Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended January 2, 1998 Commission file number: 0-05083
HYDE ATHLETIC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Centennial Industrial Park, 13 Centennial Drive, Peabody, MA 01960
(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 532-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.33-1/3 par value
(Title of class)
Class B Common Stock, $.33-1/3 par value
(Title of class)
1
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. [ ]
The aggregate market value of voting and non-voting stock held by non-affiliates
of the registrant, as of March 31, 1998 was approximately $20,355,000 (based on
the last sale prices of the Class A Common Stock and Class B Common Stock on
such date as reported on the Nasdaq National Market).
The number of shares of the registrant's Class A Common Stock, $.33-1/3 par
value, and Class B Common Stock, $.33-1/3 par value, outstanding on March 31,
1998 was 2,703,227 and 3,548,087, respectively.
Portions of the following documents are incorporated by reference in this
Report.
Documents Incorporated by Reference
Document Form 10-K Part
Proxy Statement for Annual Meeting of Stockholders Part III
of the Registrant to be held on May 14, 1998, to be
filed with the Securities and Exchange Commission.
2
PART I
ITEM 1 - BUSINESS
Hyde Athletic Industries, Inc. and its subsidiaries (together, "Hyde" or the
"Company") design, develop, manufacture and market (i) a broad line of
performance-oriented athletic shoes for adults under the Saucony(R) brand name,
(ii) high-quality bicycles and bicycle frames under the Quintana Roo(R) and
Merlin(R) names, (iii) athletic apparel under the Hind(R) brand name and (iv)
shoes for coaches and officials under the Spot-Bilt(R) name. The Company's
Saucony athletic footwear products include running, women's walking, cross
training and outdoor trail shoes. The following table sets forth the
approximate contribution to net sales (in dollars and as a percentage of net
sales) attributable to the Company's Saucony product line and other product
lines for the periods and geographic areas indicated. "Other" consists of Spot-
Bilt coaches and officials shoes, Quintana Roo bicycles and wetsuits, Hind
apparel, sales of the Company's and other products at retail factory outlets
operated by the Company and sales of other branded products at the Company's
subsidiary in Australia.
3
Net Sales (1)
(dollars in thousands)
Fiscal 1997 Fiscal 1996 Fiscal 1995
----------------------------- ----------------------------- -----------------------------
Sales Sales Co. Sales Sales Co. Sales Sales Co.
$ % % $ % % $ % %
- - -- - - - --
Saucony
Domestic $ 56,050 71% $ 54,445 69% $ 47,040 67%
International 22,580 29% 24,366 31% 23,628 33%
---------- ------- ---------- ------ ---------- ------
Total $ 78,630 100% 84% $ 78,811 100% 86% $ 70,668 100% 90%
---------- ------- ---------- ------ ---------- ------
Other
Domestic $ 9,552 64% $ 5,791 46% $ 4,021 51%
International 5,429 36% 6,739 54% 3,860 49%
---------- ------- ---------- ------ ---------- ------
Total $ 14,981 100% 16% $ 12,530 100% 14% $ 7,881 100% 10%
---------- ------- ------ ---------- ------ ----- ---------- ------ ------
Grand Total $ 93,611 100% $ 91,341 100% $ 78,549 100%
========== ====== ========== ====== ========== ======
(1) Excludes the results of operations of Brookfield Athletic Co., Inc., substantially all of the assets of which were sold by the
Company in July 1997.
RECENT DEVELOPMENTS
There were a number of developments affecting the Company during 1997 and the
first quarter of 1998. During the second quarter of 1997, the Company commenced
delivery of its Hind apparel to customers. In July 1997, the Company received
proceeds of $6,841,000 in connection with the sale of substantially all of the
assets of its Brookfield Athletic subsidiary. In February 1998, the Company
purchased substantially all of the assets of Merlin Materials, Inc., a high-
quality manufacturer of titanium bicycle frames. Together with the Company's
Quintana Roo subsidiary, Merlin is expected to provide growth opportunities as
the Company expands its line of high-performance athletic products.
During the fourth quarter of fiscal 1997, the financial position of the
Company's Australian subsidiary deteriorated significantly. Principal factors
affecting the operating results and financial position of this subsidiary
included: lower sales of Saucony brand products, excess inventories which were
liquidated in the fourth quarter of 1997, a significant devaluation of the
Australian currency, a reduction in net sales of non-Saucony products due to the
discontinuance of distribution rights in Australia of another brand of athletic
footwear and too high a level of administrative overhead in light of the lower
levels of net sales.
As a consequence of the deterioration in the Australian subsidiary's financial
position, the Company recorded a restructuring charge of $2,766,000 ($3,089,000
after tax, or $0.50 per diluted share) in the fourth quarter of fiscal 1997. In
March 1998, the Company entered into an agreement with its joint venture
partners in its Australian subsidiary pursuant to which the Company will acquire
all of the proprietary interests of such partners in the subsidiary for nominal
consideration and the employment of the managing director of such subsidiary
will be terminated. The Company expects the closing to occur pursuant to such
agreement by no later than May 1, 1998. The Company is in the process of
reassessing its operations in Australia and is evaluating several alternative
methods of continuing its presence in the Australian market.
SAUCONY BRAND. The Company sells performance running, walking, cross training,
and outdoor trail shoes for athletes under the Saucony brand name, which has
been marketed in the United States for over 30 years. The Company assembles
most of its Saucony footwear sold in the United States at its manufacturing
facility in Bangor, Maine, largely with components sourced from independent
manufacturers located overseas. The Company believes that assembly at its
Bangor facility assists in timely and flexible product delivery in the domestic
market. According to ASD/Target Research, Inc., an independent market research
organization ("ASD/Target Research"), the Company ranked sixth in sales of
running shoes in the United States during 1997. In addition, according to
ASD/Target Research, the Company's market share of running shoes sold in the
United States was 4.0% in 1997. The Company believes that a high percentage of
purchasers of Saucony brand footwear buy such products for athletic uses and
that such consumers have greater brand loyalty than athletic shoe purchasers who
buy for casual wear purposes. The Company has several product offerings within
each of the Saucony brand categories. These offerings have different designs
and features, resulting in different cushioning, stability, support
characteristics and prices.
The Company builds its Saucony shoes with a high level of technological
performance characteristics to appeal to athletic users. As a result of the
Company's application of biomechanical technology in the design process, the
Company believes that its Saucony shoes have a distinctive "fit and feel" that
is attractive to athletic users. A key element in the design of Saucony shoes
is an anatomically correct toe and heel configuration that provides support and
comfort throughout the human gait cycle for the particular activity for which
the shoe is designed.
6
Most of the Company's top-of-the-line running and other athletic shoes
incorporate the Company's GRID System, an innovative midsole system that employs
molded strings engineered to create a feeling similar to that of the "sweet
spot" of a tennis racquet. In contrast with conventional athletic shoe
midsoles, the GRID System is designed to react to various stress forces
differently and thereby simultaneously to maximize shock absorption and minimize
rear foot motion.
The Company designs and markets separate lines for men and women within most
Saucony product categories. The Company currently sells approximately the same
percentage of Saucony shoes to men and women. The suggested domestic retail
prices for most Saucony footwear products are in the range of $50 to $85 per
pair, with the Company's top-of-the-line running shoes having suggested domestic
retail prices of up to $110 per pair.
The Company designs its Saucony cross training, women's walking and outdoor
trail shoes with many of the same performance features and "fit and feel"
characteristics as are found in Saucony running shoes. Currently, the Company's
most popular non-running athletic shoe is a women's performance walking shoe.
The Company believes that a line of athletic apparel bearing the Saucony name is
supportive of its athletic footwear products and enhances the visibility of the
Saucony brand. Saucony markets apparel under both the Dave Scott and Saucony
labels. These products carry the same commitment to quality and performance as
the Company's footwear line. The Dave Scott line is an upscale multi-sport and
triathlon collection, while the Saucony apparel line is targeted at the
mainstream running consumer.
OTHER PRODUCTS
7
HIND. In the fourth quarter of 1996, the Company purchased trademarks and
related intellectual property from Hind, Inc. ("Hind"), a performance athletic
apparel company. The Company began delivery of its Hind apparel products to the
retail trade in the second quarter of 1997.
QUINTANA ROO. The Company manufactures and distributes the Quintana Roo line of
triathlon bicycles, road bicycles, mountain bicycles and wet suits through high-
end bicycle stores and sporting goods stores geared to triathletes.
MERLIN. In February 1998, the Company acquired the assets of Merlin Materials,
Inc., a high performance manufacturer of titanium bicycle frames. The Company
is marketing titanium bicycle frames under the Merlin trademark.
SPOT-BILT BRAND. The Company offers Spot-Bilt shoes for coaches and officials
through the distribution channels for its Saucony brand shoes. In addition, the
Company has licensed the Spot-Bilt name to a third party that distributes youth
team field sport shoes under this name. See Note 3 of Notes to Consolidated
Financial Statements.
FACTORY OUTLET STORES. The Company operates five retail factory outlet stores.
To avoid competing against its customers' retail outlets, the Company generally
limits the products offered at these stores to products with cosmetic defects,
products which have been discontinued and certain slow-moving products. The
Company sells Saucony, Hind, Spot-Bilt and Quintana Roo products at these
outlets, as well as athletic accessory goods of third parties.
PRODUCT DEVELOPMENT
The Company believes that the technical performance (i.e., comfort, support and
stability experienced by the athlete) of its Saucony footwear is important to
purchasers of its products. The Company uses consulting services of such
8
professionals as podiatrists, orthopedists, athletes, trainers and coaches as
part of its Saucony product development program. The Company maintains a staff
of 20 persons located in Peabody, Massachusetts to undertake continuing product
development and design. Product development work also is performed for the
Company by its suppliers at their overseas facilities. During the years ended
January 2, 1998, January 3, 1997 and January 5, 1996, the Company expended
$1,438,000, $1,417,000 and $1,513,000, respectively, in connection with its
product development programs, most of which related to Saucony products.
SALES AND MARKETING
SAUCONY BRAND. The Company's Saucony athletic footwear products are sold at
more than 5,000 retail outlets in the United States, primarily higher-end, full-
margin sporting goods chains, independent sporting goods stores, athletic
footwear specialty stores and department stores. Retail outlets include Foot
Locker/Lady Foot Locker, Athlete's Foot, The Sports Authority, Road Runner's
Sport, Sport Mart and Just For Feet. The Company maintains a corporate sales
team that is directly responsible for the sales activity in its largest 50
accounts. The Company also sells its footwear and apparel in the United States
through 13 independent manufacturer agents whose organizations employ
approximately 44 sales representatives.
The Company also maintains a field sales management team to supervise, direct
and evaluate the 44 sales representatives. The Company uses certain state-of-
the-art multi-media presentations for sales and marketing initiatives. The
Company's Website (saucony.com) receives thousands of hits weekly from consumers
looking for new product profiles, race and event data, as well as general
Saucony information.
The Company sells its Saucony products outside the United States in 34 countries
through 19 distributors located throughout the world, including joint venture
9
subsidiaries in which the Company holds controlling interests located in
Australia and Canada and through the Company's subsidiary located in the
Netherlands (which holds the distribution rights to the Company's Saucony
products in the Benelux countries) and a branch office in the United Kingdom.
In 1994, the Company formed a German subsidiary, Saucony Deutschland Vertriebs
GmbH, to provide additional sales and marketing support in Europe and to
undertake sales and marketing of Saucony products in Germany. The primary
overseas markets for the Company's Saucony products are in Western Europe.
To accommodate its customers' requirements and plan for its own product needs,
the Company employs a futures orders program for its Saucony products under
which the Company takes orders well in advance of the selling season for a
particular product and commits to ship the product to the customer in time for
the selling season. The Company affords customers price discounts and extended
payment terms in respect of such advance orders. The Company generally requires
payment at the time that the selling season ends, which increases the Company's
working capital requirements.
Saucony engages in various advertising and promotional programs. The main media
vehicles used are magazines and television. The Company employs many sports
marketing initiatives to drive brand awareness and imagery to athletes.
Examples include Saucony running and racing seen monthly on ESPN, as well as
sponsorship of the L.A. Marathon and Chase Corporate Challenge race series. To
build in-store presence, the Company uses account-specific and in-store
promotions, such as athlete appearances, special events, gift with purchase
programs and employee cost programs.
Although most of the Company's advertising and promotional programs for its
Saucony brand are directed towards ultimate consumers, the Company promotes
these products to the trade through attendance at trade shows and similar
events. The Company employs an advertising program under which it reimburses
participating retailers for a portion of the costs incurred by such retailers in
advertising the Company's Saucony products.
The Company's advertising of non-Saucony products includes advertisements in
magazines and product promotion through attendance at trade shows and similar
events.
BACKLOG; SEASONALITY; DISTRIBUTION. The Company's backlog of unfilled orders
was approximately $42.0 million at January 2, 1998 and $39.7 million at January
3, 1997. The Company expects that all of its backlog at January 2, 1998 will be
shipped in fiscal 1998. While the Company has not generally experienced
material cancellations of orders, orders may be cancelled by customers without
financial penalty, and backlog does not necessarily represent actual future
shipments.
The Company is subject to seasonality in its product sales because of the
different selling seasons for various products. The Company's first three fiscal
quarters are often stronger than the last fiscal quarter due to Saucony product
introductions in January and July and spring sales associated with warmer
weather in the Company's principal markets. The Company distributes its Saucony
and Hind products through its warehouses in Peabody, Massachusetts as well as
through independent warehouse facilities located throughout the world. The
Company distributes its Quintana Roo products through its leased warehouse in
San Marcos, California.
For information about the Company's foreign operations and export sales, see
Note 15 of Notes to Consolidated Financial Statements.
MANUFACTURING
The Company assembles most of its domestically sold Saucony footwear at the
Company's manufacturing facility in Bangor, Maine, largely with components
sourced from independent manufacturers located overseas. Independent overseas
manufacturers produce the balance of the Company's Saucony products and all of
the Company's Spot-Bilt products. Quintana Roo and Merlin products are
manufactured by the Company in San Marcos, California and Cambridge,
Massachusetts, respectively. Hind outsources the manufacturing of all its
products.
The overseas manufacturers that supply products and product components to the
Company are located in the Far East, primarily in China, but also in Taiwan and
Thailand. The Company seeks to develop additional overseas manufacturing
sources from time to time, both to increase its sourcing capacity and to obtain
alternative sources of supply. All products and components produced by foreign
suppliers are manufactured in accordance with product specifications furnished
by the Company. The Company carefully monitors foreign manufacturing operations
and imported products and components to assure compliance with the Company's
design, production and quality requirements.
The number of foreign suppliers and the percentage of the Company's total
foreign production requirements produced by each such supplier vary from time to
time. During fiscal 1997, the Company purchased products from 20 overseas
suppliers. One of such suppliers, located in China, accounted for approximately
41% of the Company's total overseas purchases by dollar volume.
The Company is subject to the usual risks of a business involving foreign
suppliers, such as government regulation of fund transfers, export and import
duties and political and labor instability. The Company has not been materially
affected by any of these factors to date. Substantially all purchases from
foreign suppliers to date have been denominated in United States dollars in
order to reduce the Company's risk from currency fluctuations.
Although the Company has no long-term manufacturing agreements with its overseas
suppliers and competes with other athletic shoe and recreational product
companies (including companies that are much larger than the Company) for access
to production facilities, management believes that the Company's relationships
with its footwear and other suppliers are strong and that it has the ability to
develop, over time, alternative sources in various countries for footwear,
footwear components and other products obtained from its current suppliers.
However, in the event of a supply interruption, the Company's operations could
be materially and adversely affected if a substantial delay occurred in locating
and obtaining alternative sources of supply.
Raw materials required for the manufacture of the Company's products, including
leather, rubber, nylon, titanium, aluminum and other fabrics, are generally
available in the country in which the products are manufactured. The Company
and its suppliers have not experienced any difficulty in satisfying their raw
material needs to date.
TRADE POLICY
The Company's practice of sourcing products and components overseas, with
subsequent importation into the United States, exposes it to possible product
supply disruptions and increased costs in the event of actions by United States
or foreign government agencies adverse to continued trade or the enactment of
legislation that restricts trade. For example, on February 2, 1997, the United
States and China reached an agreement on a four-year textile pact that generally
extends current quota arrangements in Chinese textile and apparel exports to the
United States, but reduces quotas on three occasions -- most recently in
September, 1996 when the United States imposed triple charges for illegally
transshipped merchandise (excluding footwear). China's compliance with the
current textiles agreement is under review by U.S. trade officials.
In addition, Company imports a significant amount of its products and product
components from China. The United States provides China with most-favored-
nation ("MFN") status, allowing China to receive the same tariff treatment that
the United States extends to its "most favored" trading partners.
Notwithstanding this current policy, Congress could seek to revoke MFN for China
or condition its renewal on factors such as China's human rights record.
Recently, there has been heightened scrutiny of extending MFN for China in light
of certain allegations that Chinese nationals may have sought to improperly or
illegally influence members of the Administration or Congress through political
contributions. In addition, there has been increasing concern in Congress with
regard to the growing U.S. trade deficit with China.
The administration of existing U.S. trade laws can also create adverse
consequences for trade with the Company's suppliers. In particular, under
Section 301 of the Trade Act of 1974, as well as "Special 301" and "Super 301,"
the Office of the United States Trade Representative ("USTR") can retaliate
against certain unfair foreign trading practices. For example, in early 1995
such retaliation almost occurred against China in a Special 301 investigation of
China's intellectual property regime. However, on February 26, 1995, the United
States and China reached an agreement in this Special 301 investigation,
avoiding the scheduled imposition of increased tariffs by the United States on
certain products imported from China, including certain footwear products. This
bilateral agreement has extensive compliance features, and China's compliance
with this agreement is currently under review by U.S. trade officials. On May
15, 1996, based on monitoring carried out under Section 306(a) of the Trade Act
of 1974, as amended, the United States considered that China was not
satisfactorily implementing the February 26, 1995 agreement, and proposed to
impose prohibitive tariffs on certain products from China, including certain
textile and apparel, but excluding footwear. Additionally, to prevent import
surges, USTR directed Customs to limit exports of certain textile products by
their date of entry. On June 17, 1996, USTR announced that, based on measures
that China has taken and will take in the future to implement key elements of
the 1995 agreement, the proposed sanctions would not be imposed. On April 30,
1997, the USTR reported that significant progress had occurred in China in late
1996 and early 1997. The Company is unable to predict whether USTR may decide
in the future to impose sanctions or take other actions against China under this
agreement. Also, U.S./ China trade relations, especially with respect to
China's efforts to accede to the World Trade Organization, have been contentious
in the recent past, and the Company cannot predict whether this tension will
interfere with the ability of the Company to import products from China in the
future.
In addition, USTR has identified certain of the Asian countries in which the
Company's suppliers are located as having various foreign trade barriers. As a
result of these or other unfair trade practices as identified by USTR, such
countries could be subject to possible retaliation by the United States under
Super or regular Section 301 authority.
