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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended January 5, 1996 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: (508) 532-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.33-1/3 par value
(Title of class)
Class B Common Stock, $.33-1/3 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, as of March 25, 1996, was approximately $5,734,795 (based on the
last sale price of the Class A 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 25,
1996 was 2,701,727 and 3,515,415, 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 of Part III
the Registrant to be held on May 21, 1996, to be filed
with the Securities and Exchange Commission.
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 brand name and
(II) outdoor recreational products for children and young adults under licensed
names, such as Barbie and Playskool, as well as under Brookfield and other
proprietary names of the Company ("Brookfield Products"). The Company's Saucony
athletic footwear products include running, walking, cross training and outdoor
trail shoes, and the Company's Brookfield outdoor recreational products include
roller skates, roller hockey skates and accessories. The following table sets
forth the approximate contribution to net sales (in dollars and as a percentage
of net sales) attributable to each product line for the periods and geographic
areas indicated. "Other" consists of Spot-Bilt coaches and officials shoes,
Quintana Roo bicycles and wetsuits, and 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.
Net Sales
(dollars in thousands)
Fiscal 1993 Fiscal 1994 Fiscal 1995
----------------------- ------------------------ -------------------------
Sales Sales Co. Sales Sales Co. Sales Sales Co.
$ % % $ % % $ % %
Saucony
Domestic $ 64,836 81% $ 53,939 71% $ 47,040 67%
International 14,740 19% 22,420 29% 23,628 33%
--------- ------ --------- ---- ---------
Total $ 79,576 100% 77% $ 76,359 100% 71% $ 70,668 100% 69%
Brookfield
Domestic $ 16,094 84% $ 19,699 80% $ 18,737 78%
International 3,160 16% 4,824 20% 5,277 22%
--------- ------ --------- ---- --------- ---
Total $ 19,254 100% 18% $ 24,523 100% 23% $ 24,014 100% 23%
Other $ 4,905 5% $ 6,696 6% 7,881 8%
--------- ---- -------- ---- --------- ----
Grand Total $ 103,735 100% $107,578 100% $ 102,563 100%
========= ==== ======== ==== ========== ====
SAUCONY BRAND. The Company sells quality running, cross training, walking, and
outdoor trail shoes for adults under the Saucony brand name, which has been
marketed in the United States for over 25 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 fifth in sales of
running shoes in the United States during 1995. In addition, according to
ASD/Target Research, the Company's market share of running shoes sold in the
United States was 7.0% in 1995. 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 which have different designs and features,
resulting in different cushioning, stability, support characteristics and
prices.
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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.
Many of the Company's top of the line running and other athletic shoes
incorporate the Company's G.R.I.D. ("Ground Reaction Inertia Device") 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 G.R.I.D. System is designed to
react to various stress forces differently and thereby simultaneously to
maximize shock absorption and minimize rear foot motion. In 1995, the Company
introduced the next generation of G.R.I.D. technology into its top of the line
shoes and incorporated the current G.R.I.D. System into its Saucony Jazz running
shoes, the Company's most popular shoes.
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 $135 per pair.
The Company designs its Saucony cross training, 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 traditional white leather 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. Accordingly, the Company has licensed the Saucony name for the
United States market to the Bangor Trading Company of Chula Vista, California,
for use in connection with a line of sporting apparel. The Bangor Trading
Company introduced these apparel products into the performance athletic apparel
market in 1993.
BROOKFIELD PRODUCTS. The Company markets a full range of recreational and
dedicated enthusiast sports products that provide "Outdoor Fun For Kids." The
principal products in this category includes moderately priced roller skates,
roller hockey skates and in-line skates for children and young adults. Other
products include protective accessories, such as wrist, elbow and knee pads.
These products are sold through mass merchant, toy and sporting goods
departments and, in some cases, through free-standing sporting goods outlets.
These products are sold both under names owned by the Company, including the
"Brookfield," "Hyde," and "Spot-Bilt" names, and also under brand names licensed
from third parties, including Mattel, Inc., Hasbro, Inc., Franklin Sports, Inc.,
Spalding, Inc. and the Walt Disney Company. Licensed brands include such
recognizable names as Barbie, Playskool, Nerf, Spalding and Topflite, as well as
Mickey and Minnie.
The Company's strategy for licensed products is to offer categories and families
of products under well known trademarks and children's characters that
distinguish its products from those of its competition. The Company believes use
of these licensed brand names enables it to leverage
3
established consumer awareness created by licensor-implemented national and
international advertising and promotional programs.
OTHER SALES
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 company that distributes youth team
field sport shoes under this name. (See Note 3 of Notes to Consolidated
Financial Statements).
QUINTANA ROO. The Company manufactures and distributes the Quintana Roo
line of triathlon bicycles, road bicycles, mountain bicycles and wet suits.
FACTORY OUTLET STORES. The Company operates six 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, Brookfield and Spot-Bilt products at these outlets, as
well as athletic goods of third parties, such as athletic clothing and
accessories.
AUSTRALIAN PRODUCTS. The Company's Australian subsidiary holds the exclusive
license to distribute various non-Hyde products throughout Australia.
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
professionals as podiatrists, orthopedists, athletes, trainers and coaches as
part of its Saucony product development program. In developing Brookfield
products, the Company focuses both on comfort and on the color, graphics and
design of the product and the product packaging. The Company maintains a staff
of 25 persons located in Peabody, Massachusetts and Taiwan 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 5, 1996, December 30, 1994, and December 31, 1993, the
Company expended $1,851,000, $1,296,000, and $1,386,000, respectively, in
connection with its product development programs.
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, Nordstrom's, Road Runner's Sport, Sport
Mart and United Merchandising. With the exception of certain specified "house
accounts" handled directly by the Company, the Company sells its athletic
footwear products in the United States through 10 independent manufacturer's
representatives, whose organizations employ approximately 50 individual sales
representatives. Company sales personnel directly service a limited number of
specified house accounts and sell to a number of national accounts on a joint
basis with the Company's independent representatives.
The Company sells its Saucony products outside the United States through 22
distributors located throughout the world, including joint venture subsidiaries
in which the Company holds controlling interests located in the Netherlands
(which holds the distribution rights to the Company's Saucony
4
products in the Benelux countries), Australia, Germany and Canada, and
through 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 Europe and Australia.
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.
The Company engages in various advertising and promotional programs for its
Saucony products. The principal media used by the Company as part of its
advertising and promotional programs are magazines, with a particular focus on
athletic and fitness magazines. The Company also uses radio and regional
television advertising. To heighten its brand presence in retail outlets, the
Company emphasizes account specific in-store promotions of its Saucony products,
such as holding special events, providing consumers with a gift upon the
purchase of specified products and employee contests. Also to heighten brand
awareness, the Company frequently employs grass roots promotional activities,
such as its "Walking Club" and "Extra Mile Club" promotions. In addition, the
Company promotes its products on a limited basis through product endorsements by
athletes and sponsorship of sporting events.
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.
BROOKFIELD PRODUCTS. The Company's Brookfield products are sold to retail
purchasers primarily through leading mass merchandisers, toy chains and
wholesale clubs. Retailers of Brookfield products include Sam's Wholesale Club,
Service Merchandise, Target and Toys "R" Us. The Company sells its Brookfield
products to these retailers in the United States primarily through nine
multi-line independent manufacturers representative agencies. Company sales
personnel directly service a limited number of specified house accounts for
Brookfield products and sell jointly with the Company's independent
representatives to a limited number of national accounts. The Company has begun
to expand sales of its Brookfield products in international markets and at the
end of 1995 was selling its products in 32 foreign countries.
The Company directs most of its advertising and promotional efforts for
Brookfield products towards the trade through attendance at trade shows and
similar events. The Company also employs an advertising program under which it
reimburses participating retailers for a portion of the costs incurred by such
retailers in advertising Brookfield products.
BACKLOG; SEASONALITY; DISTRIBUTION. The Company's backlog of unfilled orders was
approximately $34,727,000 at January 5, 1996 and $31,415,000 at December 30,
1994. The Company expects that all of its backlog at January 5, 1996 will be
shipped in fiscal 1996. 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.
5
Although sales of different products of the Company are subject to seasonality,
the Company as a whole is not subject to significant seasonality in its product
sales because of the different selling seasons for various products. The Company
distributes its products through its warehouses in Peabody and Brookfield,
Massachusetts, as well as through independent warehouse facilities located
throughout the world.
For information about the Company's foreign operations and export sales, see
Note 13 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 Brookfield and Spot-Bilt 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 1995, the Company purchased products from 16 overseas
suppliers. One of such suppliers, located in China, accounted for approximately
31% 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 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.
6
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, during the Reagan and Bush
Administrations, on several occasions Congress passed bills that would have
restricted footwear imports into the United States, but such legislation was
vetoed.
The 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.
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. 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 foreign relations 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. 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, Reebok, New Balance and ASICS. The principal competitors for
the Company's Brookfield products are Variflex, Roller Derby, Blade Runner and
Fisher-Price. The Company believes that the key competitive factors as to both
its Saucony and Brookfield products
7
are styling, durability, product identification through promotion, brand
awareness and price. Technical performance is also an important competitive
factor with respect to the Company's Saucony products, and name identification
is an important competitive factor with respect to the Company's licensed
Brookfield products. Customer support services and E.D.I. (Electronic Data
Interchange) are also significant 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, Spot-Bilt, Hyde, G.R.I.D., and
Quintana Roo marks, among others, in the United States. 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 is engaged in 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. The
Company also obtains licenses on a royalty-bearing basis to various marks from
third parties from time to time, generally for two- to three-year periods. The
Company currently uses Barbie, Playskool, Franklin and other marks in connection
with sales of its Brookfield products.
Although the Company has usually been able to renew its licenses upon
expiration, there can be no assurance that it will be able to do so in the
future. The loss by the Company of its license for the Barbie and Spalding marks
could have a material adverse effect on the Company's consolidated financial
position and results of operations. In addition, one or more of the Company's
licensed tradenames or likenesses may decline in popularity.
EMPLOYEES
At January 5, 1996, the Company employed approximately 362 people worldwide, of
whom approximately 128 worked at the Company's manufacturing plant in Bangor,
Maine, approximately 30 worked in the Company's Peabody, Massachusetts,
warehouse, approximately 20 were sales and marketing personnel, approximately 20
were executive and finance personnel, approximately 25 were product development
and design personnel, and the remainder were involved in various other aspects
of the Company's business. The Company employs approximately 67 people at
several international locations. The Company believes that its employee
relations are excellent. The Company has never experienced a strike or other
work stoppage. Approximately 23 employees in the Company's Peabody warehouse
were represented by a union at January 5, 1996. 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 warehouse 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,
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containing approximately 3,000 square feet of space, and a warehouse in East
Brookfield, Massachusetts, containing approximately 100,000 square feet. The
Company's Australian subsidiary owns an office and warehouse facility in St.
Peters, Australia, containing approximately 15,000 square feet.
ITEM 3 - LEGAL PROCEEDINGS
On May 25, 1988, Stuart Meyers brought suit against the Company in the United
States District Court for the District of Massachusetts. On October 12, 1988,
the suit was consolidated with four other cases as a multi-district panel
litigation matter with discovery and related proceedings in the United States
District Court for the Southern District of New York. Defendants in other cases
included several retailers of footwear, including at least one customer of the
Company, as well as other manufacturers. The suit against the Company's customer
was filed on November 2, 1987 in the United States District Court for the
Southern District of New York. These civil actions involve allegations by the
plaintiff that the Company as well as the other defendants in the litigation,
who are major manufacturers and distributors of athletic footwear, have made and
sold footwear within the scope of several patents held and owned by the
plaintiff. Two patents are alleged to be infringed by the Company, while others
are alleged to infringe three patents. The plaintiff sought to enjoin the
Company from further alleged infringements of his patents and for treble damages
for the alleged past infringements. The District Court dismissed the complaints
pursuant to the grant of motions for summary judgment filed on behalf of the
various defendants. The plaintiff filed an appeal in the Court of Appeals for
the Federal Circuit, which rendered a judgment against Meyers, holding Meyers'
three patents invalid. On reconsideration, the Court of Appeals revised its
order with slight modifications.
