 2004, January 2, 2004
and January 3, 2003:
2004 2003 2002
---- ---- ----
Revenues:
Saucony...........................................$ 141,171 $ 112,993 $ 111,035
Other Products.................................... 25,505 23,452 22,464
------ ------ ------
Total.............................................$ 166,676 $ 136,445 $ 133,499
=========== ========== ===========
Pre-tax income (loss):
Saucony...........................................$ 15,373 $ 11,910 $ 10,288
Other Products.................................... 2,386 1,664 (1,007)
Total segment pre-tax income (loss)............... 17,759 13,574 9,281
Provision for income taxes........................ 7,237 4,940 3,865
Minority interest................................. 104 146 173
--- --- ---
Net income...........................................$ 10,418 $ 8,488 $ 5,243
=========== ========== ===========
Assets:
Saucony........................................... 86,644 $ 92,007 $ 75,918
Other Products.................................... 9,613 8,681 11,622
----- ----- ------
Total.............................................$ 96,257 $ 100,688 $ 87,540
=========== ========== ===========
Depreciation and amortization:
Saucony...........................................$ 1,214 $ 1,064 $ 1,332
Other Products.................................... 320 273 265
--- --- ---
Total.............................................$ 1,534 $ 1,337 $ 1,597
=========== ========== ===========
Goodwill, net:
Saucony...........................................$ 19 $ 19 $ 19
Other Products.................................... 893 893 893
--- --- ---
Total.............................................$ 912 $ 912 $ 912
=========== ========== ===========
Interest, net income:
Saucony...........................................$ 306 $ 240 $ 327
Other Products.................................... -- -- --
------ ------ -------
Total.............................................$ 306 $ 240 $ 327
=========== ========== ===========
Components of interest, net
Interest expense..................................$ (8) $ (5) $ (5)
Interest income................................... 314 245 332
--- --- ---
Interest, net...................................$ 306 $ 240 $ 327
=========== ========== ===========
19. Concentration of Credit Risk
- --- ----------------------------
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash, cash equivalents, short-term investments and
trade receivables.
The Company maintains cash and cash equivalents and short-term investments
with various major financial institutions. Cash equivalents and short-term
investments 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 48% and 44% of the
Company's gross trade receivables balance was represented by 15 customers
at December 31, 2004 and January 2, 2004, 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 2004, 2003 or
2002.
20. Financial Instruments
- --- ---------------------
The carrying value of cash, cash equivalents, receivables, and liabilities
approximates fair value due to their short term nature. 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 based on foreign exchange rates as of December 31,
2004. At December 31, 2004 and January 2, 2004, the notional value of the
Company's foreign currency exchange contracts to purchase U.S. dollars was
$8,570 and $7,448, respectively. 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 $420, at
December 31, 2004 and January 2, 2004, against fiscal 2004 and fiscal 2003
earnings, to record the unrealized loss on certain foreign currency
contracts outstanding as of those dates. The charges are recorded in
non-operating expenses. At December 31, 2004 and January 2, 2004, the
unrealized loss on derivatives is recorded in accrued expenses.
21. Quarterly Information
(Unaudited)
2004 Quarter 1 Quarter 2 Quarter 3 Quarter 4(1)
---- --------- --------- --------- ------------
Net sales.........................................$ 46,969 $ 43,979 $ 42,266 $ 32,938
Gross profit...................................... 19,057 18,071 17,469 13,346
Net income (loss)................................. 4,231 3,045 3,458 (316)
Earnings (loss) per share:
Basic:
Class A......................................... 0.63 0.44 0.50 (0.05)
Class B......................................... 0.69 0.49 0.55 (0.05)
Diluted:
Class A......................................... 0.58 0.41 0.45 (0.05)
Class B......................................... 0.64 0.45 0.49 (0.05)
2003 Quarter 1 Quarter 2(2) Quarter 3 Quarter 4 (3)(4)
---- --------- ------------ --------- --------------
Net sales.........................................$ 39,068 $ 34,472 $ 31,978 $ 30,548
Gross profit...................................... 15,196 13,428 12,995 10,834
Net income........................................ 2,603 2,232 2,179 1,474
Earnings per share:
Basic:
Class A......................................... 0.41 0.35 0.34 0.23
Class B......................................... 0.45 0.38 0.37 0.25
Diluted:
Class A......................................... 0.39 0.33 0.32 0.21
Class B......................................... 0.43 0.37 0.35 0.24
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 2004 and 2003.