The Company is unable to predict whether additional U.S. customs duties, quotas
or other restrictions may be imposed in the future upon the importation of its
products and/or components as a result of any of the matters discussed above, or
because of similar U.S. or foreign government actions. In addition, the
Company's imports into the United States, the European Union or elsewhere could
be subjected to antidumping duties if an antidumping order that covered the
Company's products were issued in such countries or regions. Such action could
result in increases in the costs of imported footwear, footwear components or
other Company products generally, or limitations on the Company's ability to
import footwear, footwear components or such other products into the United
States. Such occurrences might adversely affect the sales or profitability of
the Company, possibly materially.
COMPETITION
Competition is intense in the markets in which the Company sells its products.
The Company competes with a large number of other companies, both domestic and
foreign. Several competitors are large organizations with diversified product
lines, well-known brands and financial resources substantially greater than
those of the Company. The principal competitors for the Company's Saucony
products are Nike, New Balance and ASICS. The principal competitors for the
Company's Hind products are Nike, Pearl Izumi and Speedo. The principal
competitors for the Company's Quintana Roo and Merlin products are Cannondale
and Trek. The Company believes that the key competitive factors as to its
products are styling, durability, technical performance, product identification
through promotion, brand awareness and price. Customer support services and
E.D.I. (Electronic Data Interchange) are also important competitive factors.
The Company believes that it is competitive in all of these areas.
TRADEMARKS
The Company utilizes trademarks on nearly all of its products and believes that
having distinctive marks is an important factor in marketing its goods. The
Company has federally registered its Saucony(R), Spot-Bilt(R), Hyde(R),
G.R.I.D.(R), Quintana Roo(R), Merlin(R) and Hind(R) marks, among others. The
Company has also registered some of these marks in a number of foreign
countries, including countries in Europe, the Far East, and North, Central and
South America. Although the Company has a foreign trademark registration
program for selected marks, no assurance can be given that it will be able to
register or use such marks in each foreign country in which registration is
sought.
EMPLOYEES
At January 2, 1998, the Company employed approximately 442 people worldwide, of
whom approximately 142 worked at the Company's manufacturing plant in Bangor,
Maine, approximately 28 worked in the Company's Peabody, Massachusetts
warehouse, approximately 29 were sales and marketing personnel, approximately 33
were executive and finance personnel, approximately 20 were product development
and design personnel and the remainder were involved in various other aspects of
the Company's business. Eighty-five of the Company's employees work at foreign
locations. The Company believes that its employee relations are excellent. The
Company has never experienced a strike or other work stoppage. Approximately 20
employees in the Company's Peabody warehouse were represented by a union at
January 2, 1998. None of the Company's other employees is represented by a
union or subject to a collective bargaining agreement.
ITEM 2 - PROPERTIES
The Company's general and executive offices and its main distribution facility
are located in Peabody, Massachusetts, and are owned by the Company. This
facility consists of approximately 175,000 square feet, of which 145,000 square
feet is warehouse space.
The Company owns a factory in Bangor, Maine, containing approximately 82,000
square feet of space, substantially all of which is used for the manufacture of
the Company's Saucony running shoes, mostly with imported components. The
Company also owns a retail store in Bangor, containing approximately 3,000
square feet of space, and a warehouse in East Brookfield, Massachusetts,
containing approximately 100,000 square feet.
The Company's Quintana Roo subsidiary leases approximately 15,000 square feet of
manufacturing office space in San Marcos, California. The Company's Merlin
division leases 13,600 square feet of manufacturing and office space in
Cambridge, Massachusetts.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in routine litigation incident to its business. In
management's opinion, none of these proceedings will have a material adverse
effect on the Company's financial position, operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
- - -------------------- --- --------------------------
John H. Fisher 50 President, Chief Executive Officer
and Director
Charles A. Gottesman 47 Executive Vice President,
Chief Operating Officer, Treasurer
and Director
Wolfgang Schweim 45 President, Saucony International
Arthur E. Rogers, Jr. 35 President, Saucony North America
Roger P. Deschenes 39 Vice President, Controller and
Chief Accounting Officer
Kenneth W. Graham 44 Senior Vice President,
Research & Development/Textiles
Daniel J. Horgan 42 Vice President, Operations
Andrew M. James 41 Vice President, MIS
John H. Fisher has served as Chief Executive Officer of the Company since 1991.
He was elected President and Chief Operating Officer in 1985 after having served
as Executive Vice President from 1981 to 1985 and as Vice President, Sales from
1979 and 1981. Mr. Fisher is a member of the World Federation of Sporting Goods
Industries, is the former Chairman of the Athletic Footwear Council of the
Sporting Goods Manufacturers Association, and is a member of various civic
associations. Mr. Fisher became a director in 1980.
Charles A. Gottesman has served as Executive Vice President and Chief Operating
Officer of the Company since 1992, and served as Executive Vice President,
Finance from 1989 to 1992, Senior Vice President from 1987 to 1989, Vice
President from 1985 to 1987, and Treasurer since 1983. Mr. Gottesman became a
director in 1983 and is the brother-in-law of John H. Fisher.
Wolfgang Schweim became the President of Saucony International in January 1998
after serving as President of the Company's athletic footwear division from June
1994 to January 1998. From 1993 to 1994, Mr. Schweim served as Managing
Director for Saucony Europe. From 1989 to 1993, Mr. Schweim was the German
Managing Director and Marketing Sales Manager for Europe at Asics, an athletic
shoe manufacturer. Prior to 1989, Mr. Schweim worked in sales and marketing
positions with Nike International, Le Coq Sportif and Adidas AG.
Arthur E. Rogers, Jr. became the President of Saucony North America in January
1998. Mr. Rogers re-joined the Company as Senior Director of Global Marketing
in 1994, having previously served as Brand Manager from 1990 - 1992. Most
recently, Mr. Rogers has been the Vice President of North American Sales and
Worldwide Marketing. Prior to joining the Company, Mr. Rogers held various
sales and marketing positions at Proctor & Gamble as well as Converse Shoe,
Inc., an athletic shoe company.
Roger P. Deschenes has served as Vice President, Controller since August 1997,
after having served as Controller and Chief Accounting Officer from October 1995
to August 1997. Mr. Deschenes joined the Company in 1990 as Corporate
Accounting Manager. He was employed at Allen-Bradley, a manufacturing company
and subsidiary of Rockwell International, Corp., from 1987 to 1990 as Financial
and Cost Reporting Supervisor. Mr. Deschenes is a Certified Management
Accountant.
Kenneth W. Graham became Senior Vice President of Research and
Development/Textiles in January 1998 after serving as Senior Vice President of
Research and Development/Manufacturing since 1996. Prior to that Mr. Graham
served as Vice President of Research and Development/Manufacturing. Mr. Graham
joined the Company in 1984 and has served as Manager and Vice President of
Research and Development. Prior to joining the Company, Mr. Graham worked for
seven years with New Balance Athletic Shoe, Inc.
Daniel J. Horgan became Vice President of Operations in September 1995 after
serving as Senior Director of Operations from September 1994 to September 1995.
Mr. Horgan joined the Company in 1982 as Manager of Import and Export
Operations, served as Product Procurement and Distribution Manager from 1985 to
1988, Manager of Production from 1988 to 1992, and Director of International
Trade for the Company from 1992 to 1994.
Andrew M. James joined the Company in February 1984. He has served the Company
as Accounting Manger (1984 - 1988), Assistant Controller (1989 - 1993), Senior
Director of Information Systems (1994 - 1997) and most recently as Vice
President, MIS. Mr. James holds advanced degrees from Washington University
(MBA) and Bentley College (MS).
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock and Class B Common Stock trade on the Nasdaq
National Market under the symbols "HYDEA" and "HYDEB," respectively. The
following table sets forth, for the periods indicated, the actual high and low
sales prices per share of the Class A Common Stock and the Class B Common Stock
as reported by the Nasdaq National Market.
Class A Class B
Common Stock Common Stock
------------ ------------
High Low High Low
---- --- ---- ---
FISCAL YEAR ENDED JANUARY 2, 1998
---------------------------------
First Quarter $ 5-1/4 $ 4-3/8 $ 5-3/8 $ 4-3/8
Second Quarter 5-3/8 4-1/2 5-1/4 4-1/2
Third Quarter 5 3-7/8 5-1/8 4
Fourth Quarter 5-1/8 3-5/8 5-1/8 3-3/8
FISCAL YEAR ENDED JANUARY 3, 1997
---------------------------------
First Quarter $ 4-3/8 $ 3-5/8 $ 4-1/4 $ 3-3/16
Second Quarter 6-3/4 3-5/8 5-13/16 3-1/4
Third Quarter 6-1/2 4-1/2 5-15/16 4-3/4
Fourth Quarter 5-1/2 4-3/8 5-1/2 4-1/2
There were 375 and 354 stockholders of record of the Class A Common Stock and
Class B Common Stock, respectively, on March 17, 1998.
The Company does not anticipate paying any cash dividends in the foreseeable
future on the shares of Class A Common Stock or Class B Common Stock. The
Company currently intends to retain future earnings to fund the development and
growth of its business. The Company's note agreement with an insurance company
contains certain covenants restricting the cash dividends which may be paid by
the Company. As of January 2, 1998, approximately $11,143,000 was available for
payment of cash dividends under the terms of these covenants. Additionally, the
Company's credit facility agreement with two banks further restricts the payment
or declaration of any dividend or other distributions to stockholders, in money
or property, except in shares of its own Common Stock. Each share of Class B
Common Stock is entitled to a regular cash dividend equal to 110% of the regular
cash dividend, if any, payable on a share of Class A Common Stock.
ITEM 6 - SELECTED FINANCIAL DATA
Selected Income Statement Data (in thousands; per share amounts in dollars)
Year Year Year Year Year
Ended Ended Ended Ended Ended
January 2, January 3, January 5, December 30, December 31,
1998 1997 1996 1994 1993
---- ---- ---- ---- ----
Net sales $ 93,611 $ 91,341 $ 78,549 $ 83,055 $ 84,482
Income (loss) from continuing operations before
interest, income taxes and minority interest (2,566) 2,785 1,291 4,491 9,027
Minority interest in income (loss) of
consolidated subsidiaries (123) 308 (286) 9 (47)
Income (loss) from continuing operations (3,826) 1,349 522 2,085 4,727
Discontinued operations:(1)
Income (loss) from discontinued operations (394) 145 1,069 851 (119)
Loss on disposal of Brookfield Athletic Co., Inc. (498) -- -- -- --
Net income (loss) (4,718) 1,494 1,591 2,937 4,608
Earnings per common share - basic (2)
Income (loss) from continuing operations $ (0.62) $ 0.22 $ 0.08 $ 0.32 $ 0.78
Income (loss) from discontinued operations (0.14) 0.02 0.18 0.14 (0.02)
--------- --------- --------- --------- -----------
Net income (loss) per common share - basic $ (0.76) $ 0.24 $ 0.26 $ 0.46 $ 0.76
========== ========= ========= ========= ==========
24
Earnings per common share - diluted (2)
Income (loss) from continuing operations $ (0.62) $ 0.22 $ 0.08 $ 0.32 $ 0.78
Income (loss) from discontinued operations (0.14) 0.02 0.18 0.14 (0.02)
--------- ---- ---- --------- -----------
Net income (loss) per common share - diluted $ (0.76) $ 0.24 $ 0.26 $ 0.46 $ 0.76
========== ========= ========= ========= ==========
Weighted average common shares and
equivalents outstanding (2) 6,240 6,268 6,244 6,446 6,057
Cash dividends per share of common stock -- -- -- -- --
Selected Balance Sheet Data
January 2, January 3, January 5, December 30, December 31,
1998 1997 1996 1994 1993
---- ---- ---- ---- ----
Current assets $ 50,295 $ 58,726 $ 59,190 $ 61,621 $ 58,121
Current liabilities 13,315 13,963 14,728 15,657 13,372
Working capital 36,980 44,763 44,462 45,964 44,747
Total assets 61,624 71,346 69,471 77,082 73,693
Long-term debt and capitalized lease
obligations, net of current portion 771 4,893 4,205 11,922 12,942
Stockholders' equity 45,278 50,078 48,365 46,754 44,709
25
- - ---------------------------
(1) See Note 13 of the Notes to Consolidated Financial Statements regarding discontinued operations.
(2) See Notes 1 and 11 of the Notes to Consolidated Financial Statements regarding the adoption of Statement of Financial
Accounting Standards 128 (SFAS 128) in fiscal 1997. SFAS 128 requires the restatement of all previously reported per share
amounts.
- - --
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Selected Quarterly Financial Results
The following tables sets forth certain unaudited quarterly financial data of
the Company for each of the four fiscal quarters in each of fiscal 1997, 1996
and 1995. The Company believes that this information has been prepared on the
same basis as the audited Consolidated Financial Statements and that all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the selected
quarterly information when read in conjunction with the audited Consolidated
Financial Statements and the Notes thereto.
Quarters Ended
(Unaudited)
(in thousands; per share amounts in dollars)
April 4, July 4, October 3, January 2,
1997 1997 1997 1998
---- ---- ---- ----
STATEMENT OF INCOME DATA:
Saucony
Domestic $ 14,914 $ 16,260 $ 14,221 $ 10,655
International 6,352 4,879 6,488 4,861
--------- --------- --------- ---------
Saucony Total 21,266 21,139 20,709 15,516
--------- --------- --------- ---------
Other
Domestic 1,500 2,013 3,016 3,023
International 2,451 1,246 910 822
--------- --------- --------- ---------
Other Total 3,951 3,259 3,926 3,845
--------- --------- --------- ---------
Net sales 25,217 24,398 24,635 19,361
Other income (expense) (151) 101 314 (544)
---------- --------- --------- ----------
Total revenue 25,066 24,499 24,949 18,817
--------- --------- --------- ---------
Costs and expenses
Cost of sales 16,632 15,848 16,213 13,478
Selling expenses 3,964 4,565 4,076 4,093
General and administrative expenses 3,234 3,458 3,449 3,271
Writedown of assets -- 850 -- --
Restructuring of Australian operations -- -- -- 2,766
Interest expense 249 251 165 223
--------- --------- --------- ---------
Total costs and expenses 24,079 24,972 23,903 23,831
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes and minority interest 987 (473) 1,046 (5,014)
Provision (benefit) for income taxes 382 (171) 419 (135)
Minority interest in income (loss) of consolidated subsidiaries 35 (182) 46 (22)
--------- ---------- --------- ----------
Income (loss) from continuing operations 570 (120) 581 (4,857)
Discontinued operations:
Loss from discontinued operations (net of tax provision
(benefit) ($190) and ($72), respectively) (287) (107) -- --
Loss on disposal of Brookfield Athletic Co., Inc. including
operating loss of $243 during the phase-out period
(net of tax provision (benefit) of ($153), ($128) and ($42) -- (241) (172) (85)
--------- ---------- ---------- ----------
Net income (loss) $ 283 $ (468) $ 409 $ (4,942)
========= ========== ========= ==========
Earnings per common share - basic:
Income (loss) from continuing operations $ 0.10 $ (0.02) $ 0.09 $ (0.78)
Income (loss) from discontinued operations (0.05) (0.05) (0.02) (0.01)
---------- ---------- ---------- ----------
Net income (loss) per common share - basic $ 0.05 $ (0.07) $ 0.07 $ (0.79)
========= ========== ========= ==========
Earnings per common share - diluted
Income (loss) from continuing operations $ 0.10 $ (0.02) $ 0.09 $ (0.78)
Income (loss) from discontinued operations (0.05) (0.05) (0.02) (0.01)
---------- ---------- ---------- ----------
Net income (loss) per common share - diluted $ 0.05 $ (0.07) $ 0.07 $ (0.79)
========= ========== ========= ==========
Weighted average common shares and equivalent outstanding 6,270 6,237 6,264 6,249
========= ========= ========= =========
Statement of Income Data as a Percentage of Net Sales:
Quarters Ended
(Unaudited)
April 4, July 4, October 3, January 2,
1997 1997 1997 1998
---- ---- ---- ----
Saucony
Domestic 59.1% 66.6% 57.8% 55.0%
International 25.2% 20.0% 26.3% 25.1%
--------- -------- --------- ---------
Saucony Total 84.3% 86.6% 84.1% 80.1%
--------- -------- --------- ---------
Other
Domestic 5.9% 8.3% 12.2% 15.8%
International 9.8% 5.1% 3.7% 4.1%
--------- -------- --------- ---------
Other Total 15.7% 13.4% 15.9% 19.9%
--------- -------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Other income (expense) (0.6%) 0.4% 1.3% (2.8%)
---------- -------- --------- ----------
Total revenue 99.4% 100.4% 101.3% 97.2%
--------- -------- --------- ---------
Costs and expenses
Cost of sales 66.0% 65.0% 65.8% 69.6%
Selling expenses 15.7% 18.7% 16.5% 21.1%
32
General and administrative expenses 12.8% 14.2% 14.0% 16.9%
Writedown of assets 0.0% 3.4% 0.0% 0.0%
Restructuring of Australian operations -- -- -- 14.4%
Interest expense 1.0% 1.0% 0.7% 1.2%
--------- -------- --------- ---------
Total costs and expenses 95.5% 102.3% 97.0% 123.1%
--------- -------- --------- ---------
Income (loss) from continuing operations
before income taxes and minority interest 3.9% (1.9%) 4.3% (25.9%)
Provision (benefit) for income taxes 1.5% (0.7%) 1.7% (0.7%)
Minority interest in income (loss) of
consolidated subsidiaries 0.2% (0.7%) 0.2% (0.1%)
--------- --------- --------- ----------
Income (loss) from continuing operations 2.2% (0.5%) 2.4% (25.1%)
Discontinued operations:
Loss from discontinued operations
(net of tax) (1.1%) (0.4%) 0.0% 0.0%
Loss on disposal of Brookfield Athletic
Co., Inc. including operating loss during
the phase-out period (net of tax) 0.0% (1.0%) (0.7%) (0.5%)
--------- --------- ---------- ----------
Net income (loss) 1.1% (1.9%) 1.7% (25.6%)
======== ========= ========= ==========
33
35
Selected Quarterly Financial Results
Quarters Ended
(Unaudited)
(in thousands; per share amounts in dollars)
April 5, July 5, October 4, January 3,
1996 1996 1996 1997
---- ---- ---- ----
Saucony
Domestic $ 18,569 $ 15,688 $ 10,796 $ 9,392
International 7,140 5,489 6,418 5,319
-------- --------- --------- ---------
Saucony Total 25,709 21,177 17,214 14,711