A subsidiary of the Company, Saucony Shoe Manufacturing Co., Inc. ("SSM"), was
named as a third-party defendant in the case of United States v. Atlas Minerals
and Chemicals, et al., which was filed on August 9, 1991 in the United States
District Court for the Eastern District of Pennsylvania asserting liability
under the Comprehensive Environmental Response Compensation and Liability Act
for the remediation of hazardous substances contamination at a landfill in
Pennsylvania. The United States and the original defendants in this case entered
into a settlement agreement under which the original defendants will conduct or
pay for future remedial actions at the landfill, and reimburse the United States
for certain past response costs. The United States and the original defendants
estimated these remedial actions and response costs at approximately $23
million. The original defendants had initiated third-party actions against
approximately 40 parties, including SSM, seeking reimbursement or contribution
as to these costs. SSM conducted manufacturing operations from 1968 to 1983, at
which time it was phased out of business. On August 25, 1995, the court issued
an opinion and judgment, holding certain parties in the case jointly and
severally liable for response costs which had been and will be incurred, and
determined the equitable share of each liable party. The court determined that
SSM's equitable share of response costs was $89,370, or 0.44% of the total
costs. Should the estimated response costs rise, or should one or more liable
parties fail to satisfy the judgments against them, SSM's obligation would
increase. Payment of SSM's obligation is expected to occur over a number of
years. One of the parties to the case has appealed the court's decision, and
that appeal is now pending.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
-------------- ------ ---------------
John H. Fisher 48 President, Chief Executive Officer
and Director
Charles A. Gottesman 45 Executive Vice President,
Chief Operating Officer, Treasurer
and Director
Wolfgang Schweim 44 President, Saucony Athletic Footwear
Division
James A. Buchanan 49 President and General Manager of
Brookfield Athletic Co., Inc. and
Director
Roger P. Deschenes 37 Controller and Chief Accounting
Officer
Kenneth W. Graham 42 Vice President,
Research & Development/Manufacturing
Daniel J. Horgan 40 Vice President, Operations
John H. Fisher became Chief Executive Officer of the Company in 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.
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Wolfgang Schweim became President of the Company's Saucony Athletic Footwear
Division in June 1994. 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.
James A. Buchanan joined the Company in 1989 as Vice President, Marketing and
was promoted to his present position in 1990. From 1985 to 1989, he was
President of Marketing Associates International Ltd., a company engaged in the
marketing of entertainment products, including the European introduction of the
board game Trivial Pursuit. From 1981 to 1985 he was employed by General Mills,
Inc., first as Director of Marketing for New Ventures (non-foods) and then as
European Marketing Vice President for the General Mills Fun Group. Mr. Buchanan
became a director in 1991.
Roger P. Deschenes joined the Company in 1990 as Corporate Accounting Manager
and was promoted to Controller and Chief Accounting Officer in October 1995. He
was employed at Allen-Bradley, a manufacturing company, and subsidiary of
Rockwell International, from 1987 to 1990 as Financial and Cost Reporting
Supervisor. From 1986 to 1987, Mr. Deschenes was employed at Rule Industries,
Inc., a manufacturing firm, as Accounting Manager. Mr. Deschenes is a Certified
Management Accountant.
Kenneth W. Graham joined the Company in 1984 as Manager of Research and
Development. In 1986, Mr. Graham was promoted to Vice President, Research and
Development and in 1991 he became Vice President, Research and
Development/Manufacturing. Prior to joining the Company, Mr. Graham worked for
seven years with New Balance Athletic Shoes Corporation.
Daniel J. Horgan became Vice President of Operations in September 1995 after
serving as Senior Director of Operations from September 1994 to September 1995.
He joined the Company in 1982 as Manager of Import and Export Operations and has
served as Product Procurement and Distribution Manager and Director of
International Trade for the Company.
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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 System 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 5, 1996
First Quarter $ 5-1/2 $ 4-5/8 $ 5-1/2 $ 4-5/8
Second Quarter 5-1/2 4 5-1/8 3-7/8
Third Quarter 5-1/4 4 5 4
Fourth Quarter 5-1/4 3-5/8 4-5/8 3-5/8
Fiscal Year ended December 30, 1994
First Quarter $ 8 $ 5-1/4 $ 7-3/8 $ 5-1/4
Second Quarter 6 4-3/4 6 5
Third Quarter 6-1/2 4-1/2 6-1/2 4-1/4
Fourth Quarter 6-1/2 4-3/4 6 4-3/4
There were 436 and 422 stockholders of record of the Class A Common Stock and
Class B Common Stock, respectively, on March 25, 1996.
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 5, 1996, approximately $10,555,000 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.
12
ITEM 6 - SELECTED FINANCIAL DATA
Selected Income Statement Data
Year Ended Year Ended Year Ended Year Ended Year Ended
January 5, December 30, December 31, January 1, January 3,
1996 1994 1993 1993 1992
------------- --------------- -------------- -------------- --------------
Net sales $102,562,755 $107,577,873 $103,735,477 $81,302,002 $57,986,848
Income before interest, income taxes
nonrecurring charges, minority
interest and cumulative effect of
change in accounting principle 3,320,129 6,256,133 9,081,123 7,701,541 3,823,128
Nonrecurring charges(1) -- -- -- -- 737,500
Minority interest (285,820) 8,516 (46,747) (26,670) --
Cumulative effect on prior years
of change in accounting principle (2) -- -- -- (303,538) --
Net income 1,591,106 2,936,637 4,607,698 3,422,099 1,034,162
Net income per common share(3) 0.26 0.46 0.76 0.65 0.19
Weighted average number of
common shares and
equivalents outstanding (3) 6,239,557 6,437,281 6,074,238 5,238,410 5,333,754
Selected Balance Sheet Data
January 5, December 30, December 31, January 1, January 3,
1996 1994 1993 1993 1992
--------------- --------------- --------------- --------------- ---------------
Current assets $59,190,090 $61,621,756 $58,121,147 $49,032,888 $40,507,779
Current liabilities 14,728,785 15,657,860 13,372,714 13,417,951 7,094,080
Working capital 44,461,305 45,963,896 44,748,433 35,614,937 33,413,699
Total assets 69,471,289 77,082,332 73,693,786 56,691,068 48,614,636
Long-term debt and capitalized
lease obligations, net of current
portion 4,205,568 11,922,392 12,941,977 10,015,977 12,395,585
Stockholders' equity 48,365,054 46,754,828 44,709,824 30,868,287 27,116,805
- --------------------------------
(1) During 1991, the Company entered into a settlement agreement to resolve
all claims arising out of the Agreement and Plan of Merger with Silvershoe.
The Company recognized a non-recurring charge of $737,500 which is included
in consolidated net income.
(2) The Company adopted Statement of Financial Accounting Standards 109
(SFAS No. 109) in fiscal 1992. SFAS No. 109 required initial application of
this statement to be reported as a change in accounting principle. Included
in 1992 consolidated net income is a charge to earnings of $303,538 or $.06
per share of Common Stock, reflecting the cumulative effect of adopting SFAS
No. 109.
(3) See Notes 1 and 10 of the Notes to Consolidated Financial Statements
regarding restatement to reflect stock dividend.
13
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Selected Quarterly Financial Results
The following table sets forth certain unaudited quarterly financial data of the
Company for each of the four fiscal quarters in each of fiscal 1995, 1994 and
1993. 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)
March 31, June 30, September 29, January 5,
1995 1995 1995 1996
-------------- --------------- --------------- -------------
STATEMENT OF INCOME DATA:
Saucony
Domestic $ 16,146,371 $ 12,777,890 $ 9,958,877 $ 8,156,455
International 7,145,958 5,775,849 5,487,042 5,219,465
------------- --------------- --------------- -------------
Saucony Total 23,292,329 18,553,739 15,445,919 13,375,920
------------- --------------- --------------- -------------
Brookfield
Domestic 4,090,634 3,933,322 6,215,743 4,497,599
International 632,771 1,181,895 1,929,266 1,533,042
------------- --------------- -------------- -------------
Brookfield Total 4,723,405 5,115,217 8,145,009 6,030,641
------------- --------------- --------------- -------------
Other 2,222,167 1,744,781 2,058,338 1,855,290
------------- --------------- --------------- -------------
Net sales 30,237,901 25,413,737 25,649,266 21,261,851
Other income 126,221 859,868 383,692 146,078
------------- --------------- --------------- -------------
Total revenue 30,364,122 26,273,605 26,032,958 21,407,929
------------- --------------- --------------- -------------
Costs and expenses
Cost of sales 20,376,734 17,380,076 17,464,091 15,639,920
Selling expenses 4,860,525 4,361,712 4,419,572 3,045,334
General and administrative
expenses 3,617,505 3,034,023 3,356,192 3,202,801
Interest expense 435,168 311,463 228,306 324,921
------------- --------------- --------------- -------------
Total costs and expenses 29,289,932 25,087,274 25,468,161 22,212,976
------------- --------------- --------------- -------------
Income (loss) before income
taxes and minority interest 1,074,190 1,186,331 564,797 (805,047)
Provision (benefit) for
income taxes 417,103 460,844 220,581 (383,543)
Minority interest in income (loss)
of consolidated subsidiaries 28,148 (113,550) 24,808 (225,226)
------------- --------------- --------------- --------------
Net income (loss) $ 628,939 $ 839,037 $ 319,408 $ (196,278)
============= =============== =============== ==============
Per share amounts:
Net income (loss) $0.10 $0.13 $0.05 $(0.03)
===== ====== ===== ========
Weighted average common shares
and equivalents outstanding 6,252,746 6,245,913 6,231,606 6,228,588
============= =============== ============ =============
14
SELECTED QUARTERLY FINANCIAL RESULTS
Statement of Income Data as a Percentage of Net Sales:
Quarters Ended
(Unaudited)
STATEMENT OF INCOME DATA: March 31, June 30, Sept. 29, Jan. 5,
1995 1995 1995 1996
-------------- -------------- ------------- ------------
Saucony
Domestic 53.4% 50.3% 38.8% 38.4%
International 23.6% 22.7% 21.4% 24.5%
----- ----- ----- -----
Saucony Total 77.0% 73.0% 60.2% 62.9%
Brookfield
Domestic 13.5% 15.5% 24.3% 21.2%
International 2.1% 4.6% 7.5% 7.2%
------ ------ ------ -------
Brookfield Total 15.6% 20.1% 31.8% 28.4%
Other 7.4% 6.9% 8.0% 8.7%
------ ------ ------ -------
Net sales 100.0% 100.0% 100.0% 100.0%
Other income 0.5% 3.4% 1.5% 0.7%
------ ------ ------ ------
Total revenue 100.5% 103.4% 101.5% 100.7%
------ ------ ------ ------
Costs and expenses
Cost of sales 67.4% 68.4% 68.1% 73.6%
Selling expenses 16.1% 17.2% 17.2% 14.3%
General and administrative
expenses 12.0% 11.9% 13.1% 15.1%
Interest expense 1.4% 1.2% 0.9% 1.5%
------ ------- ------ ------
Total costs and expenses 96.9% 98.7% 99.3% 104.5%
------ ------- ------ ------
Income (loss) before taxes and
minority interest 3.6% 4.7% 2.2% (3.8%)
Provision (benefit) for income taxes 1.4% 1.8% 0.9% (1.8%)
Minority interest in income
(loss) of consolidated
subsidiaries 0.1% (0.4%) 0.1% (1.1%)
------ ------- ------- ------
Net income (loss) 2.1% 3.3% 1.2% (0.9%)
====== ======= ======= ======
15
STATEMENT OF INCOME DATA:
Quarters Ended
(Unaudited)
April 1, July 1, Sept. 30, Dec. 30,
1994 1994 1994 1994
------- ------- ------- -------
Saucony
Domestic $14,754,713 $14,153,824 $13,580,430 $11,450,127
International 6,025,409 3,679,950 5,847,618 6,867,348
------------- ------------- ------------- -------------