_________________
(1) The Company recorded a charge of $2,275 to address environmental conditions at the Company's East
Brookfield, Massachusetts distribution facility. See Note 8 for further information relating to
this charge.
(2) The Company settled litigation with the court appointed transfer of a former customer of the
Company which had filed for bankruptcy protection. The Company recorded a pre-tax benefit of $566
to reduce general and administrative expenses. See Note 15 for further discussion on the
litigation settlement.
(3) The Company recorded a charge of $416 to cost of goods sold due to the acceleration of the vesting
of stock warrants issued to five of the Company's footwear suppliers. See Note 13 for further
discussion of the stock warrant vesting acceleration.
(4) The Company recorded a tax benefit of $325 on the reversal of valuation reserves in certain foreign
deferred tax assets.
22. Supplemental Cash Flow Disclosure
- --- ---------------------------------
The following table summarizes additional disclosure of cash flow
information for the years ended December 31, 2004, January 2, 2004 and
January 3, 2003:
2004 2003 2002
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds.................................$ 5,798 $ 5,243 $ 2,036
========= ========= =========
Interest.....................................................$ 5 $ 5 $ 4
========= ========= =========
Non-cash Investing and Financing Activities:
Property purchased under capital leases......................$ 260 $ -- $ --
========= ========= =========
Plant closing and other related charges (credits)................$ -- $ (35) $ (72)
Cash received................................................ -- -- --
Severance and other payments................................. -- -- (51)
--------- --------- ---------
$ -- $ (35) $ (123)
========= ========= =========
Non-cash portion:
Accrued expenses.............................................$ -- $ (35) $ (214)
Property, plant and equipment................................ -- -- 91
--------- --------- ----------
$ -- $ (35) $ (123)
========= ========= =========
In February 2004, two officers who are also directors and principal holders
of the Company's Class A common stock, each delivered 3,609 mature shares
of Class B common stock in payment of their respective option exercises to
purchase 9,999 shares each of the Company's Class B common stock.
SAUCONY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2004, January 2, 2004 and January 3, 2003
(in thousands)
Additions
Balance charged to Deductions Balance
beginning costs and from end
of year expenses reserve of year
------- -------- ------- -------
Allowance for doubtful accounts and discounts:
Year ended December 31, 2004....................................$ 1,108 $ 6,014 $ 5,941 $ 1,181
Year ended January 2, 2004......................................$ 2,406 $ 4,453 $ 5,751 $ 1,108
Year ended January 3, 2003......................................$ 2,457 $ 4,752 $ 4,803 $ 2,406
Environmental accrual:
Year ended December 31, 2004....................................$ -- $ 2,275 $ -- $ 2,275
Year ended January 2, 2004......................................$ -- $ -- $ -- $ --
Year ended January 3, 2003......................................$ -- $ -- $ -- $ --
Exhibit Index
Exhibit
Number Description
3.1 Restated Articles of Organization, as amended, of the Registrant are
incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 2, 2004, as filed
with the Securities and Exchange Commission on April 1, 2004.
3.2 By-Laws, as amended, of the Registrant.
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, as filed with the Securities
and Exchange Commission on November 14, 2002.
10.2 Amendment to Amended and Restated Credit Agreement, dated August 30, 2002,
between Saucony, Inc. and HSBC Bank USA (as successor in interest to State
Street Bank and Trust Company) is incorporated by reference to Exhibit 10.3
to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended July 4, 2003, as filed with the Securities and Exchange Commission on
August 18, 2003.
10.3 Amendment to Amended and Restated Credit Agreement, dated August 30, 2002,
between Saucony, Inc. and HSBC Bank USA, dated January 26, 2004 is
incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 2, 2004, as filed
with the Securities and Exchange Commission on April 1, 2004.