-------- --------- --------- ---------
Other
Domestic 1,397 1,735 1,343 1,316
International 1,532 1,484 2,052 1,671
-------- --------- --------- ---------
Other Total 2,929 3,219 3,395 2,987
-------- --------- --------- ---------
Net sales 28,638 24,396 20,609 17,698
Other income 239 355 84 300
-------- --------- --------- ---------
Total revenue 28,877 24,751 20,693 17,998
-------- --------- --------- ---------
Costs and expenses
36
Cost of sales 19,850 16,854 13,402 11,586
Selling expenses 4,223 4,478 3,626 3,738
General and administrative expenses 2,907 2,741 2,984 3,145
Interest expense 258 222 180 143
-------- --------- --------- ---------
Total costs and expenses 27,238 24,295 20,192 18,612
-------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes and minority interest 1,639 456 501 (614)
Provision (benefit) for income taxes 621 136 134 (566)
Minority interest in income (loss) of
consolidated subsidiaries 135 93 147 (67)
-------- --------- --------- ----------
Income from continuing operations 883 227 220 19
Discontinued operations:
Income (loss) from discontinued operations
(net of tax provision (benefit) of ($95),
($75), $258 and $15, respectively) (143) (114) 383 19
--------- ---------- --------- ---------
Net income $ 740 $ 113 $ 603 $ 38
======== ========= ========= =========
Earnings per common share - basic:
Income from continuing operations $ 0.14 $ 0.04 $ 0.04 $ 0.01
Income (loss) from discontinued operations (0.02) (0.02) 0.06 0.00
37
--------- ---------- --------- ---------
Net income per common share - basic $ 0.12 $ 0.02 $ 0.10 $ 0.01
======= ========= ========= =========
Earnings per common share - diluted:
Income from continuing operations $ 0.14 $ 0.04 $ 0.04 $ 0.01
Income (loss) from discontinued operations (0.02) (0.02) 0.06 0.00
--------- ---------- --------- ---------
Net income per common share - diluted $ 0.12 $ 0.02 $ 0.10 $ 0.01
======= ========= ========= =========
Weighted average common shares and
equivalent outstanding 6,226 6,244 6,269 6,269
======== ========= ========= =========
Statement of Income Data as a Percentage of Net Sales
Quarters Ended
(Unaudited)
April 5, July 5, October 4, January 3,
1996 1996 1996 1997
---- ---- ---- ----
Saucony
Domestic 64.9% 64.3% 52.4% 53.1%
International 24.9% 22.5% 31.1% 30.0%
--------- -------- --------- ---------
Saucony Total 89.8% 86.8% 83.5% 83.1%
--------- -------- --------- ---------
Other
Domestic 4.8% 7.1% 6.5% 7.4%
International 5.4% 6.1% 10.0% 9.5%
--------- -------- --------- ---------
Other Total 10.2% 13.2% 16.5% 16.9%
--------- -------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Other income 0.8% 1.5% 0.4% 1.7%
--------- -------- --------- ---------
Total revenue 100.8% 101.5% 100.4% 101.7%
--------- -------- --------- ---------
40
Costs and expenses
Cost of sales 69.3% 69.1% 65.0% 65.5%
Selling expenses 14.7% 18.4% 17.6% 21.1%
General and administrative expenses 10.2% 11.2% 14.5% 17.8%
Interest expense 0.9% 0.9% 0.9% 0.8%
--------- -------- --------- ---------
Total costs and expenses 95.1% 99.6% 98.0% 105.2%
--------- -------- --------- ---------
Income (loss) from continuing operations before
income taxes and minority interest 5.7% 1.9% 2.4% (3.5%)
Provision (benefit) for income taxes 2.1% 0.6% 0.7% (3.2%)
Minority interest in income (loss) of
consolidated subsidiaries 0.5% 0.3% 0.7% (0.4%)
--------- -------- --------- ----------
Income from continuing operations 3.1% 1.0% 1.0% 0.1%
Discontinued operations:
Income (loss) from discontinued operations
(net of tax) (0.5%) (0.5%) 1.9% 0.1%
---------- --------- --------- ---------
Net income 2.6% 0.5% 2.9% 0.2%
========= ======== ========= =========
42
Selected Quarterly Financial Results
Quarters Ended
(Unaudited)
(in thousands; per share amounts in dollars)
March 31, June 30, September 29, January 5,
1995 1995 1995 1996
---- ---- ---- ----
Saucony
Domestic $ 16,146 $ 12,778 $ 9,959 $ 8,157
International 7,146 5,776 5,487 5,219
-------- --------- --------- ---------
Saucony Total 23,292 18,554 15,446 13,376
-------- --------- --------- ---------
Other
Domestic 745 1,186 1,142 948
International 1,477 559 916 908
-------- --------- --------- ---------
Other Total 2,222 1,745 2,058 1,856
-------- --------- --------- ---------
Net sales 25,514 20,299 17,504 15,232
Other income 68 524 379 120
-------- --------- --------- ---------
Total revenue 25,582 20,823 17,883 15,352
-------- --------- --------- ---------
Costs and expenses
43
Cost of sales 16,897 13,330 11,495 10,973
Selling expenses 4,389 3,916 3,813 2,393
General and administrative expenses 3,138 2,609 2,762 2,634
Interest expense 367 273 161 262
-------- --------- --------- ---------
Total costs and expenses 24,791 20,128 18,231 16,262
-------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes and minority interest 791 695 (348) (910)
Provision (benefit) for income taxes 289 249 (146) (400)
Minority interest in income (loss) of
consolidated subsidiaries 28 (114) 25 (225)
-------- ---------- --------- ----------
Income (loss) from continuing operations 474 560 (227) (285)
Discontinued operations:
Income from discontinued operations
(net of tax provision of $129, $212, $367
and $16, respectively) 155 279 546 89
-------- --------- --------- ---------
Net income (loss) $ 629 $ 839 $ 319 $ (196)
======== ========= ========= ==========
Earnings per common share - basic:
Income (loss) from continuing operations $ 0.08 $ 0.09 $ (0.04) $ (0.04)
Income from discontinued operations 0.02 0.04 0.09 0.01
44
-------- --------- --------- --------
Net income (loss) per common share - basic $ 0.10 $ 0.13 $ 0.05 $ (0.03)
======== ========= ========= =========
Earnings per common share - diluted:
Income (loss) from continuing operations $ 0.08 $ 0.09 $ (0.04) $ (0.04)
Income from discontinued operations 0.02 0.04 0.09 0.01
-------- --------- --------- --------
Net income (loss) per common share - diluted $ 0.10 $ 0.13 $ 0.05 $ (0.03)
======== ========= ========= =========
Weighted average common shares and
equivalent outstanding 6,253 6,246 6,217 6,217
======== ========= ========= =========
46
Statement of Income Data as a Percentage of Net Sales
Quarters Ended
(Unaudited)
March 31, June 30, September 29, January 5,
1995 1995 1995 1996
---- ---- ---- ----
Saucony
Domestic 63.3% 62.9% 56.9% 53.5%
International 28.0% 28.5% 31.3% 34.3%
--------- -------- --------- ---------
Saucony Total 91.3% 91.4% 88.2% 87.8%
--------- -------- --------- ---------
Other
Domestic 2.9% 5.8% 6.6% 6.2%
International 5.8% 2.8% 5.2% 6.0%
--------- -------- --------- ---------
Other Total 8.7% 8.6% 11.8% 12.2%
--------- -------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Other income 0.3% 2.6% 2.2% 0.8%
--------- -------- --------- ---------
Total revenue 100.3% 102.6% 102.2% 100.8%
--------- -------- --------- ---------
47
Costs and expenses
Cost of sales 66.2% 65.7% 65.7% 72.1%
Selling expenses 17.2% 19.3% 21.8% 15.7%
General and administrative expenses 12.3% 12.9% 15.8% 17.3%
Interest expense 1.5% 1.3% 0.9% 1.7%
--------- -------- --------- ---------
Total costs and expenses 97.2% 99.2% 104.2% 106.8%
--------- -------- ------ ---------
Income (loss) from continuing operations before
income taxes and minority interest 3.1% 3.4% (2.0%) (6.0%)
Provision (benefit) for income taxes 1.1% 1.2% (0.8%) (2.6%)
Minority interest in income (loss) of
consolidated subsidiaries 0.1% (0.6%) 0.1% (1.5%)
-------- --------- --------- ----------
Income (loss) from continuing operations 1.9% 2.8% (1.3%) (1.9%)
Discontinued operations:
Income from discontinued operations
(net of tax) 0.6% 1.3% 3.1% 0.6%
--------- -------- --------- ---------
Net income (loss) 2.5% 4.1% 1.8% (1.3%)
========= ======== ========= ==========
This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forwarding-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
FISCAL 1997 COMPARED TO FISCAL 1996
The Company had a net loss of $4,718,000, or $0.76 per diluted share, in fiscal
1997 as compared to net income of $1,494,000, or $0.24 per diluted share, in
fiscal 1996. The Company had a loss from continuing operations of $3,826,000,
or $0.62 per diluted share, in fiscal 1997 as compared to income from
continuing operations of $1,349,000, or $0.22 per diluted share, in fiscal
1996. The Company had a loss from discontinued operations of $892,000,
or $0.14 per diluted share, in fiscal 1997 as compared to income from
discontinued operations of $145,000, or $0.02 per diluted share, in fiscal
1996.
The loss from continuing operations realized in fiscal 1997 was due
primarily to the operations and financial condition of the Company's
Australian subsidiary.
Factors affecting the operating results of the Company's Australian subsidiary
in fiscal 1997 included lower sales of Saucony brand products, excess
inventories which were liquidated in the fourth quarter of 1997, a significant
devaluation of the Australian currency, reduction in net sales of other products
due to the discontinuance of distribution rights of another brand of athletic
footwear and to a high level of administrative overhead in light of lower levels
49
of net sales. As a consequence of the deterioration in the Australian
subsidiary's financial position, the Company recorded a restructuring charge of
$2,766,000 ($3,089,000 after tax, or $0.50 per diluted share) in the fourth
quarter of fiscal 1997. See Note 14 of Notes to Consolidated Financial
Statements.
In addition, the Company recorded a non-recurring charge of $850,000 ($508,000
after tax, or $0.08 per share diluted) in the second quarter of fiscal 1997,
reducing the carrying value of the Company's distribution facility in East
Brookfield, Massachusetts, to market.
The loss from discontinued operations in fiscal 1997 resulted from the sale of
substantially all of the assets of the Company's wholly owned subsidiary,
Brookfield Athletic Co., Inc., as well as operating losses incurred by
Brookfield subsequent to the transaction measurement date. See Note 13 of Notes
to Consolidated Financial Statements.
The Company's net sales increased 3% to $93,611,000 in fiscal 1997 from
$91,341,000 in fiscal 1996. Net sales of the Company's Saucony products
decreased .2% to $78,630,000 in fiscal 1997 from $78,811,000 in fiscal 1996, due
primarily to decreased footwear unit volume and unfavorable currency exchange.
Saucony domestic net sales increased 3% to $56,050,000 in fiscal 1997 from
$54,445,000 in fiscal 1996, primarily due to higher selling prices of the
Company's recently introduced products, and, to a lesser extent, increased unit
volume. Saucony foreign net sales decreased 7% to $22,580,000 in fiscal 1997
from $24,366,000 in fiscal 1996, due primarily to decreased footwear unit volume
and, to a lesser extent, unfavorable currency exchange, offset in part by
increased apparel sales.
Net sales of other products increased 20% to $14,981,000 in fiscal 1997 from
$12,530,000 in fiscal 1996, due to increased sales by the Company's wholly owned
subsidiary, Quintana Roo, Inc. (Quintana Roo), and sales of Hind apparel, which
50
were offset to some extent by decreased sales of non-corporate brand products by
the Company's Australian subsidiary. The Company acquired trademarks and
related intellectual property from Hind, Inc. in December, 1996 and began to
ship Hind products in the second quarter of 1997.
Other income (expense) decreased 129% to ($280,000) in fiscal 1997 from $978,000
in fiscal 1996 due primarily to foreign currency transaction losses on U.S.
dollar-denominated obligations held by certain of the Company's foreign
subsidiaries.
The Company's gross profit increased 6% to $31,440,000 in fiscal 1997 from
$29,649,000 in fiscal 1996. The Company's gross margin increased to 33.6% in
fiscal 1997 from 32.5% in fiscal 1996, due primarily to increased margin for
Saucony products. The gross margin for Saucony products in fiscal 1996
reflected a significant level of unit volume of slow-moving, non-current models
and lower-margin special make-up footwear. These factors, and, to a lesser
extent, decreased freight costs and reduced manufacturing costs in fiscal 1997,
primarily accounted for the gross margin increase for Saucony products in fiscal
1997. The gross margin improvement for Saucony products in fiscal 1997 was
limited by a significant decline in gross margin realized by the Company's
Australian subsidiary during the fourth fiscal quarter of 1997 which was due to
increased sales of non-current models.
Selling, general and administrative expenses increased to $30,110,000, or 32.2%
of net sales, in fiscal 1997 from $27,842,000, or 30.5% of net sales, in fiscal
1996. Advertising and promotion expenses decreased $200,000 in fiscal 1997 due
primarily to decreased Saucony domestic television and media advertising and
reduced spending by the Company's foreign subsidiaries, offset in part by
increased account specific promotions. Selling expenses increased $833,000 in
fiscal 1997 due to increased payroll costs and selling and marketing expenses
related to the introduction of Hind apparel and to increases in domestic and
foreign sales staffs. General and administrative expenses increased $1,635,000
51
in fiscal 1997 due to increased costs related to the Company's upgraded
information system, increased professional fees, higher domestic payroll costs,
increased provisions for doubtful debts and increased administrative costs
attributable to the introduction of Hind apparel and continued expansion of
Quintana Roo's infrastructure.
The Company recorded a non-recurring charge of $850,000 ($508,000 after tax or
$0.08 per diluted share ) in fiscal 1997 to reduce the carrying value of the
Company's distribution facility in East Brookfield, Massachusetts to market. In
addition, the Company recorded a non-recurring charge of $821,000, which
includes operating losses of $243,000 during the phase-out period ($498,000
after tax or $0.07 per diluted share) in fiscal 1997 in connection with the
disposal of the assets of Brookfield Athletic Co., Inc., a wholly-owned
subsidiary of the Company.
In the fourth quarter of 1997, the Company recorded a restructuring charge of
$2,766,000 ($3,089,000 after tax or $0.50 per diluted share) associated with the
restructuring of the Company's Australian subsidiary. The restructuring charge
consisted of asset write-downs to estimated realizable values, as follows:
accounts receivable, $858,000, inventories, $1,340,000 and prepaid expenses and
other assets, $568,000. The Company recorded a deferred tax valuation allowance
of $999,000 relating to net operating loss carryforwards of the Australian
subsidiary which are not expected to be realized. In addition, the Company
forgave $1,691,000 of intercompany trade receivables owed by the Australian
subsidiary, resulting in a tax benefit of $676,000.
Interest expense increased 11% to $888,000 in fiscal 1997 from $803,000 in
fiscal 1996 due to increase borrowings on the Company's demand credit facility
and increased asset-based borrowing. Increased working capital requirements
caused the Company's borrowing in the first half of fiscal 1997 to substantially
exceed its borrowings in the second half of the year. The Company used a
portion of the $6,841,000 received in the second half of fiscal 1997 from the
52
July 4, 1997 sale of substantially all of the assets of the Company's Brookfield
subsidiary to pay down the borrowings.
The provision for income taxes increased to $495,000 in fiscal 1997 from
$325,000 in fiscal 1996, due to the deferred tax valuation allowance recorded in
fiscal 1997 relating to foreign net operating loss carryforwards that are not
expected to be realized. The effective tax rate decreased by 2.1% to 14.3% in
fiscal 1997 from 16.4% in fiscal 1996 due primarily to recording the deferred
tax valuation allowance in fiscal 1997 and from a shift in the composition of
foreign and domestic pre-tax profits and losses.
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's net income decreased by 6% to $1,494,000, or $0.24 per diluted
share, in fiscal 1996 as compared to $1,591,000, or $0.26 per diluted share, in
fiscal 1995. Income from continuing operations increased 58% to $1,349,000, or
$0.22 per diluted share, in fiscal 1996 from $582,000, or $0.08 per diluted
share, in fiscal 1995. Income from discontinued operations decreased 86% to
$145,000, or $0.02 per diluted share, in fiscal 1996 from $1,069,000, or $0.18
per diluted share, in fiscal 1995.
The Company's net sales increased 16% to $91,341,000 in fiscal 1996 from
$78,549,000 in fiscal 1995. Net sales of the Company's Saucony products
increased 12% to $78,811,000 in fiscal 1996 from $70,668,000 in fiscal 1995 due
primarily to higher selling prices and, to a lesser extent, increased unit
shipment volume. The Company believes that the increase resulted from technical
and cosmetic improvements to its Saucony products in 1996. Saucony domestic net
sales increased 16% to $54,445,000 in fiscal 1996 from $47,040,000 in fiscal
1995, due to higher selling prices of the Company's recently introduced products
in comparison with the Company's existing products and increased unit shipment
volume. Saucony foreign net sales increased 3% to $24,366,000 in fiscal 1996
53
from $23,628,000 in fiscal 1995, due primarily to higher selling prices and, to
a lesser extent, favorable currency exchange.
Net sales of other products increased 59% to $12,530,000 in fiscal 1996 from
$7,881,000 in fiscal 1995, due primarily to additional sales from the Company's
wholly owned subsidiary, Quintana Roo, which was acquired in August 1995, and
increased sales of non-corporate brands by the Company's Australian subsidiary.
Other income decreased 10% to $978,000 in fiscal 1996 from $1,091,000 in fiscal
1995, due to the gain on the sale of the Company's investment in a limited
partnership which was recognized in fiscal 1995.
The Company's gross profit increased 15% to $29,649,000 in fiscal 1996 from
$25,854,000 in fiscal 1995. The Company's gross margin decreased to 32.5% in
fiscal 1996 from 32.9% in fiscal 1995 reflecting decreased margins for Saucony
products. The gross margin decrease for Saucony products resulted from the
shipment of a single slow-moving, non-current model, increased sales of lower-
margin footwear and, to a lesser extent, increased freight costs.
Selling, general and administrative expenses increased to $27,842,000, or 30.5%
of net sales, in fiscal 1996 from $25,654,000, or 32.7% of net sales, in fiscal
1995. Advertising and promotion expenses increased $1,233,000 in fiscal 1996
due primarily to increased Saucony domestic television and print media
advertising and, to a lesser extent, increased sponsorship of athletes. Selling
expenses increased by $321,000 in fiscal 1996 due to increased selling payroll
and travel costs, offset to some extent by management's initiative to reduce
commissions on sales of Saucony products. General and administrative expenses
increased $634,000 in fiscal 1996, due to increased administrative costs related
to Quintana Roo and increased foreign costs for payroll due to increased
staffing at several of the Company's foreign subsidiaries and increased
professional fees.