Saucony Total 20,780,122 17,833,774 19,428,048 18,317,475
------------ ------------ ------------ ------------
Brookfield
Domestic 3,449,622 4,640,359 3,818,867 7,789,835
International 253,649 683,519 2,329,573 1,557,237
----------- ------------- ------------- ------------
Brookfield Total 3,703,271 5,323,878 6,148,440 9,347,072
----------- ------------- ------------- ------------
Other 1,630,817 1,587,163 1,876,050 1,601,763
----------- ------------- ------------- ------------
Net sales 26,114,210 24,744,815 27,452,538 29,266,310
Other income 129,850 240,981 379,591 558,028
----------- -------------- -------------- -------------
Total revenue 26,244,060 24,985,796 27,832,129 29,824,338
----------- ------------ ------------ -----------
Costs and expenses
Cost of goods sold 17,779,333 16,879,487 18,156,065 19,678,500
Selling expenses 4,102,384 4,713,858 4,366,960 4,494,929
General and administrative
expenses 3,093,239 2,924,344 3,418,839 3,022,252
Interest expense 371,138 358,138 360,106 390,865
----------- ----------- ----------- -----------
Total costs and expenses 25,346,094 24,875,827 26,301,970 27,586,546
----------- ----------- ----------- -----------
Income before income taxes
and minority interest 897,966 109,969 1,530,159 2,237,792
Provision for income taxes 319,229 13,277 532,244 965,983
Minority interest in income
(loss) of consolidated
subsidiaries 61,912 (87,002) 42,449 (8,843)
----------- --------------- -----------------------------
Net income $ 516,825 $ 183,694 $ 955,466 $ 1,280,652
=========== =========== =========== ===========
Per share amounts:
Net income $0.08 $0.03 $0.15 $0.20
=========== ============== ============= ==============
Weighted average common
shares and equivalents
outstanding 6,501,071 6,457,466 6,423,956 6,333,950
---------- ---------- ---------- ----------
16
SELECTED QUARTERLY FINANCIAL RESULTS
Statement of Income Data as a Percentage of Net Sales:
Quarters Ended
(Unaudited)
April 1, July 1, Sept. 30, Dec. 30,
1994 1994 1994 1994
-------- ------- ------- --------
Saucony
Domestic 56.5% 57.2% 49.5% 39.1%
International 23.1% 14.9% 21.3% 23.5%
------- ------- ------- -------
Saucony Total 79.6% 72.1% 70.8% 62.6%
------- ------- ------- -------
Brookfield
Domestic 13.2% 18.8% 13.9% 26.6%
International 1.0% 2.7% 8.5% 5.3%
------- ------- ------- -------
Brookfield Total 14.2% 21.5% 22.4% 31.9%
------- ------- ------- -------
Other 6.2% 6.4% 6.8% 5.5%
------- ------- ------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
Other income 0.4% 0.9% 1.4% 1.8%
------- ------- ------- -------
Total revenue 100.4% 100.9% 101.4% 101.8%
------- ------- ------- -------
Costs and expenses
Cost of goods sold 68.1% 68.2% 66.1% 67.2%
Selling expenses 15.7% 19.0% 16.0% 15.0%
General and administrative
expenses 11.8% 11.8% 12.4% 10.7%
Interest expense 1.4% 1.4% 1.3% 1.3%
------- ------- ------- -------
Total costs and expenses 97.0% 100.4% 95.8% 94.2%
------- ------- ------- -------
Income before taxes and
minority interest 3.4% 0.5% 5.6% 7.6%
Provision for income taxes 1.2% 0.1% 1.9% 3.3%
Minority interest in income
(loss) of consolidated
subsidiaries 0.2% (0.4%) 0.2% 0.0%
------- -------- ------- -------
Net income 2.0% 0.8% 3.5% 4.3%
======= ======= ======= =======
17
SELECTED QUARTERLY FINANCIAL RESULTS
Statement of Income Data:
Quarters Ended
(Unaudited)
April 2, July 2, Oct. 1, Dec. 31,
1993 1993 1993 1993
-------- -------- -------- --------
Saucony
Domestic $ 21,186,773 $ 18,294,845 $ 16,066,266 $ 9,288,402
International 2,822,587 3,213,964 4,776,137 3,927,478
------------ ------------ ------------ ------------
Saucony Total 24,009,360 21,508,809 20,842,403 13,215,880
------------ ------------ ------------ ------------
Brookfield
Domestic 3,657,024 3,725,655 2,950,330 5,760,693
International 530,089 1,047,489 998,885 583,574
------------ ------------ ------------ ------------
Brookfield Total 4,187,113 4,773,144 3,949,215 6,344,267
------------ ------------ ------------ ------------
Other 929,451 1,108,878 1,113,289 1,753,668
------------ ------------ ------------ ------------
Net sales 29,125,924 27,390,831 25,904,907 21,313,815
Other income 483,141 242,088 437,458 910,921
------------ ------------ ------------ ------------
Total revenue 29,609,065 27,632,919 26,342,365 22,224,736
------------ ------------ ------------ ------------
Costs and expenses
Cost of goods sold 20,356,052 18,235,365 17,235,069 15,282,662
Selling expenses 3,604,039 4,072,363 3,169,737 4,207,719
General and administrative
expenses 2,908,807 2,895,759 2,670,174 2,090,216
Interest expense 345,498 300,290 263,499 423,276
------------ ------------ ------------ ------------
Total costs and expenses 27,214,396 25,503,777 23,338,479 22,003,873
------------ ------------ ------------ ------------
Income before income taxes
and minority interest 2,394,669 2,129,142 3,003,886 220,863
Provision for income taxes 974,461 888,255 1,218,593 106,300
Minority interest in income
(loss) of consolidated
subsidiaries 44,464 43,975 20,554 (155,740)
------------ ------------ ------------ ------------
Net income $ 1,375,744 $ 1,196,912 $ 1,764,739 $ 270,303
============ ============ ============ ============
Per share amounts:
Net income $ 0.26 $ 0.21 $ 0.27 $ 0.04
============ ============ ============ ============
Weighted average common
shares and equivalents
outstanding 5,384,798 5,737,383 6,636,151 6,553,671
------------ ------------ ------------ ------------
18
SELECTED QUARTERLY FINANCIAL RESULTS
Statement of Income Data as a Percentage of Net Sales:
Quarters Ended
(Unaudited)
April 2, July 2, Oct. 1, Dec. 31,
1993 1993 1993 1993
------- ------- ------- --------
Saucony
Domestic 72.7% 66.8% 62.0% 43.6%
International 9.7% 11.7% 18.5% 18.4%
----- ----- ----- -----
Saucony Total 82.4% 78.5% 80.5% 62.0%
----- ----- ----- -----
Brookfield
Domestic 12.6% 13.6% 11.4% 27.0%
International 1.8% 3.9% 3.8% 2.8%
----- ----- ----- -----
Brookfield Total 14.4% 17.5% 15.2% 29.8%
----- ----- ----- -----
Other 3.2% 4.0% 4.3% 8.2%
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Other income 1.7% 0.9% 1.6% 4.3%
----- ----- ----- -----
Total revenue 101.7% 100.9% 101.6% 104.3%
----- ----- ----- -----
Costs and expenses
Cost of goods sold 69.8% 66.5% 66.5% 71.7%
Selling expenses 12.4% 14.9% 12.2% 19.7%
General and administrative
expenses 10.0% 10.6% 10.3% 9.8%
Interest expense 1.2% 1.1% 1.0% 2.0%
----- ----- ----- -----
Total costs and expenses 93.4% 93.1% 90.0% 103.2%
----- ----- ----- -----
Income before taxes and
minority interest 8.3% 7.8% 11.6% 1.1%
Provision for income taxes 3.3% 3.2% 4.7% 0.5%
Minority interest in income
(loss) of consolidated
subsidiaries 0.2% 0.2% 0.1% (0.7%)
----- ----- ----- -----
Net income 4.8% 4.4% 6.8% 1.3%
===== ===== ===== =====
19
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 1995 COMPARED TO FISCAL 1994
The Company's net sales decreased 4.7% in fiscal 1995 to $102,563,000 from
$107,578,000 in fiscal 1994. Net sales of Saucony footwear products decreased 7%
in fiscal 1995, reflecting a difficult retail environment, marginal acceptance
of certain new product offerings and increasing brand strength of a footwear
competitor. These factors resulted in a decrease of domestic net sales of
Saucony products of 13% in comparison with the fiscal 1994 level. International
sales of Saucony products increased by 5% in fiscal 1995 over the fiscal 1994
level and accounted for 33% of total net sales of Saucony products in 1995
compared with 29% in fiscal 1994. This increase in international net sales of
Saucony products reflected market gains from greater unit volume at the
Company's foreign subsidiaries. The Company currently distributes its Saucony
products in 32 countries.
Net sales of the Company's Brookfield products decreased by 2% in fiscal 1995.
Domestic net sales of Brookfield products decreased by 5% in fiscal 1995
primarily as a result of a difficult retail environment at the mass merchant
channels of distribution and absence of a promotional roller skate license for
the Christmas selling season. International net sales of Brookfield products
increased by 9% in fiscal 1995 and accounted for 22% of total net sales of
Brookfield products compared to 20% of total net sales of such products in
fiscal 1994. The increase in international net sales of Brookfield products was
attributable to increased international markets, with penetration in 31
countries in fiscal 1995 compared with 18 countries in fiscal 1994.
The Company's gross margin decreased to 30.9% in fiscal 1995 from 32.6% in
fiscal 1994, reflecting decreased gross margins for both Saucony and Brookfield
products. The decline in gross margin from sales of Saucony products resulted
from a greater proportion of sales of lower priced, lower margin footwear to
sales of higher priced, higher margin footwear in fiscal 1994. The decline in
gross margin from sales of Brookfield products resulted from a greater ratio of
lower margin international product sales to higher margin domestic product sales
compared with fiscal 1994. Increased international sales in fiscal 1995 by
Brookfield as an OEM manufacturer for certain of its licensors also caused gross
margins to contract on some specialty Brookfield product items.
Selling, general and administrative expense increased as a percentage of net
sales to 29.2% in fiscal 1995 compared with 28.0% of net sales in fiscal 1994
The increase in selling, general and administrative expenses as a percentage of
net sales in fiscal 1995 as compared to fiscal 1994 was due to the decrease in
net sales in fiscal 1995 in comparison to fiscal 1994. The absolute decrease in
the amount of selling, general and administrative expenses resulted from a
reduction in Saucony product advertising and promotional spending of $1,262,000,
This decrease was partially offset by increases in selling payroll, tradeshows
and administrative expenses to support the Company's new foreign subsidiary in
Germany and increased costs associated with the lease of a warehouse in
Australia.
Other income increased in fiscal 1995 to $1,516,000 from $1,308,000 in fiscal
1994 as a result of the gain on the sale of the Company's investment in a
limited partnership and increased royalty income.
20
Royalty income increased in fiscal 1995 due to a final payment received under a
litigation settlement which amounted to $272,291.
Interest expense decreased in fiscal 1995 by $180,000 as a result of the paydown
of corporate debt during fiscal 1995 and debt reduction realized as a result of
the sale by the Company of its limited partnership investment.
The provision for income tax declined by $1,116,000 in fiscal 1995 as compared
with fiscal 1994 as a result of the decrease in the Company's pretax earnings.
The effective tax rate in fiscal 1995 was 35.4% compared with 38.3% in fiscal
1994. This rate reduction was due primarily to the relative effect of fixed tax
credits from the Company's tax related investment on lower income before tax for
fiscal 1995, as compared with fiscal 1994 and an adjustment to the Company' s
tax reserves.
FISCAL 1994 COMPARED TO FISCAL 1993
The Company's net sales increased 3.7% in fiscal 1994 to $107,578,000 from
$103,735,000 in fiscal 1993. Net sales of Saucony footwear products decreased by
approximately 4.0% in fiscal 1994, reflecting a softer domestic retail sales
environment for athletic footwear. However, international net sales of Saucony
products increased by approximately 52% in fiscal 1994 and accounted for 29% of
total net sales of Saucony products in fiscal 1994 compared to 19% of Saucony
net sales in fiscal 1993. This increase in international net sales of Saucony
products reflected the additional revenue resulting from ownership of the
Company's Australian subsidiary for a full year in fiscal 1994 compared to only
six months in fiscal 1993 and increased sales by the Company's other overseas
joint venture subsidiaries and international distributors of Saucony products.