10.4*1993 Equity Incentive Plan, as amended, is incorporated herein by
reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 2, 2004, as filed with the Securities and
Exchange Commission on April 1, 2004.
10.5* Vice President Bonus.
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), as filed with the Securities and Exchange Commission on
July 27, 2001.
10.7*2003 Stock Incentive Plan is incorporated herein by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 4, 2003, as filed with the Securities and Exchange
Commission on August 18, 2003.
10.8*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, as filed with the Securities and
Exchange Commission on November 13, 2000.
10.9*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, as filed with the Securities and
Exchange Commission on November 13, 2000.
10.10* 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, as filed with the Securities and
Exchange Commission on November 13, 2000.
10.11* 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, as filed with the Securities and
Exchange Commission on November 13, 2000.
10.12* Severance Agreement dated as of January 7, 2004 by and between the
Registrant and Wolfgang Schweim is incorporated herein by reference to
Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 2, 2004, as filed with the Securities and Exchange
Commission on April 1, 2004.
10.13* Saucony, Inc. Non-Qualified Retirement Plan is incorporated herein by
reference to Exhibit 10.13 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended July 4, 2003, as filed with the
Securities and Exchange Commission on August 18, 2003.
10.14* Amendment to Employment Agreement dated as of July 31, 2003, by and
between the Registrant and John H. Fisher is incorporated herein by
reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 2, 2004, as filed with the Securities and
Exchange Commission on April 1, 2004.
10.15* Amendment to Employment Agreement dated as of July 31, 2003, by and
between the Registrant and Charles A. Gottesman is incorporated herein by
reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 2, 2004, as filed with the Securities and
Exchange Commission on April 1, 2004.
10.16* Form of Incentive Stock Option Agreement Granted Under 2003 Stock
Incentive Plan, dated December 22, 2003, by and between the Registrant and
each of Michael Umana, Michael Jeppesen, Samuel Ward and Brian Enge is
incorporated herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 2004,
as filed with the Securities and Exchange Commission on May 15, 2004.
10.17Amendment to Amended and Restated Credit Agreement, dated as of August 30,
2002, by and between Saucony, Inc. and HSBC Bank USA, National Association,
dated August 31, 2004 is incorporated herein by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended October 1, 2004, as filed with the Securities and Exchange Commission
on November 15, 2004.
10.18* Retention Agreement dated as of September 9, 2004 by and between the
Registrant and Brian Enge is incorporated herein by reference to Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 1, 2004, as filed with the Securities and Exchange
Commission on November 15, 2004.
10.19* Retention Agreement dated as of September 9, 2004 by and between the
Registrant and Michael Jeppesen is incorporated herein by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended October 1, 2004, as filed with the Securities and
Exchange Commission on November 15, 2004.
10.20* Retention Agreement dated as of September 9, 2004 by and between the
Registrant and Samuel Ward is incorporated herein by reference to Exhibit
10.4 to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 1, 2004, as filed with the Securities and Exchange
Commission on November 15, 2004.
10.21* Retention Agreement dated as of September 9, 2004 by and between the
Registrant and Michael Umana is incorporated herein by reference to Exhibit
10.5 to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 1, 2004, as filed with the Securities and Exchange
Commission on November 15, 2004.
10.22* Retention Agreement dated as of September 9, 2004 by and between the
Registrant and Roger Deschenes is incorporated herein by reference to
Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended October 1, 2004, as filed with the Securities and
Exchange Commission on November 15, 2004.
10.23* Letter Agreement dated as of September 9, 2004 by and between the
Registrant and Michael Umana is incorporated herein by reference to Exhibit
10.7 to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 1, 2004, as filed with the Securities and Exchange
Commission on November 15, 2004.
10.24* Severance Benefit Plan is incorporated herein by reference to Exhibit
10.8 to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 1, 2004, as filed with the Securities and Exchange
Commission on November 15, 2004.
10.25* Summary of Non-Employee Director Compensation.
21 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
31.1 Certification of President and Chief Executive Officer pursuant to Exchange
Act Rule 13a-14(a).
31.2 Certification of the Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a).
32.1 Certification of President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the 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 15(a)(3) of Form 10-K.