54
Interest expense decreased 24% to $803,000 in fiscal 1996 from $1,063,000 in
fiscal 1995, reflecting the paydown of the Company's senior notes and debt
reduction realized as a result of the sale by the Company of its limited
partnership investment.
The effective tax rate increased 19.9%, to 16.4% in fiscal 1996 from (3.5%) in
fiscal 1995, due to a shift in the international mix of pre-tax earnings among
taxing jurisdictions. During 1996, the Company recovered low income housing tax
credits, which had previously been recaptured and reversed a foreign tax
valuation allowance. The low-income housing tax credit recovery is a non-
recurring event.
LIQUIDITY AND CAPITAL RESOURCES
As of January 2, 1998, the Company's cash and cash equivalents totaled
$4,432,000, an increase of $1,629,000 from January 3, 1997. The increase was
the result of the receipt of $6,841,000 from the sale of substantially all of
the net assets of the Company's wholly owned subsidiary, Brookfield Athletic
Co., Inc. The increase was offset in part by an increase in accounts receivable
of $2,170,000, net of the provision for bad debts and discounts of $4,887,000,
and an increase in inventories of $1,301,000. The increase in accounts
receivable was due to increased net sales of the Company's Saucony products and
Hind products in the fourth quarter of fiscal 1997. The Company's days sales
outstanding for its accounts receivable decreased to 92 days at the end of
fiscal 1997 from 95 days at the end of fiscal 1996. Inventories increased in
fiscal 1997 due to the buildup of Hind apparel inventory. The Company's
inventory turn ratio decreased to 2.5 turns in fiscal 1997 from 2.6 turns in
fiscal 1996.
During fiscal 1997, the Company used $1,422,000 of net cash in operating
activities, expended $1,331,000 to acquire capital assets and information
55
technology, decreased short-term borrowings by $1,063,000, expended $2,711,000
to reduce long-term debt, received $511,000 from the sale of capital assets,
principally the sale of the Company's facility in Australia, and expended
$140,000 to acquire the remaining shares held by the minority shareholder in the
Company's Dutch subsidiary. Current maturities of long-term debt increased
$1,190,000 in fiscal 1997 due primarily to the reclassification of a note
payable due on January 30, 1998 from long-term debt.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting the operating cash flows in fiscal
1997 included the restructuring charge of $2,766,000 ($3,089,000 after tax or
$0.50 per diluted share) to write-down assets of the Company's Australian
subsidiary to estimated realizable value, net cash provided by discontinued
operations of $2,227,000, an increase in prepaid expenses of $539,000 (due to
advanced payments for advertising and inventory) , a decrease in accrued
expenses of $296,000 (due to a change in sales commissions payment terms) and an
increase in accounts payable and accrued letters of credit of $307,000 (due to
the timing of inventory purchases). The strengthening of the U.S. dollar in
fiscal 1997 increased the value of cash and cash equivalents by $905,000.
As of January 3, 1997, the Company's cash and cash equivalents totaled
$2,803,000, a decrease of $8,865,000 from January 5, 1996. The decrease was the
result of an increase in accounts receivable of $4,669,000, net of the provision
for bad debts and discounts of $5,269,000, an increase of $1,158,000 in
inventory during fiscal 1996 and the acquisition of trademarks and trade names
of an athletic apparel manufacturer for $1,250,000. The increase in accounts
receivable was due to increased net sales of the Company's Saucony products in
the fourth quarter of fiscal 1996 and extended payment terms given to certain of
the Company's customers. The Company's days sales outstanding for its accounts
receivable increased to 95 days at the end of fiscal 1996 from 79 days at the
end of fiscal 1995. Inventories increased in fiscal 1996 due to an increase in
production at the Company's Bangor manufacturing facility and a higher level of
56
finished goods inventory at the Company's overseas subsidiaries. The Company's
inventory turn ratio remained consistent with fiscal 1995's inventory turns
ratio of 2.6 turns.
During fiscal 1996, the Company used $5,224,000 of net cash to finance operating
activities, expended $1,857,000 to acquire capital assets and information
technology, expended $1,250,000 to acquire the trade names and trademarks of an
athletic apparel manufacturer, received $78,000 from the sale of capital assets,
increased short-term borrowings by $1,313,000, expended $2,379,000 to reduce
long-term debt, received $69,000 from the issuance of the Company's common stock
and borrowed $420,000 on a long-term basis, secured by the Company's facility in
St. Peters, Australia. The Company sold this facility in November 1997.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting the operating cash flows in fiscal
1996 included a decrease in accrued letters of credit and accounts payable of
$1,138,000 (due to the timing of inventory shipments), an increase in accrued
expenses of $733,000 (due to increased advertising and promotional spending), a
decrease in prepaid expenses of $281,000 (due to a decrease in advance payments
for insurance and other administrative expenses) and net cash used by
discontinued operations of $2,234,000.. The declining value of the U.S. dollar
decreased the value of cash and cash equivalents by $50,000.
The Company has a credit facility with two principal banks pursuant to which a
$30,000,000 credit line is available to the Company. This credit facility,
which was amended in January 1997, extends through July 31, 1998 and provides
for a short-term demand line of credit in the principal amount of up to
$15,000,000 and a revolving line of credit in the principal amount of
$15,000,000, each subject to formula adjustment. Borrowings under this
facility generally will be made at the primary bank's prime rate of interest or
a euro dollar-based rate. As of January 2, 1998, there was $2,001,000
outstanding under the revolving credit facility. The Company had open
57
commitments at such date related to letters of credit in the amount of
$3,284,000. As of March 13, 1998, $6,736,000 was available for borrowing under
the short-term demand line and $12,694,000 was available for borrowing under the
revolving term line.
The credit facility contains various covenants, including restrictions on
additional indebtedness; restrictions on the payment or declaration of
dividends; a minimum tangible net worth, as defined; a minimum ratio of current
assets to current liabilities, as defined; a minimum annual cash flow coverage
ratio; that there be no demand loans outstanding under the demand line of credit
for a period of at least 30 consecutive days in each calendar year; and, fiscal
quarter and annual net income requirements. Due to the non-recurring charge to
reduce the carrying value of the Company's distribution facility in East
Brookfield, Massachusetts, to market, the operating results applicable to the
discontinued operation, the net loss realized as a result of the sale of
substantially all of the assets of Brookfield Athletic Co., Inc. and the
significant net loss attributable to the Company's Australian subsidiary in the
fiscal quarter and fiscal year ended January 2, 1998, the Company was unable to
comply with the minimum tangible net worth, the minimum annual cash flow
coverage ratio and the net income requirements for both the fourth quarter of
fiscal 1997 and fiscal 1997. In addition, borrowings by certain of the
Company's foreign subsidiaries in fiscal 1997 caused the Company to violate the
requirement that there be no demand borrowings under the demand credit line for
a period of at least 30 consecutive days. The banks have waived the foregoing
covenant violations as of January 2, 1998 and have waived prospective violations
of such covenants, as well as violation of an additional covenant relating to
the ratio of the Company's current assets to current liabilities, as of April 3,
1998. The Company currently plans to renegotiate its credit agreement during
the second quarter of fiscal 1998.
Certain of the Company's foreign subsidiaries have credit facilities, consisting
of demand and/or revolving lines of credit, in the aggregate principal amount of
58
approximately $4,607,000. As of February 28, 1998, an aggregate of
approximately $1,842,000 was available for borrowing under the facilities of the
foreign subsidiaries. See Note 9 of Notes to Consolidated Financial Statements.
On April 29, 1988, Hyde issued to a life insurance company $12,000,000 of 9.70%
senior notes due April 29, 1998. The notes provide for semi-annual payments of
interest, payable in April and October of each year, continuing to April 1998,
and annual payments of principal of $2,000,000 each from April 1993 to and
including April 1998. The note purchase agreement relating to the notes
contains restrictive covenants commonly found in such agreements. See Note 6 of
Notes to Consolidated Financial Statements.
During 1996, the Company acquired an information technology hardware system at a
cost of $991,000 pursuant to a long-term capital lease. The lease provides for
a bargain purchase option at the conclusion of the lease term. At January 2,
1998, the Company had various commitments for capital expenditures, including
information technology systems. The Company believes that these commitments are
not significant.
The liquidity of the Company is contingent upon a number of factors, principally
the Company's future operating results. Management believes that the Company's
current cash and cash equivalents, credit facilities and internally generated
funds are adequate to meet its working capital requirements and to fund its
capital investment needs and debt service payments.
INFLATION AND CURRENCY RISK
The effect of inflation on the Company's results of operations over the past
three years has been minimal. The impact of currency fluctuation on the
purchase of inventory by the Company from foreign suppliers has been minimal as
the transactions were denominated in U.S. dollars. The Company, however, is
subject to currency fluctuation risk with respect to the operating results of
the Company's foreign subsidiaries and certain foreign currency denominated
payables. The Company has entered into certain forward foreign exchange
contracts to minimize the transaction currency risk.
YEAR 2000
The Company has evaluated and documented the effect of the turn-of-the-century
on its computer hardware, operating systems and software applications. A plan
is in place to correct year 2000 problems in the Company's long-term, technical
assets. This plan is substantially funded by existing maintenance contracts and
by normal, recurring upgrades to the computer systems. Correcting year 2000
problems in the Company's long-term technical assets will not have a material
impact on the Company's consolidated financial position.
The Company has also considered the impact of the year 2000 issue on its
customers and suppliers. The footwear and apparel industry is less advanced, in
terms of automation, than many other industries. Customers have shared their
awareness of the year 2000 issue with the Company, but have not provided
management with formal year 2000 compliance reports. The Company's suppliers of
raw materials and components are less technically sophisticated than the
Company's customers, often relying on personal computers and manual systems for
their own business needs. However, the apparel and footwear industry is
characterized by numerous companies competing in an open market. No customer
makes up 10% of sales volume. Purchase contracts and sources of supply can be
negotiated and geographically moved within a six-month period. For these
reasons, management does not expect a major disruption in supply of inventory or
a major decline in customer purchases as the year 2000 approaches.
SFAS 123
The Financial Accounting Standards Board issued Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) in October 1995.
SFAS 123 establishes the financial accounting and reporting standards for all
stock-based compensation. SFAS 123 prescribes a fair value method of accounting
for stock options and other similar equity instruments and encourages companies
to adopt this accounting treatment for all stock-based compensation plans.
However, under SFAS 123, companies are permitted to continue to measure
compensation expense using the intrinsic value based method of accounting as
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
provided that pro forma disclosures are made of net income and earnings per
share had the fair value method been adopted.
SFAS 123 is effective for fiscal years commencing after December 15, 1995. As
permitted by SFAS 123, the Company has continued to account for employee stock
compensation expense under the precepts of APB Opinion No. 25. See Note 11 of
Notes to the Consolidated Financial Statements for pro forma disclosures of net
income and earnings per share, calculated utilizing the fair value method
prescribed under SFAS 123.
SFAS 128
During the first quarter of 1997, the Financial Accounting Standards Board
issued Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128).
SFAS 128 is intended to improve the Earnings Per Share ("EPS") information
contained in the financial statements by simplifying the calculation of earnings
per share, revising the disclosure requirements, and achieving comparability
with international accounting standards. SFAS 128 is effective for both interim
and annual financial statements for periods after December 15, 1997. The impact
of adopting SFAS 128 on basic and diluted EPS was not material.
SFAS 130
The Financial Accounting Standards Board issued Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" (SFAS No. 130) in June 1997. SFAS 130
defines and establishes the financial accounting and reporting standards for
comprehensive income. As used in SFAS 130, comprehensive income encompasses net
income and other components of comprehensive income that are excluded from net
income under Generally Accepted Accounting Principles. These previously
excluded components of comprehensive income are limited to the following:
foreign currency translation adjustments, minimum pension liability adjustments
and unrealized gains and losses on certain investments in debt and equity
securities classified as available-for-sales securities.
SFAS 130 is effective for fiscal years commencing after December 15, 1997, with
earlier adoption permitted. The Company will incorporate SFAS 130 into its Form
10-Q filing for the quarter ending April 3, 1998. The Company has not
determined the impact of adopting SFAS 130 on the consolidated financial
statements.
SFAS 131
The Financial Accounting Standards Board issued Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131) in June 1997. SFAS 131 establishes the reporting standards for
operating segments in annual financial statements and requires selected
information on operating segments in interim financial statements. SFAS 131
revises the disclosure requirements for segment reporting by defining the
characteristics and quantitative thresholds for which segment information is
required to be disclosed. SFAS 131 is effective for fiscal years commencing
after December 15, 1997, application of which is not required to interim periods
during the initial year of adoption. The Company expects to incorporate the
added disclosure requirements of SFAS 131 into its Form 10-K filing for the
fiscal year ending January 1, 1999.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Annual Report and presented elsewhere by management from time to time.
COMPETITION. Competition is intense in the markets in which the Company sells
its products. The Company competes with a large number of other companies, both
domestic and foreign, several of which have diversified products lines, well-
known brands and financial, distribution and marketing resources substantially
greater than those of the Company. The principal competitors for the Company's
Saucony products are Nike, New Balance and ASICS. The principal competitors for
the Company's Hind products are Nike, Pearl Izumi and Speedo. The principal
competitors for the Company's Quintana Roo and Merlin products are Cannondale
and Trek.
DEPENDENCE ON FOREIGN SUPPLIERS. A number of manufacturers located in the Far
East, primarily in China, Taiwan and Thailand, supply products and product
components to the Company. During fiscal 1997, one of such suppliers, located in
China, accounted for approximately 41% of the Company's total purchases by
dollar volume. The Company is subject to the usual risks of a business
involving foreign suppliers, such as currency fluctuations, government
regulation of fund transfers, export and import duties, trade limitations
imposed by the United States or foreign governments and political and labor
instability. In particular, there are a number of trade-related and other
issues creating significant friction between the governments of the United
States and China, and the imposition of punitive import duties on certain
categories of Chinese products has been threatened in the past and may be
implemented in the future. In addition, the Company has no long-term
manufacturing agreements with its foreign suppliers and competes with other
athletic shoe and recreational product companies, including companies that are
much larger than the Company, for access to production facilities.
FOREIGN CURRENCY EXCHANGE. From time to time, the Company's financial results
have been adversely affected by the fluctuations in currency exchange rates.
There can be no assurance that the Company's efforts to reduce currency exchange
losses will be successful or that currency exchange rates will not have an
adverse impact on the Company's future operating results and financial
condition.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly operating
results may vary significantly depending on a number of factors, including the
timing and shipment of individual orders, market acceptance of new athletic
footwear and other products offered by the Company, changes in the Company's
operating expenses, personnel changes, mix of products sold, changes in product
pricing and general economic conditions. In addition, a substantial portion of
the Company's revenue is realized during the last few weeks of each quarter;
therefore, any delays in orders or shipments are more likely to result in
revenue not being recognized until the following quarter, which could adversely
impact the results of operations for that quarter. The Company's current
expense levels are based in part on its expectations of future revenue and, 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 the
Company's 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 the Common Stock could be materially adversely affected.
MANAGEMENT OF GROWTH. One element of the Company's business strategy is to seek
acquisitions of businesses and products that are complementary to those of the
Company. There can be no assurance that the Company will be able to effect any
acquisitions, operate any such acquired businesses profitably or otherwise
implement its growth strategy successfully. In addition, identifying and
effecting acquisitions and integrating the acquired businesses with the
operations of the Company may place significant demands upon the current
management team and operational systems of the Company. In order to effect
acquisitions of a certain size, the Company may require additional capital,
which the Company may obtain through additional borrowings under its credit
facility or otherwise.
DEPENDENCE ON CONSUMER PREFERENCES. The Company is susceptible to fluctuations
in its business based upon fashion trends and frequently changing consumer style
preferences and product demands, including levels of enthusiasm for athletic
activities. The Company believes that its success depends in substantial part
on its ability to anticipate, gauge and respond to changing consumer demands and
fashion trends in a timely manner. Moreover, the Company could be materially
adversely affected by conditions in the retail industry in general, including
consolidation and the resulting decline in the number of retailers and other
cyclical economic factors.
DISCRETIONARY CONSUMER SPENDING. Purchases of bicycles, particularly high-
performance models such as those offered by the Company, and the Company's other
products are discretionary for consumers. The success of the Company is
influenced by a number of economic factors affecting disposable consumer income,
such as employment levels, business conditions, interest rates and taxation
rates. Adverse changes in these economic factors may restrict consumer
spending, thereby negatively affecting the Company's growth and profitability.
ADVERTISING AND MARKETING PROGRAMS. The Company's success in the markets in
which it competes depends in part upon the effectiveness of advertising and
marketing programs of the Company. In particular, the Company must periodically
design and successfully execute new and effective advertising and marketing
programs.
DEPENDENCE ON MAJOR CUSTOMERS. Although the Company had no customer that
accounted for ten percent or more of the Company's consolidated revenue during
1997, the Company's business is susceptible to the loss of certain key customers
of the Company's product lines, such as Foot Locker for the Company's Saucony
products.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to the Company's Consolidated Financial Statements in Item 14 and
the accompanying consolidated financial statements, notes and schedules which
are filed as part of this Form 10-K following the signature page and are
incorporated herein by this reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Registrant" in PART I hereof, and the remainder is
contained in the Company's Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on May 14, 1998 (the "1998 Proxy Statement") under the
captions "ELECTION OF DIRECTORS" and "SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" and is incorporated herein by this reference. The Company
expects to file the 1998 Proxy Statement within 120 days after the close of the
fiscal year ended January 2, 1998.
Officers are elected on an annual basis and serve at the discretion of the Board
of Directors.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is contained under the captions
"Compensation of Directors," "Compensation of Executive Officers," "Employment
and Consulting Agreements and Other Arrangements" and "Compensation Committee
Interlocks and Insider Participation" in the 1998 Proxy Statement and is
incorporated herein by this reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the 1998 Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by this reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption "Employment
and Consulting Agreements and Other Arrangements" appearing in the 1998 Proxy
Statement and is incorporated herein by this reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
-----------------------------
The following consolidated financial statements of Hyde Athletic Industries,
Inc. and its subsidiaries are included in this report:
Reports of Independent Accountants
Consolidated balance sheets at January 2, 1998 and January 3, 1997.
Consolidated statements of income for the years ended January 2, 1998,
January 3, 1997 and January 5, 1996
Consolidated statements of stockholders' equity for the years ended
January 2, 1998, January 3, 1997 and January 5, 1996
Consolidated statements of cash flows for the years ended January 2, 1998,
January 3, 1997 and January 5, 1996
Notes to the consolidated financial statements
2. Index to Consolidated Financial Statement Schedule
---------------------------------------------------
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
Separate financial statements of the Company have been omitted since it is
primarily an operating Company and its subsidiaries included in the consolidated
financial statements do not have a minority equity interest or indebtedness to
any person other than the Company in an amount which exceeds 5% of the total
assets as shown by the consolidated financial statements as filed herein.