The Company is seeking to increase the number of international distributors of
Saucony products in fiscal 1995.
Net sales of the Company's Brookfield products increased by 27% in fiscal 1994.
Domestic net sales of Brookfield products increased 22.0% in fiscal 1994
primarily as a result of increased sales of the Company's Barbie roller skating
products and increased sales of in-line roller skates. International net sales
of Brookfield products increased by 53% in fiscal 1994 and accounted for 20% of
total net sales of Brookfield products in fiscal 1994 compared to 16% of total
net sales of such products in fiscal 1993. The increase in international net
sales of Brookfield products was attributable to increased international
distribution channels, with penetration in 18 countries in fiscal 1994 compared
to 9 countries in fiscal 1993. The Company is seeking to increase the number of
international distributors of Brookfield products in fiscal 1995.
The Company's gross margin percentage increased to 32.6% in fiscal 1994 from
31.5% in fiscal 1993, reflecting increased gross margins from sales of both
Saucony and Brookfield products. The improvement in the gross margin from sales
of Saucony products resulted from greater operating efficiencies at the
Company's Bangor, Maine manufacturing facility and a change in the Company's
Saucony product mix to higher gross margin products. The improvement in the
gross margin from sales of Brookfield products was due to increased sales of
higher margin Barbie and other licensed products as well as a decrease in
product returns. The Company believes the lower product returns resulted, in
part, from the use of higher quality components manufactured by new suppliers.
Selling, general and administrative expenses increased by approximately
$4,500,000 in fiscal 1994 to 28.0% of net sales from 24.7% of net sales in
fiscal 1993. The increase in selling, general and administrative expenses
resulted primarily from an increase of approximately $1,400,000 in advertising
and promotional expenses for the Company's Saucony products as well as an
increase of approximately $1,200,000 in selling expenses related to the
Company's expanding Saucony foreign operations. In addition, general and
administrative expenses increased by approximately
21
$1,900,000 in fiscal 1994 as a result of defense costs in connection with an
environmental lawsuit, a full year of expenses associated with the Company's
Australian subsidiary and increased expenses incurred by the Company's European
operations.
Interest expense increased by 11.0% in fiscal 1994 to $1,480,000 or
approximately 1.4% of net sales. This increase resulted from increased
borrowings by the Company's foreign subsidiaries to support their increased
selling and promotional expenses and a full year of interest expense on
borrowings incurred in connection with the Company's investment in a limited
partnership.
The provision for income tax declined by approximately $1,357,000 in fiscal
1994. This decline is attributable to the decrease in the Company's pretax
earnings. The effective tax rate in fiscal 1994 was 38.3% compared to 41.1% in
1993. This rate reduction was due primarily to the Company's tax credit
investment which was made in the fourth quarter of 1993.
LIQUIDITY AND CAPITAL RESOURCES
As of January 5, 1996, the Company's cash and cash equivalents totalled
$11,668,000, an increase of $8,319,000 from December 30, 1994. The increase was
primarily the result of a decrease in accounts receivable of $6,846,000 and a
decrease in inventory of $5,187,000 during fiscal 1995. The decrease in
receivables was due to reduced corporate net sales in the fiscal fourth quarter
of 1995. The Company's days sales outstanding at the year end fiscal of 1995
remained consistent with fiscal 1994's level of 74 days. The Company's inventory
turn ratio decreased to 2.4 turns at the end of fiscal 1995 from 2.7 turns at
the end of fiscal 1994. Inventories decreased due to lower inventory
requirements.
In fiscal 1995, the Company generated approximately $11,215,000 from operations,
expended $1,120,000 for capital expenditures, information technology and other
deferred charges, invested $112,000 to form a new subsidiary, expended $77,000
to repurchase shares of the Company's Common Stock, reduced long-term debt and
other long-term commitments by $2,920,000 and received $1,335,000 in cash as the
result of the sale, by the Company, of its investment in a limited partnership.
As part of the sale of this investment, the Company realized a reduction of
$4,056,000 of debt and accrued interest, of which $3,259,000 was long-term debt.
Principal factors (other than net income, accounts receivable and inventory)
affecting the Company's operating cash flows included an increase in prepaid
expenses and other current assets of $262,000 (due to advance payments for
business insurance and production molds), increase in marketable securities of
$308,000, an increase in accrued letters of credit of $1,115,000 (due to
increased in-transit inventory), a decrease in accounts payable of $865,000 (due
to lower inventory requirements and reduced operating spending in the fourth
quarter of 1995), a decrease in accrued expense of $1,605,000 (reflecting
decreased sales commissions, incentive bonuses, royalties payable, and other
operating expenses, which are attributable to the fourth quarter sales decrease
and lower interest payable as a result of the reduction in long term debt) and a
decrease in accrued income taxes of $743,000 due to lower pre-tax income and the
timing of tax payments. The declining value of the U.S. dollar decreased the
value of cash and cash equivalents by $37,000 in fiscal 1995.
As of December 30, 1994, the Company's cash and cash equivalents totalled
$3,350,000, a decrease of approximately $6,663,000 from December 31, 1993. The
decrease was primarily the result of a $5,500,000 increase in accounts
receivable and a $9,000,000 increase in inventory during fiscal 1994. The
increase in receivables was the result of increased sales during the fourth
quarter of 1994, partially offset by a decrease in the average days outstanding
(decreasing to 74 days at December 30, 1994 from 79 days at December 31, 1993).
The primary factor responsible for the increase in inventory was the Company's
creation of two new selling seasons for its Saucony brand
22
in the United States. These new selling seasons changed customers' buying
patterns and resulted in an increase in the Company's inventory of Saucony core
running styles.
In fiscal 1994, the Company used $3,965,000 in net cash from operating
activities, expended $1,056,000 for capital expenditures, including information
technology, expended $2,794,000 to reduce long-term debt and other long-term
commitments, expended $923,000 to repurchase shares of the Company's Common
Stock and borrowed $2,547,000 on a short-term basis. Other factors (other than
net income, accounts receivable and inventory) affecting the Company's cash flow
from operations included the decrease of the Company's investments in marketable
securities of $4,004,000, a decrease in accrued letters of credit of $1,707,000
(due to lower inventory requirements), an increase in accounts payable of
$1,132,000 (due to increased advertising and general spending) and an increase
in accrued expenses of $1,209,000 (increased commissions payable, royalties and
bonuses, which are attributable to fourth quarter sales increases realized in
1994 and increases in unbilled legal services). The declining value of the U.S.
dollar decreased the value of cash and cash equivalents by $499,000 in fiscal
1994.
The Company has a credit facility with two banks pursuant to which a $25,000,000
credit line is available to the Company. This credit facility expires on August
1, 1996 and consists of a short-term demand line of credit in the principal
amount of up to $15,000,000, based on a borrowing formula, and a revolving term
line of credit (maturing on August 1, 1996) in the principal amount of up to
$10,000,000. Borrowings under this facility generally are made at the primary
bank's prime rate of interest. As of January 5, 1996 there were no borrowings
outstanding under this facility. The Company had open commitments at such date
related to letters of credit in the amount of $5,735,540. As of March 25, 1996,
$9,811,128 was available for borrowing under the short-term demand line and
$10,000,000 was available for borrowing under the revolving term line. 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
approximately $7,069,900. As of March 25, 1996, an aggregate of approximately
$1,985,300 was available for borrowing under the facilities of the foreign
subsidiaries. See Note 10 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 7 of Notes to
Consolidated Financial Statements. The Company may prepay the note at the time
of any scheduled principal or interest payment after April 29, 1995, subject to
a prepayment premium in certain circumstances.
At January 5, 1996, the Company had various commitments for capital
expenditures, including information technology systems, improvements to and
expansion of distribution facilities, both domestic and foreign. 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 Company has experienced minimal impact of inflation over the past three
years. The Company has also experienced minimal impact due to currency
fluctuations because substantially all
23
purchases from foreign suppliers and sales to customers to date have been
denominated in United States dollars.
SFAS 115
Statement of Financial Accounting Standards 115 (SFAS 115) was issued in May
1993. This statement establishes financial accounting and reporting standards
for investments in equity securities that have readily determinable fair values
and all investments in debt securities. SFAS 115 became effective for fiscal
years commencing after December 15, 1993. The Company adopted the statement in
fiscal 1994.
SFAS 123
The Financial Accounting Standards Board issued Financial Accounting Standards
No. 123 (SFAS 123) in October 1995. SFAS 123 establishes the financial
accounting and reporting standards for all stock-based compensation. SFAS 123 is
effective for fiscal years commencing after December 15, 1995, requires
companies to elect either the expense recognition for all stock-based
compensation or the disclosure-only alternative permitted under the statement.
As of January 5, 1996, the Company has not adopted SFAS 123 and has not
determined the impact of such adoption on its consolidated results of
operations.
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 on Form 10-K 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, Reebok International, New Balance and
ASICS. The principal competitors for the Company's Brookfield products are
Variflex, Roller Derby, Blade Runner and Fisher-Price.
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 1995, one of such suppliers, located in
China, accounted for approximately 31% 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.
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 or outdoor recreational products for children, 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
24
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.
DEPENDENCE UPON LICENSING ARRANGEMENTS. The Company sells Brookfield products
under trade names licensed from other parties. Most of the Company's licenses
are non-exclusive, have a fixed term and limit the types of products that may be
sold under the license.
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.
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, it is imperative that the
Company 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
1995, 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 and Toys-R-Us for the Company's Brookfield products.
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.
25
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 21, 1996 (the "1996 Proxy Statement") under the
captions "ELECTION OF DIRECTORS" and "OTHER MATTERS" and is incorporated herein
by this reference. The Company expects to file the 1996 Proxy Statement within
120 days after the close of the fiscal year ended January 5, 1996.
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 caption "ELECTION
OF DIRECTORS" in the Company's 1996 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 Company's 1996 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 Company's
1996 Proxy Statement and is incorporated herein by this reference.
26
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements Page No.
The following consolidated financial statements of
Hyde Athletic Industries, Inc. and its subsidiaries
are included in this report:
Report of Independent Accountants
Consolidated balance sheets at January 5, 1996 and
December 30, 1994
Consolidated statements of income for the years ended January 5, 1996,
December 30, 1994, and December 31, 1993
Consolidated statements of stockholders' equity for the years ended
January 5, 1996, December 30, 1994, and December 31, 1993
Consolidated statements of cash flows for the years ended January 5,
1996, December 30, 1994, and December 31, 1993
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 1995.
27
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 4, 1996
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 4, 1996
John H. Fisher Chief Executive Officer
Director
/s/ Charles A. Gottesman Executive Vice President April 4, 1996
- -------------------------- Chief Operating Officer
Charles A. Gottesman Director
(Principal Financial Officer)
/s/ Roger P. Deschenes Controller April 4, 1996
- ------------------------
Roger P. Deschenes Chief Accounting Officer
/s/ James A. Buchanan President April 4, 1996
- ------------------------- Brookfield Athletic Company
James A. Buchanan Director
/s/ John J. Neuhauser Director April 4, 1996
- --------------------------
John J. Neuhauser
/s/ Jonathan O. Lee Director April 4, 1996
- --------------------------
Jonathan O. Lee
/s/ Phyllis H. Fisher Director April 4, 1996
- --------------------------
Phyllis H. Fisher
28
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
Item 14(a) of this Annual Report on Form 10-K. 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 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 5, 1996 and December
30, 1994, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended January 5, 1996, 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.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 22, 1996
29
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
January 5, December 30,
1996 1994
-------------- --------------
Current Assets:
Cash and cash equivalents $ 11,668,316 $ 3,349,776
Marketable securities (Note 2) 307,500 --
Accounts receivable, net of
allowance for doubtful
accounts and discounts
(1995, $940,244; 1994,
$1,147,409) (Note 3) 17,361,195 23,947,584
Inventories (Note 4) 26,831,600 31,863,443
Deferred income taxes (Note 12) 1,251,654 1,148,048
Prepaid expenses and other
current assets 1,769,825 1,312,905
-------------- --------------
Total current assets 59,190,090 61,621,756
-------------- --------------
Property, plant and equipment,
net of accumulated depreciation
and amortization (Note 5) 8,122,937 8,292,926
-------------- --------------
Other assets:
Deferred charges, net of
accumulated amortization (1995,
$1,185,319; 1994, $927,476) 999,363 774,947
Notes receivable (Note 3) 353,175 612,317
Investments in limited partnerships,
at cost (Note 6) 753,433 5,746,768
Other 52,291 33,618
-------------- --------------
Total other assets 2,158,262 7,167,650
-------------- --------------
Total assets $ 69,471,289 $ 77,082,332
============== ==============
See notes to consolidated financial statements
30
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
January 5, December 30,
1996 1994
---------------- ---------------
Current liabilities:
Accrued letters of credit (Note 9) $ 2,619,819 $ 1,507,548
Notes payable (Note 9) 4,336,940 2,825,120
Current portion of long-term debt and
capital lease obligations (Notes 6 & 7) 2,199,225 2,732,208
Accounts payable 2,436,148 3,210,521
Accrued expenses (Notes 9) 3,136,653 4,813,578
Accrued income taxes payable -- 542,019
Current portion of termination benefit
payable -- 26,866
-------------- --------------
Total current liabilities: 14,728,785 15,657,860
-------------- --------------
Long term obligations:
Long-term debt, net of current portion (Note 6) 4,000,000 11,617,055
Capital lease obligations, net of current
portion (Note 7) 205,568 305,337
Deferred income taxes (Note 12) 2,001,655 2,320,777
-------------- --------------
Total long-term obligations 6,207,223 14,243,169
-------------- --------------
Commitments and contingencies (Note 9)
Minority interest in consolidated subsidiaries 170,227 426,475
-------------- --------------
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 1995, 2,704,727; 1994,
2,704,027) 901,575 901,342
Class B, $.333 par; authorized 20,000,000
shares (issued 1995, 3,710,815;
1994, 3,710,115;) 1,236,939 1,236,705
Additional paid-in capital 15,521,470 15,592,805
Retained earnings 32,210,867 30,619,761
Accumulated translation (257,694) (171,471)
--------------- --------------
49,613,157 48,179,142
-------------- --------------
Less:
Common stock held in treasury, at cost
(1995, 198,400; 1994, 180,700) (1,053,790) (977,103)
Unearned compensation (194,313) (447,211)
--------------- ---------------
48,365,054 46,754,828
-------------- --------------
Total liabilities and stockholders' equity $ 69,471,289 $ 77,082,332
============== ==============
See notes to consolidated financial statements.
31
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended January 5, 1996, December 30, 1994, and December 31, 1993
1995 1994 1993
---- ---- ----
Net sales $ 102,562,755 $ 107,577,873 $ 103,735,477
Other income (Note 13) 1,515,859 1,308,450 2,073,608
--------------- --------------- --------------
Total revenue 104,078,614 108,886,323 105,809,085
--------------- --------------- --------------
Costs and expenses:
Cost of sales 70,860,821 72,493,385 71,109,148
Selling expenses 16,687,144 17,678,131 15,053,858
General and administrative
expenses (Note 9) 13,210,520 12,458,674 10,564,956
Interest expense 1,299,858 1,480,247 1,332,563
--------------- --------------- --------------
102,058,343 104,110,437 98,060,525
--------------- --------------- --------------
Income before income taxes and
minority interest 2,020,271 4,775,886 7,748,560
Income taxes (Note 12) 714,985 1,830,733 3,187,609
Minority interest in income (loss) of
consolidated subsidiaries (285,820) 8,516 (46,747)
---------------- ---------------- ---------------
Net income 1,591,106 2,936,637 4,607,698
=============== =============== ==============
Per share amounts: (Note 1)
Net income $ 0.26 $ 0.46 $ 0.76
=============== =============== ===============
Weighted average common shares
and equivalents outstanding 6,239,557 6,437,281 6,074,238
=============== =============== ==============
See notes to consolidated financial statements
32
[Start Restubbed page]
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended January 5, 1996, December 30, 1994 and December 31, 1993
Additional
Common Stock Paid-in Retained Treasury Stock
Class A Class B Capital Earnings Shares Amount
------- ------- ------- -------- ------ ------
Balance, January 1, 1993 $ 881,642 -- $ 6,937,306 $ 23,075,426 -- --
Stock dividend (Note 10) -- 937,898 (937,898) -- -- --
Issuance of 59,800 shares of
common stock, stock option
exercise (Note 10) 19,367 567 245,992 -- -- --
Issuance of 111,968 shares of
common stock, restricted
stock grant (Note 10) 37,323 -- 2,391,246 -- -- --
Issuance of 1,000,000 shares
of common stock, public
offering (Note 10) -- 333,334 8,575,085 -- -- --
Retirement of 134,370 shares of
common stock, issued under
restricted stock grant
(Note 10) (22,395) (22,395) (1,439,873) -- -- --
Issuance of below market
options (Note 10) -- -- 515,339 -- -- --
Amortization of unearned
compensation (Note 10) -- -- -- -- -- --
Net income, 1993 -- -- -- 4,607,698 -- --
Foreign currency translation
adjustments -- -- -- -- -- --
---------- ----------- ------------ -------------- ------------ -------------
Balance, December 31, 1993 $ 915,937 $1,249,404 $16,287,197 $ 27,683,124 -- --
========== =========== ============ ============== ============ =============
Issuance of 7,688 shares of
common stock, stock option
exercise (Note 10) 333 2,229 23,313 -- -- --
Retirement of 89,566 shares
of common stock issued
under restricted stock
grant (Note 10) (14,928) (14,928) (914,050) -- -- --
Issuance of below market
options (Note 10) -- -- 237,925 -- -- --
Cancellation of below market
options (Note 10) -- -- (41,580) -- -- --
Amortization of unearned
compensation (Note 10) -- -- -- -- -- --
Acquisition of 176,700 shares
of common stock, at cost
(Note 10) -- -- -- -- 176,700 (922,963)
Reclassification of 4,000 shares
of common stock owned by a
subsidiary (Note 10) -- -- -- -- 4,000 (54,140)
Net income, 1994 -- -- -- 2,936,637 -- --
Foreign currency translation
adjustments -- -- -- -- -- --
---------- ----------- ------------ -------------- ------------ -------------
Balance, December 30, 1994 $ 901,342 $1,236,705 $15,592,805 $ 30,619,761 $180,700 $ (977,103)
========== =========== ============ ============== ============ ==============
Issuance of 1,400 shares of
common stock, stock option
exercise (Note 10) 233 234 3,184 -- -- --
Cancellation of below market
options (Note 10) -- -- (74,519) -- -- --
33
Amortization of unearned
compensation (Note 10) -- -- -- -- -- --
Acquisition of 17,700 shares
of common stock, at cost
(Note 10) -- -- -- -- 17,700 (76,687)
Net income, 1995 -- -- -- 1,591,106 -- --
Foreign currency translation
adjustments -- -- -- -- -- --
---------- ----------- ------------ -------------- ------------ -------------
Balance, January 5, 1996 $ 901,575 $1,236,939 $15,521,470 $ 32,210,867 $ 198,400 ($1,053,790)
========== =========== ============ ============== ============ ==============
See notes to consolidated financial statements.
34
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended January 5, 1996, December 30, 1994 and December 31, 1993
Total
Unearned Notes Accumulated Stockholders'
Compensation Receivable Translation Equity
------------ ---------- ----------- --------------
Balance, January 1, 1993 $ -- $ -- $ (26,087) $ 30,868,287
Stock dividend (Note 10) -- -- -- --
Issuance of 59,800 shares of
common stock, stock option
exercise (Note 10) -- -- -- 265,926
Issuance of 111,968 shares of
common stock, restricted
stock grant (Note 10) (1,357,613) (1,070,956) -- --
Issuance of 1,000,000 shares of
common stock, public offering
(Note 10) -- -- -- 8,908,419
Retirement of 134,370 shares of
common stock, issued under
restricted stock grant
(Note 10) 814,618 670,045 -- --
Issuance of below market options
(Note 10) (515,339) -- -- --
Amortization of unearned
compensation (Note 10) 107,980 -- -- 107,980
Net income, 1993 -- -- -- 4,607,698
Foreign currency translation
adjustments -- -- (48,486) (48,486)
-------------- -------------- ---------------- -----------------
Balance, December 31, 1993 $ (950,354) $ (400,911) $ (74,573) $ 44,709,824
=============== =============== ================ ================
Issuance of 7,688 shares of
common stock, stock option
exercise (Note 10) -- -- -- 25,875
Retirement of 89,566 shares of
common stock issued under
restricted stock grant
(Note 10) 542,995 400,911 -- --
Issuance of below market options
(Note 10) (237,925) -- -- --
Cancellation of below market
options (Note 10) 41,580 -- -- --
Amortization of unearned
compensation (Note 10) 156,493 -- -- 156,493
Acquisition of 176,700 shares
of common stock, at cost
(Note 10) -- -- -- (922,963)
Reclassification of 4,000
shares of common stock
owned by a subsidiary
(Note 10) -- -- -- (54,140)
Net income, 1994 -- -- -- 2,936,637
Foreign currency translation
adjustments -- -- (96,898) (96,898)
-------------- -------------- ---------------- -----------------
Balance, December 30, 1994 (447,211) -- (171,471) 46,754,828
Issuance of 1,400 shares
of common stock, stock
option exercise (Note 10) -- -- -- 3,651
Cancellation of below market
options (Note 10) 74,519 -- -- --
35
Amortization of unearned
compensation (Note 10) 178,379 -- -- 178,379
Acquisition of 17,700 shares
of common stock, at cost
(Note 10) -- -- -- (76,687)
Net income, 1995 -- -- -- 1,591,106
Foreign currency translation
adjustments -- -- (86,223) (86,223)
-------------- -------------- ---------------- -----------------
Balance, January 5, 1996 $ (194,313) -- $ (257,694) $ 48,365,054
=============== ============== ================ ================
See notes to consolidated financial statements.
36
[End restubbed page]
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended January 5, 1996, December 30, 1994, and December 31, 1993
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income $ 1,591,106 $ 2,936,637 $ 4,607,698
Adjustments to reconcile net income
to net cash
Provided (used) by operating activities:
Depreciation and amortization 1,210,689 1,109,906 786,170
Provision for bad debt and discounts 5,072,962 4,754,567 4,310,019
Loss on sale of equipment 2,498 4,491 4,705
Gain on sale of marketable securities -- -- (11,525)
Deferred income tax (benefit) expense (422,737) 125,992 220,566
Minority interest in (income) loss of
consolidated subsidiaries (285,820) 8,516 (46,747)
Compensation from stock grants and
stock options 178,379 156,493 107,980
Unrealized loss on marketable securities -- -- 104,033
Notes receivable from sale and licensing
of trademarks -- -- 719,876
Gain on sale of investment in limited partnership (426,377) -- --
Changes in operating assets and liabilities,
net of effects of acquisitions and foreign
currency adjustments:
Decrease (increase) in assets:
Marketable securities (307,500) 4,003,952 --
Accounts and notes receivable 1,772,637 (9,765,650) (1,798,940)
Inventories 5,187,467 (8,523,396) 1,077,061
Prepaid expenses and other
current assets (261,598) 328,272 (1,053,493)
Increase (decrease) in liabilities:
Accrued letters of credit 1,115,229 (1,707,261) (1,033,017)
Accounts payable (865,034) 1,131,609 (205,865)
Accrued expenses (1,604,521) 1,209,458 (1,693,426)
Accrued income taxes (742,846) 261,512 34,150
--------------- ------------- --------------
Total adjustments 9,623,428 (6,901,539) 1,521,547
-------------- -------------- --------------
Net cash provided (used) by operating
activities 11,214,534 (3,964,902) 6,129,245
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of property, plant and equipment (650,570) (676,371) (1,546,246)
Proceeds from sale of marketable securities -- -- 18,041
Proceeds from the sale of equipment 31,813 496 23,463
Increase in deferred charges, and other (469,257) (379,933) (591,584)
Investments in marketable securities -- -- (4,060,581)
Investment in distribution from limited
partnership 28,732 -- (37,114)
Payments for business acquisitions,
net of cash acquired (111,800) -- (572,781)
Proceeds from sale of investment in
limited partnership 1,335,289 -- --
--------------- ------------- ---------------
Net cash (used) provided by investing
activities 164,207 (1,055,808) (6,766,802)
-------------- -------------- ---------------
See notes to consolidated financial statements.