3. Index to Exhibits
-----------------
The exhibits filed as part of this Form 10-K are listed on the Exhibit Index
immediately preceding such exhibits, which Exhibit Index is incorporated herein
by reference.
(b) Reports on Form 8-K
-------------------
No Current Reports on Form 8-K were filed in the fourth quarter of fiscal
1997.
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.
HYDE ATHLETIC INDUSTRIES, INC.
------------------------------
(registrant)
By: /s/ John H. Fisher
-----------------------------------
John H. Fisher
President and Chief Executive Officer
Date: April 2, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME CAPACITY DATE
---- -------- ----
/s/ John H. Fisher President April 2, 1998
----------------------------
John H. Fisher Chief Executive Officer
Director
/ s/ Charles A. Gottesman Executive Vice President April 2, 1998
----------------------------
Charles A. Gottesman Chief Operating Officer
Director
(Principal Financial Officer)
/s/ Roger P. Deschenes Vice President, Controller April 2, 1998
----------------------------
Roger P. Deschenes Chief Accounting Officer
/s/ John J. Neuhauser Director April 2, 1998
----------------------------
John J. Neuhauser
/s/ Jonathan O. Lee Director April 2, 1998
----------------------------
Jonathan O. Lee
/s/ Robert J. LeFort, Jr. Director April 2, 1998
----------------------------
Robert J. LeFort, Jr.
/s/ Phyllis H. Fisher Director April 2, 1998
----------------------------
Phyllis H. Fisher
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Hyde Athletic Industries, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Hyde Athletic Industries, Inc. and Subsidiaries listed in
Note 1 to these financial statements. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits. We
did not audit the financial statements of Saucony SP Pty. Ltd., a fifty percent
owned joint venture, which statements reflect total net assets and revenues
consisting of six percent and eleven percent, respectively, of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and in our opinion, insofar as it relates to
the amounts included for Saucony SP Pty. Ltd., is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hyde
Athletic Industries, Inc. and Subsidiaries as of January 2, 1998 and January 3,
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended January 2, 1998, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 26, 1998
INDEPENDENT AUDIT REPORT TO THE MEMBERS OF SAUCONY SP PTY., LIMITED
Scope
We have audited the financial statements of Saucony SP Pty., Ltd., as set out on
pages 2 to 19, for the year ended 2 January 1998. The Company's directors are
responsible for the financial statements. We have conducted an independent
audit of these financial statements in order to express an opinion on them to
the members of the Company.
Our audit has been conducted in accordance with generally accepted auditing
standards to provide reasonable assurance as to whether the financial statements
are free of material misstatement. Our procedures included examination, on a
test basis, of evidence supporting the amounts and other disclosures in the
financial statements, and the evaluation of accounting policies and significant
accounting estimates. These procedures have been undertaken to form an opinion
as to whether, in all material respects, the financial statements are presented
fairly in conformity with generally accepted accounting principles and so as to
present a view which is consistent with our understanding of the Company's
financial position, the results of its operations and its cash flows.
The audit opinion expressed in this report has been formed on the above basis.
Audit Opinion
In our opinion, the financial statements of Saucony SP Pty Limited are properly
drawn up so as to present fairly in accordance with generally accepted
accounting principles the Company's state of affairs as at 2 January 1998 and
its profit and cash flows for the financial year ended on that date.
Going Concern Basis of Accounting
Without qualification to the opinion expressed above, attention is drawn to Note
1 of the financial statements. Notwithstanding the deficiency of working
capital and net assets, the financial statements have been prepared to on a
going concern basis as the directors have received an undertaking of continued
financial support from the directors of Hyde Athletic Industries, Inc. and the
directors believe that such financial support will be continued to be made
available.
GRANT THORNTON
Chartered Accountants
/s/ Grant Thornton
/s/ B.R. Gordon
Partner
Sydney, NSW Australia
April 2, 1998
75
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
January 2, January 3,
1998 1997
---- ----
Current assets:
Cash and cash equivalents $ 4,432 $ 2,803
Marketable securities (Note 2) 148 236
Accounts receivable, net of allowance for
doubtful accounts and discounts (1997,
$2,032; 1996, $1,234) (Note 3) 18,730 18,403
Inventories (Note 4) 23,471 24,537
Deferred income taxes (Note 12) 1,989 1,425
Prepaid expenses and other current assets 1,525 1,388
Net assets of discontinued operations (Note 13) -- 9,934
---------- ----------
Total current assets 50,295 58,726
---------- ----------
76
Property, plant and equipment, net of accumulated
depreciation and amortization (Note 5) 8,135 9,027
---------- ----------
Other assets:
Deferred charges, net of accumulated
amortization (1997, $1,843; 1996, $1,558) 491 1,380
Long-term accounts and notes receivable (Note 3) 366 138
Goodwill, net of accumulated amortization
(1997, $42; 1996, $0) (Note 17) 1,238 1,250
Investment in limited partnership (Note 6) 653 753
Deferred income taxes (Note 12) 353 --
Other 93 72
---------- ----------
Total other assets 3,194 3,593
---------- ----------
Total assets $ 61,624 $ 71,346
========== ==========
See notes to consolidated financial statements
78
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands)
January 2, January 3,
1998 1997
---- ----
Current liabilities:
Accrued letters of credit (Note 9) $ 1,201 $ 1,849
Notes payable (Note 9) 2,885 4,237
Current portion of long-term debt and capital
lease obligations (Notes 6 & 7) 3,639 2,449
Accounts payable 2,680 2,091
Accrued expenses (Note 9) 2,910 3,337
---------- ----------
Total current liabilities: 13,315 13,963
---------- ----------
Long-term obligations:
Long-term debt, net of current portion (Note 6) 25 3,885
Capital lease obligations, net of current portion (Note 7) 746 1,008
Deferred income taxes (Note 12) 1,921 1,924
Other obligations 144 --
---------- ----------
79
Total long-term obligations 2,836 6,817
---------- ----------
Commitments and contingencies (Note 9)
Minority interest in consolidated subsidiaries 195 488
---------- ----------
Stockholders' Equity (Notes 10 & 11)
Preferred stock, $1.00 par; authorized 500,000
shares; none issued and outstanding -- --
Common stock:
Class A, $.333 par; authorized 20,000,000 shares
(issued 1997, 2,706,227; 1996, 2,706,227) 902 902
Class B, $.333 par; authorized 20,000,000 shares
(issued 1997, 3,743,487; 1996, 3,729,059) 1,248 1,243
Additional paid-in capital 15,652 15,581
Retained earnings 28,987 33,705
Accumulated translation (417) (234)
----------- -----------
46,372 51,197
---------- ----------
Less:
Common stock held in treasury, at cost
(1997, 198,400; 1996, 198,400) (1,054) (1,054)
Unearned compensation (40) (65)
----------- -----------
45,278 50,078
80
---------- ----------
Total liabilities and stockholders' equity $ 61,624 $ 71,346
========== ==========
See notes to consolidated financial statements.
82
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended January 2, 1998, January 3, 1997 and January 5, 1996
(in thousands; per-share amounts in dollars)
1997 1996 1995
---- ---- ----
Net sales $ 93,611 $ 91,341 $ 78,549
Other income (expense) (Note 15) (280) 978 1,091
------------ ----------- -----------
Total revenue 93,331 92,319 79,640
----------- ----------- -----------
Costs and expenses:
Cost of sales 62,171 61,692 52,695
Selling expenses 16,698 16,065 14,511
General and administrative expenses (Note 9) 13,412 11,777 11,143
Writedown of assets (Note 14) 850 -- --
Restructuring of Australian operations (Note 14) 2,766 -- --
Interest expense 888 803 1,063
----------- ----------- -----------
Total costs and expenses 96,785 90,337 79,412
----------- ----------- -----------
Income (loss) before continuing operations,
income taxes and minority interest (3,454) 1,982 228
Provision (benefit) for income taxes (Note 12) 495 325 (8)
83
Minority interest in income (loss) of
consolidated subsidiaries (123) 308 (286)
------------ ----------- ------------
Income (loss) from continuing operations (3,826) 1,349 522
Discontinued operations (Note 13):
Income (loss) from discontinued operations (net
of tax provision (benefit) expense ($262), $103
and $723, respectively) (394) 145 1,069
Loss on disposal of Brookfield Athletic Co., Inc.,
including operating loss of $243 during the
phase-out period (net of tax benefit of $323) (498) 0 0
------------ ----------- -----------
Net income (loss) (Note 11) $ (4,718) $ 1,494 $ 1,591
============ =========== ===========
Earnings per common share - basic (Note 11):
Income (loss) from continuing operations $ (0.62) $ 0.22 $ 0.08
Income (loss) from discontinued operations (0.14) 0.02 0.18
------------ ---------- -----------
Net income (loss) per common share - basic $ (0.76) $ 0.24 $ 0.26
============ ========== ===========
Earnings per common share - Diluted (Note 11)
Income (loss) from continuing operations $ (0.62) $ 0.22 $ 0.08
Income (loss) from discontinued operations (0.14) 0.02 0.18
------------ ---------- -----------
Net income (loss) per common share - diluted $ (0.76) $ 0.24 $ 0.26
============ ========== ===========
84
See notes to consolidated financial statements
86
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND JANUARY 5, 1996
Common Stock Paid-In Retained
Class A Class B Capital Earnings
------- ------- ------ --------
Balance, December 30, 1994 $ 901 $ 1,237 $ 15,593 $ 30,620
Issuance of 1,400 shares of common
stock, stock option exercise (Note 10) 1 -- 3 --
Cancellation of below market options (Note 11) -- -- (75) --
Amortization of unearned compensation (Note 11) -- -- -- --
Acquisition of 17,700 shares of common stock, at cost (Note 10) -- -- -- --
Net income -- -- -- 1,591
Foreign currency translation adjustments -- -- -- --
-------- --------- --------- ---------
Balance, January 5, 1996 $ 902 $ 1,237 $ 15,521 $ 32,211
Issuance of 19,744 shares of common
stock, stock option exercise (Note 10) -- 6 63 --
Cancellation of below market options (Note 11) -- -- (3) --
87
Amortization of unearned compensation (Note 11) -- -- -- --
Net income -- -- -- 1,494
Foreign currency translation adjustments -- -- -- --
-------- --------- --------- ---------
Balance, January 3, 1997 $ 902 $ 1,243 $ 15,581 $ 33,705
Issuance of 14,428 shares of common stock, stock
option exercise (Note 10) -- 5 34 --
Cancellation of below market options (Note 11) -- -- (15) --
Issuance of below market options and restricted stock -- -- 52 --
Amortization of unearned compensation (Note 11) -- -- -- --
Net loss -- -- -- (4,718)
Foreign currency translation adjustments -- -- -- --
-------- --------- --------- ---------
Balance, January 2, 1998 $ 902 1,248 15,652 28,987
======== ========= ========= =========
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
88
FOR THE YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND JANUARY 5, 1996
Treasury Stock Unearned Accumulated Stockholders'
Shares Amount Compensation Translation Equity
----- ------ ------------ ---------- ------
Balance, December 30, 1994 180,700 $ (977) $ (447) $ (171) $ 46,756
Issuance of 1,400 shares of common
stock, stock option exercise (Note 10) -- -- -- -- 4
Cancellation of below market options (Note 11) -- -- 75 -- --
Amortization of unearned compensation (Note 11) -- -- 178 -- 178
Acquisition of 17,700 shares of common stock,
at cost (Note 10) 17,700 (77) -- -- (77)
Net income -- -- -- -- 1,591
Foreign currency translation adjustments -- -- -- (86) (86)
--------- --------- -------- ---------- ----------
Balance, January 5, 1996 198,400 $ (1,054) $ (194) $ (257) $ 48,366
Issuance of 19,744 shares of common stock,
stock option exercise (Note 10) -- -- -- -- 69
Cancellation of below market options (Note 11) -- -- 3 -- --
89
Amortization of unearned compensation (Note 11) -- -- 126 -- 126
Net income -- -- -- -- 1,494
Foreign currency translation adjustments -- -- -- 24 24
--------- --------- -------- --------- ---------
Balance, January 3, 1997 198,400 $ (1,054) $ (65) $ (233) $ 50,079
Issuance of 14,428 shares of common stock, stock
option exercise (Note 10) -- -- -- -- 39
Cancellation of below market options (Note 11) -- -- 15 -- --
Issuance of below market options and restricted stock -- -- (52) -- --
Amortization of unearned compensation (Note 11) -- -- 62 -- 62
Net loss -- -- -- -- (4,718)
Foreign currency translation adjustments -- -- -- (184) (184)
--------- --------- -------- ---------- ----------
Balance, January 2, 1998 198,400 $ (1,054) $ (40) $ (417) $ 45,278
========= ========== ========= ========== =========
See notes to condensed consolidated financial statements.
91
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended January 2, 1998, January 3, 1997 and January 5, 1996
(in thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (4,718) $ 1,494 $ 1,591
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Restructuring of Australian operations 3,089 -- --
Discontinued operations 892 (145) (1,069)
Depreciation and amortization 1,594 1,452 1,113
Provision for bad debt and discounts 4,887 5,269 4,807
(Gain) loss on sale of equipment (91) 22 2
Deferred income tax benefit (1,445) (217) (369)
Minority interest in (income) loss of consolidated subsidiaries (123) 308 (286)
Compensation from stock grants and stock options 62 126 178
Gain on sale of investment in limited partnership -- -- (426)
Writedown of assets 850 -- --
Changes in operating assets and liabilities, net of effects
of acquisitions, dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Marketable securities 88 71 (308)
Accounts and notes receivable (7,057) (9,938) (157)
Inventories (1,301) (1,158) 4,104
92
Prepaid expenses and other current assets (539) 281 (45)
Increase (decrease) in liabilities:
Accrued letters of credit (612) (613) 1,189
Accounts payable 919 (525) (655)
Accrued expenses (296) 733 (1,415)
Accrued income taxes 152 (5) (749)
--------- ---------- ---------
Total adjustments 1,069 (4,339) 5,914
--------- ---------- --------
Net cash provided (used) by continuing operations (3,649) (2,845) 7,505
---------- ---------- --------
Net cash provided (used) by discontinued operations 2,227 (2,379) 3,621
--------- ---------- --------
Net cash provided (used) by operating activities (1,422) (5,224) 11,126
---------- ---------- --------
Cash flows from investing activities:
Proceeds from the sale of Brookfield Athletic Co., Inc. 6,841 -- --
Purchases of property, plant and equipment (1,305) (791) (569)
Proceeds from the sale of equipment 511 78 32
Increase in deferred charges and other (26) (1,066) (469)
Investment distribution from limited partnership -- -- 29
Payments for trademarks and trade names -- (1,250) --
Payments for business acquisitions, net of cash acquired (140) -- (112)
Proceeds from sale of investment in limited partnership -- -- 1,335
--------- --------- --------
Net cash provided (used) by investing activities 5,881 (3,029) 246
93
--------- ---------- --------
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
1997 1996 1995
---- ---- ----
Cash flows from financing activities:
Net short-term borrowings (1,063) 1,313 (30)
Repayment of long-term debt and capital lease obligations (2,711) (2,364) (2,887)
Proceeds from long-term borrowings -- 420 --
Common stock repurchased -- -- (77)
Payment of termination benefit payable -- -- (27)
Issuances of common stock, including options 39 69 4
--------- --------- ---------
Net cash used by financing activities (3,735) (562) (3,017)
Effect of exchange rate changes on cash and cash equivalents 905 (50) (37)
--------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1,629 (8,865) 8,318
Cash and cash equivalents at beginning of period 2,803 11,668 3,350
--------- --------- ---------
Cash and cash equivalents at end of period $ 4,432 $ 2,803 $ 11,668
========= ========= =========
94
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds $ 663 $ 736 $ 1,936
========= ========= =========
Interest $ 887 $ 959 $ 1,534
========= ========= =========
Non-cash Investing and Financing Activities:
Property purchased under capital leases $ 86 $ 1,234 $ 138
Reconciliation of assets acquired and liabilities
assumed, business acquisitions
Assets acquired -- -- 232
Liabilities assumed -- -- 120
--------- --------- ---------
Cash paid for business acquisitions $ -- $ -- $ 112
========= ========= =========
Sale of investment in limited partnership
Cash received, net of broker fees -- -- 1,335
Reduction in short-term debt, long-term
debt and accrued liabilities -- -- 4,056
--------- --------- ---------
Total proceeds -- -- 5,391
Investment in limited partnership, net of distributions -- -- 4,965
--------- --------- ---------
95
Gain realized on sale -- -- $ 426
========= ========= =========
See notes to consolidated financial statements
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended January 2, 1998, January 3, 1997 and January 5, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
BUSINESS ACTIVITY
-----------------
The Company is an importer and manufacturer of a broad line of high-
performance athletic footwear, athletic apparel and high-quality bicycles
and bicycle frames. The Company markets its products principally to
domestic and international retailers and distributors.
REPORTING PERIOD
----------------
The Company adopted a 52-53 week fiscal year reporting period in 1991. The
consolidated financial statements and notes for 1997, 1996 and 1995
represent the fiscal years ended January 2, 1998, January 3, 1997 and
January 5, 1996, respectively. In management's opinion, the consolidated
financial statements for 1997, 1996 and 1995 are comparable.
PRINCIPLES OF CONSOLIDATION
---------------------------
97
The consolidated financial statements include the accounts of Hyde Athletic
Industries, Inc. and its wholly owned subsidiaries, Spot-Bilt, Inc., Hyde
Transition Corp. (formerly Brookfield Athletic Co., Inc.), Saucony, Inc.,
Saucony Deutschland Vertriebs GmbH (Germany), Quintana Roo, Inc. and Hyde
International Services Limited (Hong Kong), and its majority-owned foreign
subsidiary, Saucony Canada, Inc., all herein referred to as the "Company".
Hyde International Services Limited owns a controlling interest in a
subsidiary called Saucony SP Pty Limited (Australia). (See Note 14 of
Notes to Consolidated Financial Statements.) Saucony, Inc. owns a wholly
owned subsidiary called Saucony Sports BV (Netherlands). The Company also
operates a branch in the United Kingdom called Saucony UK and maintains a
marketing representative office in Germany called Saucony Europe. Saucony
GmbH and Quintana Roo, Inc. are included in the consolidated financial
statements beginning in December 1994 and August 1995, respectively.
Saucony Shoe Manufacturing Co., Inc., an inactive wholly owned domestic
subsidiary, was dissolved in 1992. Hyde Security Corp., a wholly owned
domestic subsidiary, was dissolved in 1996. During 1997, the Company sold
substantially all of the assets of Brookfield Athletic Co., Inc. The
effects of transactions among related companies are eliminated in the
consolidated financial statements.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
REVENUE RECOGNITION
-------------------
Sales, net of discounts, and related costs of sales are recognized upon
shipment of products.