37
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
1995 1994 1993
---- ---- ----
Cash flows from financing activities:
Net short-term borrowings (30,087) 2,547,110 (225,585)
Repayment of long term debt and
capital lease obligations (2,893,098) (2,487,567) (2,991,815)
Common stock repurchases (76,687) (922,963) --
Payment of termination benefit payable (26,866) (306,075) (277,888)
Issuances of common stock, (including
options) net of issuance expenses 3,651 25,875 9,174,345
-------------- ------------ ------------
Net cash provided (used) by financing
activities (3,023,087) (1,143,620) 5,679,057
Effect of exchange rate changes on
cash and cash equivalents (37,114) (499,060) 21,720
-------------- -------------- ------------
Net increase (decrease) in cash and
cash equivalents 8,318,540 (6,663,390) 5,063,220
Cash and cash equivalents at beginning
of year 3,349,776 10,013,166 4,949,946
-------------- ------------- ------------
Cash and cash equivalents at end of year $ 11,668,316 $ 3,349,776 $ 10,013,166
============== ============= ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 1,935,902 $ 1,507,484 $ 2,972,095
============== ============ ============
Interest $ 1,534,015 $ 1,245,927 $ 1,279,069
============== ============ ============
See notes to consolidated financial statements.
38
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
1995 1994 1993
---- ---- ----
Non-cash Investing and Financing
Activities:
Financing of investment in limited
partnership -- -- $ 4,950,000
Property purchased under capital leases $ 137,853 $ 175,377 288,946
Reconciliation of assets acquired and
liabilities assumed, business acquisitions
Book value of assets acquired 232,232 -- 4,870,639
Liabilities assumed 120,432 -- 4,297,858
-------------- ------------- -------------
Cash paid for business acquisitions $ 111,800 -- $ 572,781
============== ============= ===========
Sale of investment in limited
partnership
Cash received, net of broker fees 1,335,289 -- --
Reduction in short-term debt,
long-term debt and accrued
liabilities 4,055,691 -- --
-------------- ------------- -------------
Total proceeds 5,390,980 -- --
Investment in limited partnership,
net of distributions 4,964,603 -- --
-------------- ------------- -------------
Gain realized on sale $ 426,377 -- --
============== ============= =============
39
See notes to consolidated financial statements.
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended January 5, 1996, December 30, 1994 and December 31, 1993
1. Summary of Significant Accounting Policies:
Business Activity
The Company is an importer and manufacturer of a broad line of high
performance athletic footwear and outdoor recreational products. 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 1995, 1994 and 1993
represent the fiscal years ended January 5, 1996, December 30, 1994 and
December 31, 1993, respectively. In Management's opinion, the
consolidated financial statements for 1995, 1994 and 1993 are
comparable.
Principles of Consolidation
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.
The consolidated financial statements include the accounts of Hyde
Athletic Industries, Inc. and its wholly-owned subsidiaries, Spot-Bilt,
Inc., Brookfield Athletic Co., Inc., Hyde Security Corp., 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).
Saucony, Inc. owns a majority interest in a joint venture, Saucony
Sports BV (Netherlands). The Company also operates a branch in the
United Kingdom called Saucony UK and maintains a European sales and
marketing headquarters in Germany called Saucony Europe. Saucony Sports
BV, Saucony UK, Saucony Europe, Saucony GmbH and Quintana Roo, Inc. are
included in the consolidated financial statements beginning in January
1992, September 1992, September 1993, December 1994, and August 1995,
respectively. Saucony Canada Inc. and Saucony SP Pty Limited are
included in the consolidated financial statements beginning March 1993
and July 1993, respectively. Saucony Shoe Manufacturing Co., Inc., an
inactive wholly-owned domestic subsidiary, was dissolved in 1992. The
effects of transactions among related companies are eliminated in the
consolidated financial statements.
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.
40
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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. 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 is included
in consolidated net income.
Investments
The Company's investment in real estate limited partnerships is carried
at cost. It is Management's intention to retain this investment for its
long-term tax benefit.
Investments in Marketable Securities
During 1994, the Company adopted Statement of Financial Standards No.
115 (SFAS No. 115), "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS No. 115, 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
Deferred charges consist primarily of computer software, bond issuance,
trademarks, financing and organization costs. The deferred charges are
amortized on the straight-line basis over the estimated useful life of
the software and the term of the debt; organization costs and trademarks
are amortized over five 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 5, 1996 and December 30, 1994 reflect the estimated future
tax effects attributable to temporary differences and carryforwards
based on the provisions of enacted tax law.
41
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Earnings per Share
Earnings per common share is based upon the weighted average common
shares and common equivalents (stock options) outstanding during the
year. Primary and fully diluted earnings per share are approximately the
same. All share and per share amounts have been restated to reflect the
stock dividend (Note 10) which had the same effect on the shares of
common stock outstanding as a two-for-one stock split.
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. Gains from foreign currency
translation amounted to $77,409, $341,651, and $32,631 for 1995, 1994,
and 1993, respectively.
Forward Foreign Currency Exchange Contracts
The Company enters into forward foreign currency exchange contracts to
hedge certain foreign currency denominated payables. Gains and losses on
forward exchange contract 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 the 1994 and 1993 consolidated financial statements
have been reclassified to conform to the 1995 presentation.
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 $7,897,128, $9,160,105 and $7,784,147
for 1995, 1994 and 1993, respectively.
Research and Development Expenses
Expenditures for research and development of products are expensed as
incurred. Research and development expenses amounted to approximately
$1,850,521, $1,295,779 and $1,386,400 for 1995, 1994 and 1993,
respectively.
Related Party Transactions
Saucony Sports BV, a majority-owned foreign joint venture, leases office
space and office equipment from an entity controlled by the minority
stockholder of Saucony Sports BV. Rent expense amounted to $70,980,
$73,300 and $50,084 for 1995, 1994 and 1993, respectively.
42
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 and $10,353
for 1995 and 1994, respectively. See Note 6 of the Notes to Consolidated
Financial Statements for further discussion of the note agreement.
During 1995 the Company prepaid the note realizing a discount of $13,759
which is included in consolidated net income.
The Company has entered into a consulting agreement with the principal
stockholder of the Company's Class A Common Stock, beginning January 4,
1993. The agreement, as amended, is effective for a term of five years,
provides for an annual fee of $40,000 during each of the first two years
of the agreement and $90,000 for each of the remaining three years of
the agreement. Included in general and administrative expenses for 1995,
1994 and 1993 are consulting fees of $90,000, $40,000 and $40,000,
respectively.
New Accounting Pronouncements
Statement of Financial Accounting Standards 123 (SFAS 123) - Accounting
for Stock Based Compensation was issued in October 1995 by the Financial
Accounting Standards Board. This statement establishes financial
accounting and reporting standards for all stock-based compensation
arrangements. SFAS 123 will require the Company to elect either the
expense recognition or the disclosure-only alternative for stock-based
compensation. The Company is required to adopt SFAS 123 in 1996 with
comparable disclosures for the prior year. The Company has not
determined whether it will elect the expense recognition or
disclosure-only alternative permitted under SFAS 123 and therefore has
not yet determined the impact of such adoption on the consolidated
results of operations.
2. Marketable Securities:
The Company adopted Statement of Financial Accounting Standards No.
115 (SFAS No. 115) in 1994. Marketable securities consists of equity
securities and are classified as trading securities.
The cost of the securities held at January 5, 1996 was $287,500. As of
January 5, 1996, the market value of such securities was $307,500. A
gross unrealized gain of $20,000 is included in consolidated net income
and is based on quoted market prices.
Net realized losses on sales of securities included in the determination
of net income amounted to $263,267 for 1994.
3. Accounts and Notes Receivable:
In 1990, the Company sold its right, title and interest in the PF, PF
Flyer, Posture Foundation and Air Foil trademarks for a minimum of
$500,000, subject to annual upward adjustments, due in equal annual
installments through July 1994. During 1993, the Company amended the
agreement by extending the term to December 1996 and eliminating any
upward adjustments in consideration of an agreement on the part of the
buyer to pay an additional $200,000. In 1993, the Company recorded a
receivable for the present value of the additional $200,000 utilizing an
imputed interest rate of 6.5%, which equaled $170,950. As of January 5,
1996, $93,897 was outstanding on the note and is included in current
receivables.
On December 28, 1993, the Company executed an agreement whereby it
granted 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 1997 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
43
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
manufacture, distribution and sale. The agreement established a minimum
cumulative guaranteed royalty of $630,000, subject to annual upward
adjustments, due in various quarterly payments, commencing in 1994. In
1993, 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 6.0%, which equates to $548,925. At January
5, 1996, $418,421 was outstanding, of which $200,000 is due in 1996. The
Company has received all scheduled payments on a timely basis.
During 1993, the Company loaned $100,000 to an officer of the Company.
The promissory note issued to the Company by the 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.
4. Inventories:
Inventories at January 5, 1996 and December 30, 1994 consist of the
following:
1995 1994
---- ----
Finished goods $ 22,954,048 $ 24,722,893
Work-in-process 20,243 71,700
Raw materials and supplies 3,857,309 7,068,850
-------------- --------------
Total $ 26,831,600 $ 31,863,443
============== ==============
5. Property, Plant and Equipment:
Major classes of property, plant and equipment, at cost, at January 5,
1996 and December 30, 1994 are as follows:
1995 1994
---- ----
Land $ 745,307 $ 755,597
Buildings and improvements 7,010,015 6,995,977
Machinery and equipment 6,228,358 6,203,871
Capitalized leases 641,136 507,488
Leasehold improvements 90,770 --
--------------- --------------
14,715,586 14,462,933
Less accumulated depreciation
and amortization 6,592,649 6,170,007
--------------- --------------
Total $ 8,122,937 $ 8,292,926
=============== ==============
Accumulated amortization of the leased property is $235,475 and $119,859
at January 5, 1996 and December 30, 1994, respectively.
44
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Long-Term Debt:
1995 1994
---- ----
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. $ 6,000,000 $ 8,000,000
Note payable to a limited partnership,
collateralized by the Company's limited
partner interest, with imputed interest
of 7.9%, due in various annual installments
to 2000. -- 4,551,987
Note payable to the minority stockholder of
the Company's majority-owned Canadian
subsidiary, due in ten annual installments
of $16,961, commencing March 1, 1994,
with interest of 6.5% paid quarterly. -- 152,649
Note payable to a bank under a revolving line
of credit agreement, due on December 6,
1996, with interest of 11.7% paid monthly. -- 1,551,200
------------ -----------
6,000,000 14,255,836
Less current portion 2,000,000 2,638,781
------------ -----------
$ 4,000,000 $11,617,055
============ ===========
Long-term debt maturities payable for the five years and thereafter
subsequent to January 5, 1996 are as follows:
1996 .............................. $ 2,000,000
1997 .............................. 2,000,000
1998 .............................. 2,000,000
1999 .............................. --
2000 ............................. --
Thereafter ...................... --
---------
Total .............................. $ 6,000,000
============
On October 12, 1993, the Company invested as a limited partner in
Columbia Housing Partners Corporate Tax Credit II Limited Partnership, a
Massachusetts limited partnership, by acquiring five (5) units of
limited partner interest for an aggregate capital contribution of
$5,000,000. The Company issued a promissory note, collateralized by the
Company's partnership interest, in the amount of $6,392,960. The note is
recorded at the present value of future cash flows, utilizing an imputed
interest rate of 7.9% which equates to $4,950,000.
45
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 totalled $1,335,000,
resulting in a pre-tax gain of $426,377, 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 5, 1996, approximately $10,555,000 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 5, 1996.