INVENTORIES
-----------
Inventories are stated at lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Land, buildings and equipment, including significant improvements to
existing facilities, are stated at cost. The assets are depreciated over
their estimated useful lives or capital lease terms, if shorter, using the
straight-line method for financial reporting purposes and accelerated
methods for income tax purposes. The estimated useful lives of the assets
are: 33 years for buildings and improvements and 3 to 15 years for office
equipment and machinery and equipment. Major renewals and betterments are
capitalized. Maintenance, repairs and minor property renewals are expensed
as incurred. The cost and related accumulated depreciation of all property,
plant and equipment retired or otherwise disposed of, are removed from the
accounts. Any gain or loss, resulting from the retirement or disposition
of property, plant and equipment, is included in consolidated net income.
INVESTMENTS
-----------
The Company's investment in a real estate limited partnership is valued at
its net realizable value. It is management's intention to retain this
investment for its long-term tax benefit.
INVESTMENTS IN MARKETABLE SECURITIES
------------------------------------
Investment in debt securities and marketable securities are categorized as
trading, held-to-maturity or available-for-sale. Trading securities are
reported at fair value, with changes in fair value recorded in consolidated
net income. Investment securities include both available-for-sale and
held-to-maturity securities. Available-for-sale securities are reported at
fair value, with net unrealized gains and losses included as a separate
component of stockholders' equity. Held-to-maturity debt securities are
reported at amortized cost. For all investments, unrealized losses, other
than temporary losses, are recognized in consolidated net income.
DEFERRED CHARGES AND GOODWILL
------------------------------
Deferred charges consist primarily of bond issuance, trademarks, financing
and organization costs. The deferred charges are amortized on the
straight-line basis over the term of the debt; organization costs and
trademarks are amortized over five years; goodwill, representing the excess
of the purchase price over the estimated fair value of the net assets of
the acquired business, is being amortized over the period of expected
benefit of fifteen years.
INCOME TAXES
------------
The provision for income taxes is calculated according to the precepts of
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes". Under SFAS No. 109, income taxes are
provided for the amount of taxes payable or refundable in the current year
and for the expected future tax consequences of events that have been
recognized in the financial statements or tax returns. As a result of
recognition and measurement differences between tax laws and financial
accounting standards, temporary differences arise between the amount of
taxable income and pretax financial income for a year and the tax bases of
assets or liabilities and their reported amount in the financial
statements. The deferred tax assets and liabilities reported as of January
2, 1998 and January 3, 1997 reflect the estimated future tax effects
attributable to temporary differences and carryforwards based on the
provisions of enacted tax law.
EARNINGS PER SHARE
------------------
Earnings per common share is calculated in accordance with the precepts of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128),
which was issued in 1997 by the Financial Accounting Standards Board. SFAS
128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes the dilutive effect of
options, warrants and convertible securities. Diluted earnings per share
is very similar to fully diluted earnings per share. As required under
SFAS 128, all previously reported per share amounts have been restated.
STATEMENTS OF CASH FLOWS
------------------------
For purposes of these statements, cash equivalents include all short-term
deposits with an original maturity of three months or less purchased in
connection with the Company's cash management program.
FOREIGN CURRENCY TRANSLATION
----------------------------
The financial statements of the Company's foreign subsidiaries are measured
using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at exchange rates as of
the balance sheet date. Revenues and expenses are translated at average
rates of exchange in effect during the year. The resulting cumulative
translation adjustments have been recorded as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are
included in consolidated net income. Net gains and (losses) from foreign
currency transaction translation amounted to ($1,127,000), $171,000 and
$77,000 for 1997, 1996 and 1995, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
-------------------------------------------
From time to time, the Company enters into forward foreign currency
exchange contracts to hedge certain foreign currency denominated payables.
Gains and losses on forward exchange contracts are deferred and offset
against foreign currency exchange gains or losses on the underlying hedged
item upon consummation of the transaction.
RECLASSIFICATIONS
-----------------
Certain items in prior years' consolidated financial statements have been
reclassified to conform to the 1997 presentation. The results of
operations for Brookfield Athletic Co., Inc. for the fiscal years ended
January 2, 1998, January 3, 1997 and January 5, 1996 have been segregated
from continuing operations and are reported separately as discontinued
operations.
ADVERTISING AND PROMOTION
-------------------------
Advertising and promotion costs are expensed when incurred or expensed
ratably over the year in relation to sales. Production costs of future
media advertising are deferred until the advertising occurs. Advertising
and promotion expense amounted to $8,543,000, $8,743,000 and $7,508,000 for
1997, 1996 and 1995, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------
Expenditures for research and development of products are expensed as
incurred. Research and development expenses amounted to approximately
$1,438,000, $1,417,000 and $1,513,000 for 1997, 1996 and 1995,
respectively.
RELATED PARTY TRANSACTIONS
--------------------------
Saucony Sports BV, a wholly owned foreign subsidiary, leased office space
and office equipment from an entity controlled by the former minority
stockholder of Saucony Sports BV. Rent expense amounted to $12,442 and
$70,980 for 1996 and 1995, respectively.
The Company issued a note payable to the minority stockholder of Saucony
Canada, Inc., a majority-owned foreign subsidiary, as part of the
consideration paid to acquire an 85% interest in the former Canadian
distributor. Interest expense incurred amounted to $7,038 for 1995.
See Note 6 of the Notes to Consolidated Financial Statements for further
discussion of the note agreement. During 1995, the Company prepaid the
note and realized a discount of $13,759 which is included in 1995
consolidated net income.
The Company entered into a consulting agreement with a principal
stockholder of the Company's Class A Common Stock, beginning January 4,
1993. The agreement, as amended, was effective for a term of five years,
provided for an annual fee of $40,000 during each of the first two years of
the agreement and $90,000 for each of the final three years of the
agreement. Included in general and administrative expenses for 1997, 1996
and 1995 are consulting fees of $90,000, $90,000 and $90,000, respectively.
As of January 2, 1998, the agreement had not been renewed.
The Company presently holds a note receivable of $100,000 from a former
officer of the Company. The promissory note, originated from a transaction
in 1993, is collateralized by a mortgage from the former officer on two
parcels of real estate. See Note 3 of the Notes to Consolidated Financial
Statements for further discussion of the terms and conditions of the
promissory note.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
During the first quarter of 1997, the Financial Accounting Standards Board
issued Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS
128). SFAS 128 is intended to improve the Earnings Per Share ("EPS")
information contained in the financial statements by simplifying the
calculation of earnings per share, revising the disclosure requirements,
and achieving comparability with international accounting standards. SFAS
128 is effective in financial statements for periods ending after December
15, 1997, and has been adopted by the Company in fiscal 1997.
The Financial Accounting Standards Board issued Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS No. 130) in June
1997. SFAS 130 defines and establishes the financial accounting and
reporting standards for comprehensive income. As used in SFAS 130,
comprehensive income encompasses net income and other components of
comprehensive income that are excluded from net income under generally
accepted accounting principles. These previously excluded components of
comprehensive income are limited to the following: foreign currency
translation adjustments, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities classified as available-for-sales securities.
SFAS 130 is effective for fiscal years commencing after December 15, 1997,
with earlier adoption permitted. The Company will incorporate SFAS 130
into the Form 10-Q filing for the quarter ending April 3, 1998. The
Company has not determined the impact of adopting SFAS 130 on the
consolidated financial statements.
The Financial Accounting Standards Board issued Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131) in June, 1997. SFAS 131 establishes the
reporting standards for operating segments in annual financial statements
and requires selected information on operating segments in interim
financial statements. SFAS 131 revises the disclosure requirements for
segment reporting by defining the characteristics and quantitative
thresholds for which segment information is required to be disclosed. SFAS
131 is effective for fiscal years commencing after December 15, 1997,
application of which is not required to interim periods during the initial
year of adoption. The Company expects to incorporate the added disclosure
requirements of SFAS 131 into its Form 10-K filing for the fiscal year
ending January 1, 1999.
2. MARKETABLE SECURITIES:
---------------------
As of January 2, 1998, the Company's holdings in marketable securities
consisted primarily of equity securities which were classified as trading
securities.
The cost of the securities held at January 2, 1998 and January 3, 1997 was
$138,000 and $171,000, respectively. As of January 2, 1998 and January 3,
1997, the market value of such securities was $148,000 and $236,000,
respectively. Gross unrealized gains of $2,000 and $65,000, based on
quoted market prices, are included in consolidated net income for the years
ended January 2, 1998 and January 3, 1997.
Included in the determination of net income for the years ended January 2,
1998 and January 3, 1997 and January 5, 1996 were: 1997, net realized
gains of $22,000 and net unrealized gains of $2,000; 1996, net realized
gains of $10,000 and net unrealized gains of $65,000; and 1995, net
unrealized gains of $20,000.
3. ACCOUNTS AND NOTES RECEIVABLE:
-----------------------------
On August 1, 1997, the Company executed an agreement whereby it renewed its
grant of an exclusive, worldwide, nonassignable right and license for the
use of the "Spot-Bilt" and the "single spot" logo trademarks. The
agreement, which expires in 2000 and may be renewed for up to three
additional one-year terms at the licensee's option, contains restrictions
with respect to the licensed product, its manufacture, distribution and
sale. The agreement established a minimum cumulative guaranteed royalty of
$447,000, subject to annual upward adjustments, due in various quarterly
payments, commencing in 1997. In 1997, the Company recorded a receivable
based upon the minimum guaranteed royalty for the present value of future
cash flows, utilizing an imputed interest rate of 8.5%, which equates to
$378,000. At January 2, 1998, $363,000 was outstanding, of which $111,000
was included in current accounts receivable and $252,000 was included in
long-term accounts receivable. The Company has received all scheduled
payments on a timely basis.
During 1995, the Company exchanged inventory having a fair value of
$1,400,000 for $100,000 in cash, receipt of which occurred in March 1996,
and media and trade receivable barter credits amounting to $1,300,000. The
media and trade receivable barter credits expire on November 14, 1998. As
of January 3, 1997, $1,297,714 was outstanding, of which $400,000 was
included in current accounts receivable and $897,714 was included in long-
term accounts receivable. The media and trade receivable barter credits
were included in the assets sold to Brookfield International, Inc. during
1997.
During 1993, the Company loaned $100,000 to a former officer of the
Company. The promissory note issued to the Company by the former officer
is collateralized by a mortgage from the officer on two parcels of real
estate (land and building). The note calls for semi-annual payments of
interest through maturity on the unpaid principal amount, commencing on
July 1, 1994 and five annual principal payments of $15,000 commencing July
1, 1998 and one principal payment of $25,000 due on July 1, 2003. The note
bears interest at a rate equal to the prevailing prime rate of interest.
At January 2, 1998, $100,000 was outstanding of which $15,000 was included
in current accounts receivable and $85,000 was including in long-term
accounts receivable.
4. INVENTORIES:
-----------
Inventories at January 2, 1998 and January 3, 1997 consisted of the
following (in thousands):
1997 1996
---- ----
Finished goods $ 17,534 $ 18,215
Work-in-process 514 110
Raw materials and supplies 5,423 6,212
-------- --------
Total $ 23,471 $ 24,537
======== ========
5. PROPERTY, PLANT AND EQUIPMENT:
-----------------------------
Major classes of property, plant and equipment, at cost, at January 2, 1998
and January 3, 1997 were as follows (in thousands):
1997 1996
---- ----
Land $ 484 $ 761
Buildings and improvements 5,997 7,043
Machinery and equipment 8,328 6,744
Capitalized leases 1,708 1,751
Leasehold improvements 236 206
--------- --------
16,753 16,505
Less accumulated depreciation
and amortization 8,618 7,478
--------- --------
Total $ 8,135 $ 9,027
========= ========
Accumulated amortization of the leased property was $678 and $344 at
January 2, 1998 and January 3, 1997, respectively.
During 1997, the Company recorded a non-recurring charge of $850,000
($508,000 after tax or $0.08 per diluted share) to reduce the carrying
value of the Company's distribution facility in East Brookfield,
Massachusetts to market.
6. LONG-TERM DEBT:
--------------
(in thousands)
1997 1996
---- ----
Senior notes payable due in semiannual
installments of interest on the unpaid
principal amount through maturity and
six annual principal payments of
$2,000,000 commencing April 29, 1993.
The notes bear interest at 9.70% and are
subject to certain restrictive covenants
pertaining to consolidation or merger
with another entity, levels of working
capital, net worth, the payment of cash
dividends and various other restrictions. $ 2,000 $ 4,000
Note payable to a bank under a revolving line
of credit agreement, due on January 30,
1998, with interest of 8.15%. 1,302 1,581
Note payable due in ten semi-annual principal
payments of $43,477 commencing July 1, 1996
and interest on the unpaid principal amount
through maturity. The note bears interest at
9.25% and is secured by a mortgage. -- 391
Note payable to bank due in sixty monthly installments
of $744 commencing May 1997 with interest of
10.0%. 31 --
------- --------
3,333 5,972
Less current portion 3,308 2,087
------- --------
$ 25 $ 3,885
======= ========
Long-term debt maturities payable for the five years and thereafter
subsequent to January 2, 1998 are as follows (in thousands):
1998 $ 3,308
1999 7
2000 7
2001 8
2002 3
--------
Total $ 3,333
========
On June 1, 1995, the Company sold its entire limited partnership interest
in the Columbia Housing Partners Corporate Tax Credit II Limited
Partnership for $5,501,000. Net proceeds totaled $1,335,000, resulting in
a pre-tax gain of $426,000, after transaction expenses, or $.02 per share
after tax. The after-tax gain is based upon projected tax credits and
passive losses provided by the general partner. As a result of the sale,
the Company realized reductions in current and long-term debt and accrued
interest of $4,056,000.
During 1995, the Company prepaid its note payable to the minority
stockholder of the Company's majority-owned Canadian subsidiary, resulting
in a gain of $13,759, which is included in consolidated net income.
Under the terms of the senior notes payable, the Company may not declare
any cash dividends or make any cash distributions unless, immediately
thereafter, the aggregate amount of cash dividends and cash distributions
since December 31, 1987 would not exceed the sum of (i) $2,000,000, (ii)
75% of cumulative consolidated net income as defined (or minus 100% of
consolidated net income in the case of a loss) for such period and (iii)
the proceeds of sales of Common Stock of the Company. As of January 2,
1998, approximately $11,143,000 was available for payment of cash dividends
under the terms of these covenants.
7. CAPITAL LEASE OBLIGATIONS:
-------------------------
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease
payments as of January 2, 1998 (in thousands):
1998................................... $ 392
1999................................... 336
2000................................... 295
2001................................... 157
2002................................... 8
------
Total minimum lease payments $1,188
Less amounts representing interest 111
------
Present value of minimum lease payments 1,077
Less current portion 331
------
Long-term portion $ 746
======
112
8. EMPLOYEE BENEFIT PLANS:
----------------------
The Company maintains a qualified retirement plan for the benefit of all
United States employees who have attained the age of 21 and have completed
six months of consecutive service. As amended in 1996, the plan permits
employees to defer on a pre-tax basis up to 15% of gross wages subject to
the federal maximum limit. The Company will match a portion of the
employee contributions, subject to profitability goals, at the discretion
of the Board of Directors. The Company matched 25% of employee elective
deferrals subject to a limitation of 1.25% of total employee compensation.
Both employee and employer contributions are funded, on a monthly basis, to
a group defined contribution plan administered by an independent investment
company. The defined contribution for 1997, 1996 and 1995 were $83,000,
$71,000 and $51,000, respectively. Expenses related to the administration
of the plan are paid by the Company.
During 1995, the Company established a supplementary retirement program to
provide retirement benefits to certain management and highly compensated
employees, as determined by the Company's Board of Directors. Employees
are eligible to defer up to 15% of gross wages on a pre-tax basis. The
Company will match a portion of employee contributions, subject to
profitability goals, at the discretion of the Board of Directors. The
Company match of employee elective deferrals is limited to 1.25% of total
employee compensation. Both employee and employer contributions and deemed
investment income accrued, net of the amount allowable under the qualified
plan are funded, on a monthly basis to a group defined contribution plan
administered by an independent investment company. The defined
contribution for 1997 and 1996 amounted to $10,000 and $5,000,
respectively. Expenses related to the administration of the plan are paid
by the Company.
9. COMMITMENTS AND CONTINGENCIES:
-----------------------------
LEASE COMMITMENTS
-----------------
The Company is obligated under various leases for equipment and retail
space through 2002. Total rental expenses for 1997, 1996 and 1995 were
$910,000, $831,000 and $674,000, respectively. Future minimum rental
payments are as follows: 1998, $534,000; 1999, $436,000; 2000, $166,000;
2000, $197,000; 2001, $94,000; and 2002 and thereafter, $1,000.
OTHER COMMITMENTS
-----------------
The Company is obligated under various agreements, including event
sponsorships and athlete sponsorship through 2012. Future sponsorship
payments are as follows: 1998, $185,000; 1999, $192,000; 2001, $180,000;
and 2002 and thereafter, $610,000.
COMMITMENTS
-----------
On August 31, 1993, the Company entered into a credit facility with two
banks pursuant to which up to a $30,000,000 credit line was available to
the Company as of January 2, 1998. This arrangement provides for a short-
term demand line of credit, in the principal amount of up to $15,000,000,
subject to formula, for domestic borrowings, international borrowings, and
letters of credit; and a revolving line of credit in the principal amount
of up to $15,000,000. Borrowings under the demand line of credit are
made at the bank's prime rate of interest while borrowing's under the
revolving line of credit are made at the bank's prime rate of interest, or
at the Company's option, the Eurodollar rate (Fixed Rate Option).
At January 2, 1998, there was $2,001,000 outstanding under this facility.
This credit facility, which was amended in January 1997, terminates July
31, 1998. This credit facility is subject to the bank's periodic reviews
of the Company's operations. The credit facility contains various
covenants, including: restrictions on additional indebtedness; restrictions
on the payment or declaration of dividends; a minimum tangible net worth,
as defined; a minimum ratio of current assets to current liabilities, as
defined; a minimum annual cash flow coverage ratio; that there be no demand
loans outstanding under the demand line of credit for a period of at least
30 consecutive days in each calendar year; and, fiscal quarter and annual
net income requirements. Due to the non-recurring charge to reduce the
carrying value of the Company's distribution facility in East Brookfield,
Massachusetts, the operating results applicable to the discontinued
operation, the net loss realized as a result of the sale of substantially
all of the assets of Brookfield Athletic Co., Inc. and the significant net
loss attributable to the Company's Australian subsidiary in the fiscal
quarter and fiscal year ended January 2, 1998, the Company was unable to
comply with the minimum tangible net worth, the minimum annual cash flow
coverage ratio and the net income requirements for both the fourth quarter
of fiscal 1997 and fiscal 1997. In addition, borrowings by certain of the
Company's foreign subsidiaries in fiscal 1997 caused the Company to violate
the requirement that there be no demand borrowings under the demand credit
line for a period of at least 30 consecutive days. As of January 2, 1998,
the banks granted waivers as of that date only for these covenant
violations. Additionally, the facility limits the Company's ability to pay
or declare a dividend or make other distributions to stockholders.