1996 .................................... $ 235,052
1997 .................................... 137,593
1998 .................................... 65,008
1999 .................................... 19,890
2000 .................................... 1,250
------------
Total minimum lease payments $ 458,793
Less amounts representing interest 54,000
-------------
Present value of minimum lease payments 404,793
Less current portion 199,225
-------------
Long-term portion $ 205,568
=============
8. Employee Benefit Plans:
The Company established a 401(k) retirement plan in 1991 for the benefit
of all United States employees who have attained the age of 21,
completed one year of service, and are not members of a collective
bargaining group. The employee is eligible to defer on a pre-tax basis
up to 15% of gross wages subject to a maximum limit defined in section
402(g) of the Internal Revenue Code. 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 insurance company. Defined contribution
expenses for 1995, 1994, and 1993 were $57,570, $49,611 and $37,940,
respectively.
46
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Commitments and Contingencies:
Lease Commitments
The Company is obligated under various leases for equipment and retail
space through 1997. Total rental expenses for 1995, 1994 and 1993 were
$673,869, $479,132 and $484,004, respectively. Future minimum rental
payments are as follows: 1996, $342,767; 1997, $316,102; 1998, $275,240;
1999, $212,968 and 2000 and thereafter, $51,610.
Licenses
The Company is obligated under various royalty licensing agreements
through December 31, 2003. Minimum guaranteed royalties for 1996, 1997,
1998, 1999, 2000 and thereafter are $553,144, $190,000, $155,000,
$70,000, $70,000 and $210,000, respectively.
Commitments
On August 31, 1993, the Company entered into a credit facility with two
banks pursuant to which up to a $25,000,000 credit line was available to
the Company as of January 5, 1996. This arrangement provides: 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 $10,000,000. 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 5, 1996, there were no borrowings
outstanding under this facility. This credit facility, which was amended
in August 1994, terminates August 1, 1996. This credit facility is
subject to the bank's periodic reviews of the Company's operations. The
facility contains requirements for maintaining defined levels of working
capital, net worth, capital expenditures, net income and various
financial ratios. 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 $1,000,000 Canadian dollar,
subject to formula, (approximately $735,000 in U.S. dollars at January
5, 1996) line of credit. The agreement provides 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 5, 1996, there was
$7,348 in U.S. dollars 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
bank. In September 1994, the agreement was amended, whereby the
available line was increased. The principal terms and conditions of the
agreement remained unchanged. The credit facility provides Saucony SP
with a $6,000,000 Australian dollar (approximately $4,477,000 in U.S.
dollars at January 5, 1996) line of credit. The agreement provides: a
short-term demand line of credit, in the principal amount of up to
$3,000,000 (Australian dollars) for letters of credit and foreign
exchange facilities; and a revolving line of credit, in the principal
amount of $3,000,000 (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 5, 1996, there was
$2,798,250 in U.S. dollars outstanding under this credit facility. The
facility is subject to the lender's periodic reviews of the Company's
operations.
Saucony Sports BV maintains a credit facility with a Dutch lender. The
agreement provides Saucony Sports BV with a 1,500,000 Dutch Guilder
(approximately $930,000 U.S. dollars at January 5, 1996) line of credit.
Borrowings under this facility are made at the bank's discount borrowing
rate plus 1.75%. At January 5, 1996, $755,836 in U.S. dollars was
outstanding under this credit facility.
47
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
A division of Saucony, Inc. located in the United Kingdom maintains a
demand line of credit facility with a British lender. The credit
facility provides the Company with a 500,000 Pound Sterling
(approximately $775,000 in U.S. dollars at January 5, 1996) line of
credit. Borrowings under this facility are made at the bank's prime rate
of interest, plus 1.5%. At January 5, 1996, $775,506 in U.S. dollars was
outstanding under this facility.
At January 5, 1996, the Company was committed under open letters of
credit to several lenders in the amount of $5,768,715 and under foreign
exchange contracts in the amount of $600,000.
The Company is guarantor on credit facility agreements for three foreign
joint ventures. At January 5, 1996 the guarantees totalled $6,230,650,
of which $2,000,000 was collateralized by the issuance of standby
letters of credit.
The Company has entered into an employment contract with one key
employee that provides for minimum annual compensation of $211,000 in
1996. The contracts provide 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. In 1995, the Company included in its general
and administrative expenses, bonus expense to four key employees of
$275,574, which is payable and is included in accrued expenses at
January 5, 1996. Bonus expense to key executives amounted to $456,903
and $681,680 for 1994 and 1993, respectively.
The Company has entered into an employment contract with the minority
stockholder of Saucony SP Pty Limited. The agreement provides for a lump
sum payment of $250,000 in Australian dollars in consideration of the
stockholder entering into an employment agreement and minimum annual
compensation of $250,000 in Australian dollars for three years
commencing November 13, 1993. The contract provides for minimum annual
salary, cost-of-living adjustments and life insurance coverage.
Included in accrued expenses at January 5, 1996 and December 30, 1994
are sales commissions payable of $813,940 and $1,000,377, respectively.
Litigation
The Company is also 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 other proceedings
will have a material adverse effect on the Company's financial position
and operations and cash flows (irrespective of any potential insurance
recovery).
10. Stockholders' Equity:
At the Annual Meeting of the Stockholders of the Company, held on May
25, 1993, the stockholders approved an amendment to the Company's
Articles of Organization which increased the number of authorized shares
of common stock of the Company from 7,275,000 to 40,000,000, consisting
of 20,000,000 shares of Class A Common Stock, $.33-1/3 par value per
share, and 20,000,000 shares of Class B Common Stock, $.33-1/3 par value
per share; reclassified the then existing Common Stock ("Prior Common
Stock") as Class A Common Stock; authorized a new class of non-voting
stock designated as Class B Common Stock; and established the rights,
powers and limitations of the Class A Common Stock and the Class B
Common Stock.
The Class A Common Stock has essentially the same rights, powers and
limitations as the Prior Common Stock. The Class B Common Stock is
non-voting, except with respect to amendments to the Company's Articles
of Organization that alter or change the powers, preferences or special
rights of the Class B Common Stock so as to affect them adversely and as
otherwise required by law. The Class B Common Stock has certain
features, including a "Class B Protection" feature and a
48
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
premium on regular cash dividends, if any, which are intended to
minimize the economic reasons for the Class A Common Stock to trade at a
premium compared to the Class B Common Stock. The other terms of the
Class A Common Stock and Class B Common Stock, including rights with
respect to special cash dividends, stock dividends, stock splits,
consideration payable in a merger or consolidation and distributions
upon liquidation, generally are the same.
The Board of Directors of the Company declared a stock dividend of one
share of Class B Common Stock for each share of Class A Common Stock
outstanding on May 16, 1993. The stock dividend had the same effect on
the total number of shares of Class A Common Stock outstanding as a
two-for-one split. The ex-dividend date for the stock dividend was May
26, 1993, on which date the Class A Common Stock and the Class B Common
Stock began to trade separately. The stock dividend resulted in the
issuance of 2,813,695 shares of Class B Common Stock and the transfer of
$937,898 from Additional Paid-in Capital to Class B Common Stock. All
references in the consolidated financial statements to average number of
shares outstanding and related prices, per share amounts and stock
option plan data have been restated to reflect the dividend.
On June 18, 1993, 1,000,000 shares of Class B Common Stock were sold by
the Company in a public offering for approximately $8,908,000, net of
issuance expenses of $1,342,000.
At the May 25, 1993 Annual Meeting, the stockholders also approved the
1993 Equity Incentive Plan ("the Equity Incentive Plan") and 1993
Director Stock Option Plan, adopted by the Company's Board of Directors
on April 7, 1993. On April 20, 1993, the Compensation Committee approved
the issuance under the Equity Incentive Plan of restricted stock awards,
covering 111,968 shares of Prior Common Stock to nine executive officers
of the Company. The shares subject to each award were issued on April
27, 1993. Each award vests in equal annual installments over a five-year
period, beginning in April 1994. The purchase price for each award was
$12-1/8 per share, which represents 50% of the fair market value of the
Prior Common Stock on the date the stock was issued. The purchase price
was paid in the form of a non-recourse, non-interest bearing promissory
notes, which were payable in five equal installments, beginning in July
1994 and were collateralized by a pledge of the shares subject to the
award. The excess of the quoted market price, as of the date of the
grant, over the purchase price for each award was recorded as unearned
compensation and is shown as a separate component of stockholders'
equity.
On November 4, 1993, the Company amended the restricted stock award
agreements and repurchased and retired 67,185 shares of each of the
Class A and Class B Common Stock issued to the nine executive officers
of the Company on April 27, 1993. The purchase price of $6 1/16 per
share (reflects stock dividend) was paid by the Company by cancellation
of a portion of the promissory notes issued in conjunction with the
original stock awards. During 1994, 3,758 shares each of Class A Common
Stock and Class B Common Stock, issued to an executive officer of the
Company, were repurchased and retired as a result of the termination of
employment by the executive. On June 27, 1994, the Company further
amended the restricted stock awards and repurchased and retired 41,025
shares of each of the Class A and Class B Common Stock, thus
repurchasing and retiring all remaining restricted shares.
Unearned 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 $178,379,
$156,493, and $107,980 for 1995, 1994, and 1993, respectively.
During 1993, the Company issued an additional 59,800 shares of its
Common Stock; 56,800 shares of its Prior Common Stock, 1,300 shares of
Class A Common Stock and 1,700 shares of Class B Common Stock. Incentive
stock options issued under the Company's 1982 stock option plan
accounted for 59,400 shares.
49
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The Company issued 1,000 shares of Class A Common Stock and 6,688 shares
of Class B Common Stock in 1994 and 700 shares each of Class A Common
Stock and Class B Common Stock.
Also approved at the 1993 Annual Meeting of the Company's Stockholders
was an amendment to the Company's Articles of Organization. The
amendment eliminated the requirement that Preferred Stock must
necessarily have priority over common stock with respect to dividends.
The Board of Directors has the authority by resolution to establish the
rights and designate series of Preferred Stock. The Company has
authorized 500,000 shares of Preferred Stock for issuance. No shares or
series of Preferred Stock were issued and outstanding or designated as
of January 5, 1996 and December 30, 1994.
In July 1994, the Board of Directors of the Company authorized the
repurchase of up to an aggregate of 500,000 shares of the Company's
Class A Common Stock and Class B Common Stock. The authority to purchase
the shares of Common Stock expires on the earlier of the first
anniversary date of this action of Directors, or a determination by the
Board of Directors to discontinue such repurchases. During 1994, the
Company repurchased 1,000 shares of Class A Common Stock at a cost of
$5,000 and 175,700 shares of Class B Common Stock at a cost of $917,963.
During 1995, the Company repurchased 17,700 shares of Class B Common
Stock at a cost of $76,687. At January 5, 1996, Saucony SP Pty Ltd, a
foreign subsidiary controlled by the Company, held 2,000 shares each of
the Company's Class A Common Stock and Class B Common Stock.
11. Stock Options:
At the May 25, 1993 Annual Meeting, the stockholders approved the
Company's 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.
The Equity Incentive Plan is administered by the Compensation Committee
of the Board of Directors who, at its sole discretion, grant 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. 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 1994 Annual Meeting of Stockholders held on May 26, 1994, the
stockholders approved an amendment of the Company's 1993 Equity
Incentive Plan (the "Equity Incentive Plan"). The amendment increased
the number of shares issuable under the Equity Incentive Plan from
400,000 to 800,000 shares and limited to 75,000 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 800,000 shares, in the
50
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
aggregate, of Class A Common Stock and Class B Common Stock have been
reserved by the Company and may be issued under the plan.
The Director Stock Option Plan provides for the automatic grant to
non-employee directors of non-statutory stock options upon specified
occasions. A total of 100,000 shares of Class B Common Stock have been
reserved for issuance under the plan. The option purchase price per
share shall equal the fair market value of Class B Common Stock on the
date of the grant. The options are exerciseable at any time, in whole or
in part, prior to the fifth anniversary of the date of the grant.