Saucony Canada Inc. maintains a credit facility with a Canadian lender.
The agreement provides Saucony Canada with a line of credit for $1,000,000
Canadian dollars, subject to formula (approximately $702,000 in U.S.
dollars at January 2, 1998). The agreement provides for a demand line in
the principal amount of $300,000 (Canadian dollars), for letters of credit,
and a revolving line of credit, in the principal amount of $700,000
(Canadian dollars). Borrowings under this facility are made at the
lender's prime lending rate plus .25%. At January 2, 1998, there were no
borrowings outstanding under this credit facility. The facility contains
requirements for maintaining defined levels of net worth, working capital
and various financial ratios.
Saucony SP Pty Limited maintains a credit facility with an Australian
lender. The credit facility provides Saucony SP with a $6,000,000
Australian dollar (approximately $3,905,000 in U.S. dollars at January 2,
1998) line of credit. The agreement provides for a short-term demand line
of credit, in the principal amount of up to $4,000,000 (Australian
dollars), for letters of credit and foreign exchange facilities; and a
revolving line of credit, in the principal amount of $2,000,000 (Australian
dollars). Borrowings under this facility are made at market rates of
interest as defined in the agreement or at the lender's quoted rate. At
January 2, 1998, there was $2,186,000 in U.S. dollars outstanding under
this credit facility. The facility is subject to the lender's periodic
reviews of the Company's operations. The Company has guaranteed the
obligations of Saucony SP Pty Limited enabling such obligations to be
satisfied. See Notes 14 and 20 of Notes to Consolidated Financial
Statements.
At January 2, 1998, the Company was committed under open letters of credit
to several lenders in the aggregate amount of $3,307,000 under foreign
exchange contracts to purchase U.S. dollars in the amount of $1,072,000 and
foreign exchange contracts to sell U.S. dollars in the amount of $146,000.
The Company is guarantor on credit facility agreements for two foreign
subsidiaries. At January 2, 1998, the guarantees totaled $4,607,000.
The Company has entered into an employment contract with one key employee
that provides for minimum annual compensation of $216,000 in 1998. The
contract provides for annual salary, cost-of-living adjustments, additional
compensation in the form of bonuses based on performance, life insurance
coverage and options to purchase shares of the Company's common stock.
Bonus expense to key executives amounted to $0, $148,000 and $276,000 for
1997, 1996 and 1995, respectively.
Included in accrued expenses at January 2, 1998 and January 3, 1997 were
sales commissions payable of $209,000 and $759,000, respectively.
LITIGATION
----------
The Company is involved in various routine litigation incident to its
business. Many of these proceedings are covered in whole or in part by
insurance. In management's opinion, none of these proceedings will have a
material adverse effect on the Company's financial position, operations or
cash flows (irrespective of any potential insurance recovery).
10. STOCKHOLDERS' EQUITY:
--------------------
As of January 2, 1998 and January 3, 1997, the number of shares of Class A
Common Stock and Class B Common Stock outstanding were as follows:
117
January 2, 1998 January 3, 1997
-------------- ---------------
Class A Common Stock 2,703,227 2,703,227
Class B Common Stock 3,548,087 3,533,659
Issuances by the Company of shares of Class A Common Stock and Class B
Common Stock, for the years ended January 2, 1998, January 3, 1997 and
January 5, 1996 were: 1997, 14,428 shares of Class B Common Stock; 1996,
1,500 shares of Class A Common Stock and 18,244 shares of Class B Common
Stock; and 1995, 700 shares each of Class A Common Stock and Class B Common
Stock.
During 1995, the Company repurchased 17,700 shares of Class B Common Stock
at a cost of $76,687. At January 2, 1998, Saucony SP Pty LTD, a foreign
subsidiary controlled by the Company, held 2,000 shares of each of the
Company's Class A Common Stock and Class B Common Stock.
11. STOCK OPTIONS AND EARNINGS PER SHARE:
------------------------------------
At the 1993 Annual Meeting of the Stockholders held on May 23, 1993, the
stockholders approved the Company's 1993 Equity Incentive Plan (the "Equity
Incentive Plan") and the 1993 Director Stock Option Plan (the "Director
Option Plan"), adopted by the Company's Board of Directors on April 7,
1993. The 1993 Equity Incentive Plan provides for the grant to officers and
key employees of the Company, incentive stock options, non-statutory stock
options and awards of restricted stock. Outside consultants and advisors
to the Company are eligible to receive only non-statutory options and
restricted stock awards under the Equity Incentive Plan.
118
The Equity Incentive Plan is administered by the Compensation Committee of
the Board of Directors which, at its sole discretion, grants options to
purchase shares of Common Stock and make awards of restricted stock. The
plan provides that the purchase price per share of Common Stock shall be
determined by the Board of Directors, provided, however, in the case of
Incentive Stock Options, the purchase price shall not be less than 100% of
the fair market value of such stock at the time of grant of the option.
The terms of option agreements are established by the Board of Directors,
except, in the case of Incentive Stock Options, wherein the term cannot
exceed ten years. Generally, an option cannot be exercised within one year
of date of grant. The vesting schedule is subject to the discretion of the
Board of Directors.
Restricted stock awards which may be granted under the Equity Incentive
Plan entitle recipients to purchase shares of the Company's Common Stock
subject to restrictions concerning the sale, transfer and other disposition
of the shares issued until such shares are vested. The Board of Directors
shall determine the purchase price, which can be less than the fair market
value of the Common Stock, and the vesting schedule for such award. The
Equity Incentive Plan provides for grants of restricted stock awards
without the payment of any cash purchase price.
At the 1997 Annual Meeting of Stockholders held on May 15, 1997, the
stockholders approved an amendment to the Equity Incentive Plan. The
amendment increased the number of shares issuable under the Equity
Incentive Plan from 800,000 to 1,150,000 shares and limited to 150,000 the
number of shares for which options or awards may be granted in any calendar
year to any one person. As amended, a total of 1,150,000 shares, in the
aggregate, of Class A Common Stock and Class B Common Stock have been
reserved by the Company and may be issued under the plan.
119
The following table summarizes the awards available for grant under the
Company's 1993 Equity Incentive Plan and 1993 Director Option Plan for the
three-year reporting period ended January 2, 1998:
Shares
------
Shares available at December 30, 1994 502,738
Awards granted (112,000)
Options expired 30,502
-------
Shares available at January 5, 1996 421,240
Awards granted (8,000)
Options expired 44,486
-------
Shares available at January 3, 1997 457,726
Additional shares reserved 350,000
Awards granted (149,150)
Options expired 25,278
-------
Shares available at January 2, 1998 683,854
=======
The Director Stock Option Plan provides for the automatic grant to non-
employee directors of non-statutory stock options upon specified occasions.
A total of 100,000 shares of Class B Common Stock have been reserved for
issuance under the plan. The option purchase price per share shall equal
the fair market value of Class B Common Stock on the date of the grant.
The options are exerciseable at any time, in whole or in part, prior to the
fifth anniversary of the date of the grant.
The following table sets forth the computation of basic earnings per common
120
share and diluted earnings per common share (dollars in thousands, except
per share amounts):
121
1997 1996 1995
--------------------- ---------------------- ----------------------
Earnings Earnings Earnings Earnings Earnings Earnings
per per per per per per
Common Common Common Common Common Common
Share - Share - Share - Share - Share - Share -
Basic Diluted Basic Diluted Basic Diluted
---- ------ ---- ------ ---- ------
Consolidated income (loss)
Income (loss) from
continuing operations $(3,826) $ (3,826) $ 1,349 $ 1,349 $ 522 $ 522
Income (loss) from
discontinued operations (892) (892) 145 145 1,069 1,069
-------- --------- -------- -------- -------- --------
Net income (loss) available
for common shares and
assumed conversions $(4,718) $ (4,718) $ 1,494 $ 1,494 $ 1,591 $ 1,591
======== ========= ======== ======== ======== ========
Weighted-average common
shares and equivalents
outstanding:
Weighted-average shares
outstanding 6,240 6,240 6,224 6,224 6,225 6,225
Effect of dilutive securities:
Employee stock options 0 0 0 44 0 19
122
------- -------- -------- -------- -------- --------
6,240 6,240 6,224 6,268 6,225 6,244
======= ======== ======== ======== ======== ========
Earnings per share:
Income (loss) from
continuing operations ($0.62) ($0.62) $0.22 $0.22 $0.08 $0.08
Income (loss) from
discontinued operations (0.14) (0.14) 0.02 0.02 0.18 0.18
------- ------- ------- ------- -------- --------
Net income (loss) ($0.76) ($0.76) $0.24 $0.24 $0.26 $0.26
======== ======== ======= ======= ======== ========
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to continue to measure stock-based
compensation expense using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options and restricted
stock awards is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the exercise price an
employee must pay to acquire the stock.
Stock-based compensation arising from the issuance of restricted stock and
below market options, is being amortized to expense over the vesting period
of the stock grant or option term and amounted to $62,000, $126,000 and
$178,000 for 1997, 1996 and 1995, respectively.
The following table summarizes the Company's stock option activity as of
January 5, 1996, January 3, 1997 and January 2, 1998:
124
Weighted
Average
Exercise Option
Shares Price Price Range
------ ----- ----------
Outstanding at December 30, 1994 316,206 $ 4.28 $ 2.00 - $ 12.25
Granted 112,000 $ 4.61 $ 4.00 - $ 4.88
Exercised (1,400) $ 2.61 $ 2.25 - $ 2.75
Expired (36,502) $ 4.42 $ 2.50 - $ 10.75
--------
Outstanding at January 5, 1996 390,304 $ 4.37 $ 2.00 - $ 12.25
-------
Granted 8,000 $ 4.00 $ 4.00 - $ 4.00
Exercised (19,744) $ 3.52 $ 2.25 - $ 3.69
Forfeited (10,386) $ 5.00 $ 2.25 - $ 10.75
Expired (35,000) $ 4.68 $ 4.68 - $ 4.68
--------
Outstanding at January 3, 1997 333,174 $ 4.36 $ 2.00 - $ 12.25
-------
Granted 147,350 $ 4.50 $ 4.44 - $ 5.00
Exercised (12,628) $ 3.11 $ 2.50 - $ 3.69
Forfeited (38,278) $ 5.87 $ 2.50 - $ 8.50
Expired (3,000) $ 3.35 $ 2.88 - $ 3.63
----------
125
Outstanding at January 2, 1998 426,618 $ 4.32 $ 2.00 - $ 12.25
======= ======= ======== =========
Options exercisable for shares of the Company's Class A and Class B Common
Stock as of January 5, 1996 and January 3, 1997, and January 2, 1998, are
as follows:
Options Exercisable
-------------------------------------------------
Weighted Average
Exercise Price
----------------
Class A Class B Class A Class B
Common Common Common Common
Stock Stock Total Stock Stock
----- ----- ---- ---- -----
January 5, 1996 11,400 155,470 166,870 $ 4.81 $ 4.92
January 3, 1997 11,400 181,953 193,353 $ 5.60 $ 4.81
January 2, 1998 4,900 228,586 233,486 $ 2.27 $ 4.71
The following table summarizes information about stock options outstanding
at January 2, 1998:
127
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
-------------- ---------- ---- ----- ---------- -----
$ 2.00 - $ 3.69 147,768 1.16 $ 3.15 92,586 $ 3.54
$ 4.00 - $ 6.00 265,600 3.82 $ 4.58 127,900 $ 4.71
$ 10.75 - $ 12.50 13,250 .56 $ 12.11 13,000 $ 12.13
---------- ---------
426,618 233,486
========== =========
The weighted average fair value at date of grant for options granted in
1997, 1996 and 1995 was $2.47, $1.93 and $2.81 per option, respectively.
The weighted-average fair value of these options at the date of grant was
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-
free interest rates of 6.3%, 6.3% and 6.5%; dividend yields of 0%, 0% and
0%; volatility factors of the expected market price of the Company's common
stock of 41.0%, 47.0% and 48.0%; and a weighted-average expected life of
the options of five years.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for
stock option awards in 1997, 1996 and 1995, consistent with the provisions
of SFAS No. 123, the Company's net income (loss) and net income (loss) per
share would have been reduced to the pro forma amounts indicated below
(dollars in thousands, except per share amounts):
129
1997 1996 1995
---------------------- ---------------------- ----------------------
Earnings Earnings Earnings Earnings Earnings Earnings
per per per per per per
Common Common Common Common Common Common
Share - Share - Share - Share - Share - Share -
Basic Diluted Basic Diluted Basic Diluted
---- ------ ---- ------ ---- ------
Net income (loss):
As reported $(4,718) $(4,718) $ 1,494 $ 1,494 $ 1,591 $ 1,591
Compensation expense for
stock, net of tax (63) (63) (87) (87) (65) (65)
-------- -------- -------- --------- --------- ---------
Pro forma net income (loss) (4,781) (4,781) 1,407 1,407 1,526 1,526
======== ======== ======= ======== ======== ========
Pro forma earnings per share
As reported $ (0.76) $ (0.76) $ 0.24 $ 0.24 $ 0.26 $ 0.26
Compensation expense for
stock, net of tax (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
-------- -------- --------- --------- --------- ----------
Pro forma net income (loss)
per share $ (0.77) $ (0.77) $ 0.23 $ 0.23 $ 0.25 $ 0.25
========= ========= ======== ======== ========= =========
The pro forma net income for 1997, 1996 and 1995 is not representative of
the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made
prior to 1995.
12. INCOME TAXES:
------------
The provision for income taxes was calculated according to the precepts of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The objective of SFAS No. 109 is to recognize the amount of taxes
payable or refundable in the current year and to recognize the expected
future tax consequences of events that have been included in the financial
statements or tax returns. SFAS No. 109 requires the identification of all
cumulative temporary differences arising between the tax bases of assets
and liabilities and their reported amounts in the financial statements.
The tax effects of these temporary differences are measured using enacted
tax rates and are reported on the consolidated balance sheet as deferred
tax assets and liabilities. Deferred tax assets are then reduced if it is
more likely than not that some portion of the expected future tax benefits
will not be realized.
The following is a summary of the components of the provision for income
taxes, current and long- term deferred tax assets and liabilities and a
reconciliation of the U.S. statutory federal income tax rate to the
effective income tax rate reflected in the consolidated income statement.
The provision for income taxes was based on pretax income (loss) from
continuing operations before minority interest which was subject to
131
taxation by the following jurisdictions. Domestic pretax income includes
the pretax income of U.S. based entities as well as the international
branches of these entities (in thousands):
1997 1996 1995
---- ---- ----
Pre-Tax income (loss):
Domestic $ 715 $1,149 $1,013
Foreign (4,169) 833 (785)
-------- ------ -------
Total $(3,454) $1,982 $ 228
The provision (credit) for income taxes consists of the following (in
thousands):
1997 1996 1995
---- ---- ----
Current:
Federal $1,053 $ 265 $ 71
State 307 142 51
Foreign 223 135 239
------ ------ ------
1,583 542 361
------ ------ ------
Deferred:
Federal (859) (102) 10
State (263) (34) 38
Foreign (1,365) 137 (482)
------- ------ -------
(2,487) 1 (434)
132
------- ------ -------
Change in valuation allowance 1,399 (218) 65
------ ------- ------
Total $ 495 $ 325 $ (8)
====== ====== =======
The net deferred tax asset or liability reported on the consolidated
balance sheet consist of the following items as of January 2, 1998 and
January 3, 1997 (in thousands):
1997 1996
---- ----
Net current deferred tax assets:
Allowance for doubtful accounts and discounts $ 1,111 $ 400
Inventory allowances and tax costing adjustments 236 246
Deferred compensation 279 229
Accrued expenses, not currently deductible 283 125
Untaxed installment receivables (45) (174)
Loss carryforwards 125 599
Valuation allowance -- --
------- ------
Total $ 1,989 $1,425
------- ------
Net long-term deferred tax assets:
Loss carryforwards $ 1,752 --
Valuation allowance (1,399) --
-------- ------
Total $ 353 --
------- ------
Net long-term deferred tax liabilities:
Property, plant and equipment $ 621 $ 769
Investments in limited partnerships 1,198 1,155
Untaxed installment receivables 102 --
------- ------
Total $ 1,921 $1,924
------- ------
Net deferred tax asset (liability) $ 421 $ (499)
======= =======
The loss carryforward amounts shown above relate to foreign operating
losses of approximately $6,289,000 which may be carried forward
indefinitely. At January 2, 1998, the Company has determined that it is
more likely than not that $1,399,000 of the deferred tax assets resulting
from foreign operating losses will not be realized.
The differences between the U.S. statutory federal income tax rate and
the effective income tax rate on pretax income from continuing operations
before minority interest are summarized as follows:
1997 1996 1995
---- ---- ----
U.S. federal income tax rate (34.0%) 34.0% 34.0%
State income tax, net of federal benefit 0.8% 3.6% 25.8%
Detriment (benefit) of valuation allowance
relating to foreign losses 40.5% (11.0%) 28.5%
Non-deductible expenses and tax-exempt income 0.8% 1.5% 13.4%
International tax rate differences 7.7% (0.6%) 10.3%
Low-income housing tax credits (1.5%) (9.0%) (71.6%)
Adjustment of prior years' estimated
tax liabilities 0.0% (2.1%) (43.9%)
---- ------ ------
Effective income tax rate 14.3% 16.4% (3.5%)
===== ===== ======
The Company has not recorded deferred income taxes applicable to the
undistributed earnings of foreign subsidiaries that are indefinitely
reinvested in foreign operations. These earnings amounted to approximately
$3,046,000 at January 2, 1998.
13. DISCONTINUED OPERATIONS:
-----------------------
On July 4, 1997, Brookfield Athletic Co., Inc. ("Brookfield"), a wholly
owned subsidiary of the Company, sold substantially all of the assets used
in the Brookfield business to Brookfield International, Inc. for
$6,841,000. The consideration paid equals the net asset value of the
Brookfield assets as of July 4, 1997, reduced by certain liabilities that
were assumed by Brookfield International, Inc.
The summarized balance sheet for the discontinued operations as of January
3, 1997 is as follows (in thousands):
Assets
------
Current assets
Accounts receivable $ 4,437
Inventories 4,095
Prepaid expenses 491
--------
Total current assets 9,023
Property, plant and equipment, net 190
Other assets 966
--------
Total assets $ 10,179
--------
Liabilities
-----------
Current liabilities
Current portion of long-term debt and
capital lease obligations $ 36
Accounts payable 30
Accrued expenses 179
--------
Total liabilities $ 245
--------
Net of discontinued operations $9,934
======
As of January 3, 1997, the net assets of the discontinued operation have
been reclassified and are reflected in current assets in the consolidated
balance sheet as of that date.
As a result of the Brookfield sale, the Company recorded a pre-tax loss of
$821,000, (after tax or $0.08 per diluted share). The pre-tax loss
includes $278,000 of costs incurred in connection with the disposal of
Brookfield, agreed reduction to the selling price of $300,000, as well as
operating losses of $243,000, incurred by Brookfield subsequent to the
transaction measurement date.
The results of operations for Brookfield for the fiscal years ended January
2, 1998, January 3, 1997 and January 5, 1996 have been segregated from
continuing operations and are reported separately as discontinued
operations. Prior year consolidated statements of earnings have been
restated to present Brookfield as a discontinued operation.
The following table summarizes Brookfield's results of operations for the
years ended January 2, 1998, January 3, 1997 and January 5, 1996 (in
thousands):
1997 1996 1995
--- --- ---
Net revenues $ 2,381 $ 19,567 $ 24,439
Costs and expenses 3,037 19,319 22,647
------- ------- -------
Income (loss) before tax (656) 248 1,792
Income tax expense (benefit) (262) 103 723
-------- ------- -------
Income (loss) from discontinued operations (394) 145 1,069
Loss on disposal of Brookfield Athletic
Co., Inc., including operating losses
of $243 during the phase-out
period (net of tax benefit of $323) (498) -- --
-------- ------ -------
Income (loss) from discontinued operations $ (892) $ 145 $ 1,069
======== ====== =======
14. BUSINESS RESTRUCTURING AND OTHER CHARGES:
----------------------------------------
Results of continuing operations for 1997 include a non-recurring charge of
$2,766,000 ($3,089,000 after tax or $0.50 per diluted share) associated
with the restructuring of the Company's Australian subsidiary and a non-
recurring charge of $850,000 ($508,000 after tax or $0.08 per diluted share
) to reduce the carrying value of the Company's distribution facility in
East Brookfield, Massachusetts to market.
The restructuring charge attributable to the Company's Australian
subsidiary consisted of asset write-downs to estimated realizable values,
as follows: accounts receivable of $858,000; inventory of $1,340,000; and
prepaid expenses and other assets of $568,000. The Company recorded a
deferred tax valuation allowance of $999,000 relating to net operating loss
carryforwards of the Australian subsidiary which are not expected to be
realized. In addition, the Company forgave $1,691,000 of intercompany
trade receivables owed by the Australian subsidiary, resulting in a tax
benefit of $676,000.
15. FOREIGN OPERATIONS, GEOGRAPHIC AREAS, AND OTHER INCOME:
-------------------------------------------------------
During 1997, 1996 and 1995, foreign operations of the Company included the
international activities of Hyde International Services, Ltd., Saucony
Sports BV, and Saucony Deutschland Vertriebs GmbH, wholly owned foreign
subsidiaries; Saucony Canada, Ltd., a majority-owned foreign joint venture
Saucony SP Pty Ltd., a 50%-owned foreign joint venture; and Saucony UK, a
branch operation of Saucony, Inc.
The condensed balance sheet of the Company's foreign operations as of
January 2, 1998 and January 3, 1997, are as follows (in thousands):
1997 1996
---- ----
ASSETS:
Current assets:
Cash $ 1,390 $ 1,830
Accounts receivable 4,116 4,768
Inventories 5,888 8,909
Other current assets 1,178 1,127
Noncurrent assets 325 1,092
------- -------
$12,897 $17,726
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Notes payable $ 2,885 $ 1,935
Current portion of long-term debt 1,308 94
Accounts payable and accrued expenses 1,465 1,614
Due to related parties 8,344 7,161
Long-term debt -- 1,885
Capitalized lease obligations 19 31
Minority interest 195 488
Stockholders' equity (1,319) 4,518
-------- -------
$12,897 $17,726
======= =======
The results of foreign operations included in the consolidated statements
of income are as follows (in thousands):
1997 1996 1995
---- ---- ----
Net sales to unaffiliated parties $22,412 $23,723 $21,214
Net sales to affiliated parties
(eliminated in consolidation) 604 741 738
------- ------- -------
Net sales $23,016 $24,464 $21,952
======= ======= =======
Income (loss) before income
taxes and minority interest $(6,109) $ 677 $ 632
Income tax provision (benefit) 225 54 (179)
Minority interest in income (loss) (123) 308 (286)
-------- ------- --------
Net income (loss) $(6,211) $ 315 $ 1,097
======== ======= =======
The foreign operations changes in stockholders' equity from 1997 to 1996,
1996 to 1995 and 1995 to 1994 were due to the recognition of common stock
and paid-in capital amounts offset by income or losses and accumulated
translation adjustments.
The following table summarizes the Company's continuing operations by
geographic area for the years ended January 2, 1998, January 3, 1997 and
January 5, 1996 and identifiable assets as of January 2, 1998, January 3,
1997 and January 5, 1996 (in thousands):
1997 1996 1995
---- ---- ----
NET SALES TO UNAFFILIATED PARTIES:
United States $65,602 $ 60,236 $51,061
International 28,009 31,105 27,488
------- -------- -------
$93,611 $ 91,341 $78,549
======= ======== =======
INTERNATIONAL NET SALES TO UNAFFILIATED PARTIES:
International divisions of
United States parent company $ 5,597 $ 7,382 $ 6,274
Foreign subsidiaries 22,412 23,723 21,214
------- -------- -------
$28,009 $ 31,105 $27,488
======= ======== =======
NET SALES BETWEEN GEOGRAPHIC AREAS:
United States $ 180 $ 44 $ 138
International 7,430 8,148 8,241
------- -------- -------
$ 7,610 $ 8,192 $ 8,379
======= ======== =======
TOTAL NET SALES:
United States $65,782 $ 60,280 $51,199
International 35,439 39,253 35,729
Less: Inter-area eliminations (7,610) (8,192) (8,379)
-------- --------- --------
$93,611 $ 91,341 $78,549
======= ======== =======
OPERATING PROFIT (LOSS):
United States $ 3,479 $ 2,069 $ 2,199
International (5,748) 944 (858)
Less: Inter-area eliminations (297) (228) (50)
-------- --------- --------
$(2,566) $ 2,785 $ 1,291
======== ======== =======
IDENTIFIABLE ASSETS:
United States $59,828 $ 66,448 $64,395
International 13,142 17,741 14,754
Less: Inter-area eliminations (11,346) (12,843) (9,678)
-------- --------- --------
$61,624 $ 71,346 $69,471
======= ======== =======
Net sales to unaffiliated customers is based on the location of the
customers. International inter-area sales represent shipment of inventory
to international subsidiaries and purchases of inventory from international
subsidiaries. These inter-area sales are generally priced to recover cost
plus an appropriate mark-up for profit and are eliminated in the
determination of consolidated net sales. Operating profit consists of
revenue less related cost of sales, selling expenses and general and
administrative expenses, and does not include interest expense, income
taxes or minority shareholders' interest.
Other income (expense) consists primarily of royalty income, income from
short-term investments, income recognized due to the sale or licensing of
trademarks, foreign currency transaction exchange gains and losses, and
gains or losses from the sale or disposition of assets.
16. MAJOR CUSTOMER:
---------------
For 1997, 1996 and 1995, the Company did not have a major customer account
for more than 10% of gross sales.
17. ACQUISITIONS:
------------
Saucony Sports B.V.
-------------------
On December 11, 1991, the Company entered into a joint venture with a Dutch
company to market and distribute Saucony footwear. On December 31, 1991,
the Company purchased 51% of the issued and outstanding stock of Saucony
143
Sports BV for $414,000. On June 9, 1993, the Company increased its
majority ownership from 51% to 76% by acquiring an additional 25% of the
issued and outstanding common stock from the minority shareholder, for
$210,000, which equaled the book value of the stock. On December 22, 1997,
the Company acquired the remaining issued and outstanding stock owned by
the minority stockholder for $140,000 of which $30,000 has been recorded as
goodwill.
At January 2, 1998, January 3, 1997 and January 5, 1996, Saucony Sports BV
had assets of $1,889,000, $1,571,000 and $1,595,000; liabilities of
$930,000, $1,236,000 and $1,455,000; and revenues of $3,170,000, $3,084,000
and $3,216,000, respectively.
Saucony Canada, Inc.
--------------------
On March 1, 1993, the Company acquired 85% of the issued and outstanding
stock of a Canadian distributor, Saucony Canada, Inc. The purchase price
of $351,000 was financed with available cash of $161,000 and the issuance
of a note payable of $189,843. At January 2, 1998, January 3, 1997 and
January 5, 1996, Saucony Canada, Inc. had assets of $2,841,000, $2,102,000
and $1,867,000; liabilities of $359,000, $851,000 and $741,000; and
revenues of $4,199,000, $4,002,000 and $3,777,000, respectively.
Saucony SP Pty. Ltd.
--------------------
Effective July 1, 1993, the Company acquired 50% of the issued and
outstanding common stock of an Australian distributor, Saucony SP Pty.
Ltd., for $214,000 in cash. The agreement was completed on November 13,
1993. During 1995, the Company increased its investment in Saucony SP Pty.
Ltd. by acquiring 28 shares of Cumulative Redeemable Preferred Stock ($1
par) for $2,082,000 in exchange for an equivalent reduction in debt owed to
the Company by Saucony SP. The shares, which are redeemable on or after
January 1, 1998, provide for cumulative preferential dividends and confer
priority to the preferred shareholders, with respect to dividends and
return of share capital and share premium. As the fair value of assets
acquired equaled the carrying value of the debt reduction, there was no
impact on consolidated net income. See Note 14 of Notes to Consolidated
Financial Statement regarding the restructuring charge recorded in the
fourth quarter of 1997.
At January 2, 1998, January 3, 1997 and January 5, 1996, Saucony SP Pty.
Ltd. had assets of $3,515,000, $9,420,000 and $7,401,000; liabilities of
$2,692,000, $6,895,000 and $5,528,000; and revenues of $10,333,000,
$14,024,000 and $11,661,000, respectively.
Quintana Roo, Inc.
------------------
On August 31, 1995, Quintana Roo, Inc., a newly formed subsidiary of the
Company, acquired the assets of a bicycle and wetsuit manufacturer for
$112,000 in cash.
Hind Apparel
------------
On December 20, 1996, the Company acquired the trade name, trademarks,
patents and service marks of an athletic apparel manufacturer for
$1,250,000 in cash. The entire purchase amount has been recorded as
goodwill.
These acquisitions are accounted for as purchases.
18. CONCENTRATION OF CREDIT RISK:
----------------------------
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash, cash equivalents and trade receivables.
The Company maintains cash and cash equivalents with various major
financial institutions. Cash equivalents include investments in commercial
paper of companies with high credit ratings, investments in money market
securities and securities backed by the U.S. Government. At times such
amounts may exceed the F.D.I.C. limits. The Company limits the amount of
credit exposure with any one financial institution and believes that no
significant concentration of credit risk exists with respect to cash
investments.
Trade receivables subject the Company to the potential for credit risk with
customers in the retail and distributor sectors. To reduce credit risk,
the Company performs ongoing evaluations of its customers financial
condition but does not generally require collateral. Approximately 31% of
the Company's gross trade receivables balance was represented by 8
customers at January 2, 1998, which exposes the Company to a concentration
of credit risk.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS:
-----------------------------------
The carrying value of cash, cash equivalents, receivables, long-term debt
and other notes payable approximates fair value. The Company believes
similar terms for current long-term debt and other notes payable would be
attainable. The fair value of marketable securities is estimated based
146
upon quoted market prices for these securities. The Company enters into
forward currency exchange contracts to hedge intercompany liabilities
denominated in other than the functional currency. The fair value of the
Company's foreign currency exchange contracts is estimated based on current
foreign exchange rates. At January 2, 1998, the value of the Company's
foreign currency exchange contracts to purchase U.S. dollars was $1,072,000
and to sell U.S. dollars was $146,000. Gains and losses on forward
exchange contracts are deferred and offset against foreign currency
exchange gains and losses on the underlying hedged item upon consummation
of the transaction. At January 2, 1998, estimated fair value of the
Company's financial instruments approximated the carrying value.
20. QUARTERLY INFORMATION:
----------------------
147
(in thousands, per share amounts in dollars)
1997 Quarter 1 Quarter 2 Quarter 3 Quarter 4
---- -------- -------- -------- ---------
Net sales $ 25,217 $ 24,398 $ 24,635 $ 19,361
Gross profit 8,585 8,550 8,422 5,883
Income (loss) from continuing operations 570 (120) 581 (4,857)
Income (loss) from discontinued operations (287) (348) (172) (85)
Net income (loss) 283 (468) 409 (4,942)
Earnings per share:
Basic 0.05 (0.07) 0.07 (0.79)
Diluted 0.05 (0.07) 0.07 (0.79)
1996 Quarter 1 Quarter 2 Quarter 3 Quarter 4
---- -------- -------- -------- ---------
Net sales $ 28,638 $ 24,396 $ 20,609 $ 17,698
Gross profit 8,788 7,542 7,207 6,112
Income (loss) from continuing operations 883 227 220 19
Income (loss) from discontinued operations (143) (114) 383 19
Net income (loss) 740 113 603 38
Earnings per share:
Basic 0.12 0.02 0.10 0.01
Diluted 0.12 0.02 0.10 0.01
During the second quarter of 1997, the Company recorded a non-recurring
charge of $850,000 ($508,000 after tax, $0.08 per share diluted) to reduce
the carrying value of the Company's distribution facility in East
Brookfield, Massachusetts to market.
During the fourth quarter of 1997, the Company's gross profit was reduced
due to the significant decline in gross margin realized by the Company's
Australian subsidiary which was due to increased sales of non-current
models. In addition, the Company recorded a charge of $2,766,000
($3,089,000 after tax, or $0.50 per share diluted) associated with the
restructuring of the Company's Australian subsidiary, which included a
deferred tax valuation allowance of $999,000, and the Company recorded a
deferred tax valuation allowance of $400,000 related to net operating loss
carryforwards of the Company's German subsidiary which are not expected to
be realized.
Earning 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 1997 and fiscal 1996.
21. SUBSEQUENT EVENT
----------------
In March 1998, the Company entered into an agreement with its joint venture
partners in its Australian subsidiary pursuant to which the Company will
acquire all of the proprietary interests of such partners in the subsidiary
for nominal consideration and the employment of the managing director of
such subsidiary will be terminated. The Company expects the closing to
occur pursuant to such agreement by no later than May 1, 1998. The
149
Company is in the process of reassessing its operations in Australia and is
evaluating several alternative methods of continuing its presence in the
Australian market.
150
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 2, 1998, January 3, 1997 and January 5, 1996
------------------------------------------------------------------------
(dollars in thousands)
Additions
Balance charged to Deductions Balance
beginning costs and from end
of year expenses reserve of year
------- -------- ------- -------
Year ended January 2, 1998:
Allowance for doubtful accounts and discounts $ 1,234 $ 5,475 $ 4,677 $ 2,032
Year ended January 3, 1997:
Allowance for doubtful accounts and discounts $ 940 $ 5,269 $ 4,975 $ 1,234
Year ended January 5, 1996:
Allowance for doubtful accounts and discounts $ 1,147 $ 4,807 $ 5,014 $ 940
EXHIBIT INDEX
151
-------------
Exhibit
Number Description Page
- - ------ ----------- ----
2.0 Asset Purchase Agreement, dated June 27, 1997, between
Brookfield International, Inc. and Brookfield Athletic Co.,
Inc. is incorporated herein by reference to Exhibit 2.1 to
the Registrant's Current Report on Form 8-K dated
July 4, 1997. *
3.1 Restated Articles of Organization, as amended, of the
Registrant are incorporated herein by reference to
Exhibit 4.1 to the Registrant's Registration Statement
on Form S-8 (File No. 33-66482) *
3.2 By-Laws, as amended, of the Registrant are incorporated
herein by reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form S-2, as amended
(File No. 33-61040) (the "Form S-2") *
10.1 Note Purchase Agreement between the Registrant and
the Principal Mutual Life Insurance Company is incorporated
herein by reference to Exhibit (4b) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1988 (the "1988 10-K Report") *
10.2 Credit Agreement among the Registrant, State Street Bank
and Trust Company and CoreStates Bank, N.A., dated
August 31, 1993 is incorporated herein by reference
152
to Exhibit 10.2 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1993 (the
"1993 10-K Report") *
10.3 Guarantee of the Registrant to the Bank of Nova Scotia
is incorporated herein by reference to Exhibit 10.3 to
the 1993 10-K Report *
10.4 Letter of Guarantee of the Registrant to State Street
Finance Limited is incorporated herein by reference
to Exhibit 10.4 to the 1993 10-K Report *
10.5** 1982 Employee Stock Option Plan, as amended, is
incorporated herein by reference to Exhibit 10.7 to the Form S-2 *
10.6** Amendment to the Credit Agreement among the Registrant,
State Street Bank and Trust Company and CoreStates Bank,
N.A., dated August 31, 1993, is incorporated herein by reference
to Exhibit 10.06 to the Registrant's Quarterly Report on Form
10-Q for the 39 weeks ended September 30, 1994 *
10.7# Trademark License Agreement, dated as of February 1, 1994,
between the Registrant and Leif J. Ostberg, Inc. is incorporated
herein by reference to Exhibit 10.21 of the 1993 10-K Report *
10.8** 1993 Equity Incentive Plan, as amended.
10.9** 1993 Director Option Plan is incorporated herein by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form
153
10-Q for the thirteen weeks ended April 2, 1993, as amended
(the "1993 Form 10-Q") *
10.10** VP Bonus Plan is incorporated herein by reference to
Exhibit 10.19 to the Form S-2 *
10.11** Compensation Agreement between the Registrant and
James H. Noyes, Jr. is incorporated herein by reference
to Exhibit 10.3 to the 1993 Form 10-Q *
10.12** Letter Agreement dated March 30, 1995, between the Registrant
and Principal Mutual Life Insurance Company is incorporated herein
by reference to Exhibit 10.01 of the Registrant's Quarterly Report
on Form 10-Q for the thirteen weeks ended March 31, 1995 *
10.13# Second and Third Amendments to the Credit Agreement among the
Registrant, State Street Bank and Trust Company and CoreStates
Bank, N.A. is incorporated herein by reference to Exhibit 10.27 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 3, 1997. *
21 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Grant Thornton
27.1 Financial Data Schedule restated for the fiscal year ended January 5,
1996.
27.2 Financial Data Schedule restated for the fiscal year ended January 3,
154
1997, the three months ended April 5, 1996, the six months ended
July 5, 1996 and the nine months ended October 4, 1996.
27.3 Financial Data Schedule restated for the fiscal year ended January 2,
1998 and Financial Data Schedule restated for the three months
ended April 4, 1997, the six months ended July 4, 1997 and the
nine months ended October 3, 1997.
* Incorporated herein by reference.
** Management contract or compensatory plan or arrangement filed
herewith in response to Item 14(a)(3) of the instructions to Form 10-
K.
# Confidential treatment previously granted as to certain portions of
such document.
155
156