The following schedule summarizes the changes in employee and director
stock options for the three year reporting period:
Incentive Non-qualified
Stock Stock
Options Options Option Price
------- --------- -------------
Outstanding at January 1, 1993 76,900 --
Stock Dividend 22,700 --
Granted 9,000 148,770 $ 8.250 -10.750
Exercised (59,400) (400) $ 2.000 - 4.500
Cancelled (2,000) -- $ 2.000 -10.750
----------- ---------
Outstanding at December 31, 1993 47,200 148,370
Granted 12,750 139,050 $ 2.500 - 6.000
Exercised (2,000) (5,688) $ 2.000 - 3.688
Cancelled (4,200) (16,276) $ 3.250-10.750
----------- ----------
Outstanding at December 30, 1994 53,750 265,456
Granted 81,500 4,000 $ 4.000 - 4.875
Exercised (1,400) -- $ 2.250 - 2.750
Cancelled (8,750) (27,752) $ 2.500 -10.750
------------- ----------
Outstanding at January 5, 1996 125,100 241,704
=========== ==========
At January 5, 1996, options for 11,400 shares of Class A Common Stock
and 151,270 shares of Class B Common Stock were exercisable.
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.
51
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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) before
minority interest which was subject to 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.
1995 1994 1993
---- ---- ----
Domestic $ 2,805,549 $ 4,622,282 $ 7,713,490
Foreign (785,278) 153,604 35,070
-------------- -------------- --------------
Total $ 2,020,271 $ 4,775,886 $ 7,748,560
============== ============== ==============
The provision (credit) for income taxes consists of the following:
1995 1994 1993
---- ---- ----
Current:
Federal $ 665,961 $ 1,217,123 $ 2,106,785
State 232,664 329,813 684,675
Foreign 239,097 157,805 175,583
------------- ------------ ------------
1,137,722 1,704,741 2,967,043
------------- ------------ ------------
Deferred:
Federal (30,025) 15,065 302,153
State 24,828 50,197 76,833
Foreign (417,540) 60,730 (158,420)
-------------- ------------ -------------
(422,737) 125,992 220,566
-------------- ------------ -------------
Total $ 714,985 $ 1,830,733 $ 3,187,609
============= ============== ==============
The deferred tax provision includes the recognition of a foreign
operating loss carryforwards translated at the current exchange rate in
effect at the balance sheet date.
52
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The current deferred tax asset and long-term deferred tax liability
reported on the consolidated balance sheet consist of the following
items as of January 5, 1996 and December 30, 1994.
Net current deferred tax assets: 1995 1994
---- ----
Allowance for doubtful accounts
and discounts $ 276,877 $ 411,825
Inventory allowances and tax costing
adjustments 265,403 288,079
Deferred compensation 178,578 115,307
Accrued expenses, not currently
deductible 140,361 200,464
Untaxed installment receivables (127,189) (89,902)
Loss carryforwards 735,624 375,275
Valuation allowance (218,000) (153,000)
-------------- --------------
Total $ 1,251,654 $ 1,148,048
============= =============
Net long term deferred tax liabilities:
Property, plant and equipment $ 806,283 $ 873,363
Investments in limited partnerships 1,107,416 1,224,556
Untaxed installment receivables 87,956 222,858
------------- -------------
Total $ 2,001,655 $ 2,320,777
============= =============
Net deferred tax liability $ 750,001 $ 1,172,729
============= =============
The loss carryforward amount shown above relates to foreign operating losses
of approximately $1,999,000 which may be carried forward indefinitely.
Expectations of future operating performance and tax planning strategies,
exclusive of reversing temporary differences and carryforwards, are
considered sufficient to realize deferred tax assets included in the
financial statements.
The difference between the statutory federal income tax rate on income
before income taxes and minority interest is summarized as follows:
1995 1994 1993
---- ---- ----
U.S. federal income tax rate 34.00% 34.00% 34.00%
State income tax, net of federal benefit 8.41 5.21 6.82
Foreign losses producing no tax benefit 3.15 2.87 0.39
Nondeductible expenses and tax exempt income 1.63 0.84 0.94
International tax rate difference 1.23 0.62 (0.32)
Low income housing tax credits (8.08) (5.21) (0.69)
Adjustment of prior years' estimated tax
liabilities (4.95) 0.00 0.00
------ ---- ----
Effective income tax rate 35.39% 38.33% 41.14%
====== ====== ======
53
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 $2,785,000 at January 5, 1996.
13. Foreign Operations, Geographic Areas, and Other Income:
During 1994 and 1995, foreign operations of the Company included the
international activities of Hyde International Services, Ltd., a
wholly-owned foreign subsidiary; Saucony Canada, Ltd. and Saucony Sports
BV, majority-owned foreign subsidiaries; Saucony SP Pty Limited, a
foreign subsidiary controlled by the Company, Saucony UK and Saucony
Europe, branch operations of Saucony, Inc.; and, Saucony Deutschland
Vertriebs GmbH, a wholly-owned subsidiary of the Company.
In 1993, foreign operations of the Company included the international
activities of Hyde International Services, Ltd., a wholly-owned foreign
subsidiary; Saucony Canada Ltd. and Saucony Sports BV, majority-owned
foreign subsidiaries; Saucony SP Pty Ltd., a foreign subsidiary
controlled by the Company; and, Saucony UK and Saucony Europe, branch
operations of Saucony, Inc.
The condensed balance sheets of the Company's foreign operations as of
January 5, 1996 and December 30, 1994, are as follows:
1995 1994
---- ----
Assets:
Current assets:
Cash $ 1,314,537 $ 1,629,409
Accounts receivable 3,993,168 3,796,541
Inventory 7,341,438 7,714,343
Other current assets 917,380 452,904
Noncurrent assets 1,187,762 1,184,602
---------------- --------------
$ 14,754,285 $ 14,777,799
================ ==============
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $ 4,336,940 $ 1,983,465
Current portion of capital leases 72,879 17,114
Accounts payable and accrued expenses 1,404,481 1,140,566
Due to related parties 6,799,124 8,624,542
Long-term debt -- 1,551,200
Capitalized lease obligations -- 74,933
Minority interest 170,227 426,475
Stockholders' equity 1,970,634 959,504
---------------- --------------
$ 14,754,285 $ 14,777,799
================= ==============
54
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The results of foreign operations included in the consolidated
statements of income are as follows:
1995 1994 1993
---- ---- ----
Net sales to unaffiliated parties $ 21,814,016 $ 18,822,752 $ 10,168,490
Net sales to affiliated parties
(eliminated in consolidation) 137,849 43,967 18,644
---------------- --------------- ----------------
Net sales $ 21,951,865 $ 18,866,719 $ 10,187,134
================ =============== ===============
Income (loss) before income
taxes and minority interest 632,367 ($ 1,152,297) ($ 191,643)
================= ============== ==============
Net income (loss) $ 810,810 ($ 1,379,349) ($ 161,879)
================ ============== ===============
The foreign operations changes in stockholders' equity from 1995 to
1994, 1994 to 1993 and 1993 to 1992 were due to the recognition of
common stock and paid-in capital amounts offset by income or losses and
accumulated translation adjustments.
Foreign sales attributed to international divisions of the United States
parent company were $11,550,486, $11,486,051 and $8,681,353, for 1995,
1994, and 1993, respectively. Foreign sales attributed to foreign
subsidiaries were $21,814,016, $18,822,752 and $10,168,490 for 1995,
1994, and 1993, respectively.
The following table summarizes the Company's operations by geographic
area:
1995 1994 1993
---- ---- ----
Net sales to unaffiliated parties:
United States $ 69,659,932 $ 77,269,070 $ 84,465,219
International 32,902,823 30,308,803 19,270,258
--------------- -------------- ----------------
$ 102,562,755 $ 107,577,873 $ 103,735,477
=============== ============== ================
Net sales between geographic areas:
United States $ 137,849 $ 43,967 $ 18,644
International 8,241,637 9,076,190 4,723,167
--------------- -------------- ----------------
$ 8,379,486 $ 9,120,157 $ 4,741,811
=============== ============== ================
Total net sales:
United States $ 69,797,781 $ 77,313,037 $ 84,483,863
International 41,144,460 39,384,993 23,993,425
Less: Inter-area eliminations (8,379,486) (9,120,157) (4,741,811)
---------------- -------------- ----------------
$ 102,562,755 $ 107,577,873 $ 103,735,477
=============== ============== ================
Operating profit:
United States$ 3,962,144 $ 5,934,688 $ 8,795,583
International (592,195) 417,143 987,404
Less: Inter-area eliminations (49,820) (95,698) (701,864)
-------------- -------------- -----------------
$ 3,320,129 $ 6,256,133 $ 9,081,123
=============== ============== ================
Identifiable assets:
United States $ 64,395,000 $ 74,387,496 $ 71,022,951
International 14,754,285 14,777,799 10,755,950
Less: Inter-area eliminations (9,677,996) (12,082,963) (8,085,115)
---------------- -------------- ----------------
$ 69,471,289 $ 77,082,332 $ 73,693,786
=============== ============== ================
55
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 from the consolidated net sales. Operating profit is
comprised of revenue less related cost of sales, selling expenses,
general and administrative expenses, and does not include either
interest expense, income taxes or minority shareholders' interest.
Other income consists primarily of royalty income, income from
short-term investments, income recognized due to the sale or licensing
of trademarks, foreign currency exchange gains and losses, and gains or
losses from the sale or disposition of assets.
14. Major Customer:
For 1994 and 1995, the Company did not have a major customer account for
more than 10% of gross sales. During 1993, the Company had one major
customer that accounted for approximately 10% of gross sales.
15. Acquisitions:
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 Sports BV for $413,598. 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 $210,192, which equaled the book value of the stock.
At January 5, 1996, December 30, 1994 and December 31, 1993, Saucony
Sports BV had assets of $1,595,470, $1,853,804 and $2,080,443,
liabilities of $1,454,778, $1,551,890 and $1,458,989 and revenues of
$3,215,936, $2,988,367 and $2,641,422, respectively.
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 $350,797 was financed with available cash of $160,954 and the
issuance of a note payable of $189,843. At January 5, 1996, December 30,
1994 and December 31, 1993, Saucony Canada, Inc. had assets of
$1,867,383, $2,293,569 and $1,562,263, liabilities of $740,380,
$1,453,913 and $898,511, and revenues of $3,776,545, $3,755,057 and
$2,663,165, respectively.
Effective July 1, 1993, the Company acquired 50% of the issued and
outstanding common stock of an Australian distributor, Saucony SP Pty.
Limited for $214,159 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 $2,081,800 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.
At January 5, 1996, December 30, 1994 and December 31, 1993, Saucony SP
had assets of $7,401,248, $7,252,590 and $4,674,254, liabilities of
$5,527,511, $6,848,537 and $4,414,133, and revenues of $11,661,122,
$10,840,627 and $3,819,165, respectively.
56
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
These acquisitions are accounted for as purchases.
16. 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.
The Company limits the amount of credit exposure with any one financial
institution and believes that no significant concentration of credit
risk exists with respect to cash investments.
Trade receivables subject the Company to the potential for credit risk
with customers in the retail and distributor sectors. To reduce credit
risk, the Company performs ongoing evaluations of its customers
financial condition but does not generally require collateral.
Approximately 41% of the Company's gross trade receivables balance were
represented by 13 customers, at January 5, 1996, which exposes the
Company to the concentrations of credit risk.
17. 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 are
estimated based upon quoted market prices for these securities. At
January 5, 1996, estimated fair value of the Company's financial
instruments approximated the carrying value.
57
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 5, 1996, December 30, 1994 and December 31, 1993
Additions
Balance, charged to Deductions Balance,
beginning costs and from end
of year expenses reserve of year
-------------- -------------- -------------- ------------
Year ended January 5, 1996:
Allowance for doubtful accounts
and discounts $ 1,147,409 $ 5,072,962 $ 5,280,127 $ 940,244
Year ended December 30, 1994:
Allowance for doubtful accounts
and discounts $ 1,191,819 $ 4,754,567 $ 4,798,977 $ 1,147,409
Year ended December 31, 1993:
Allowance for doubtful accounts
and discounts $ 1,001,615 $ 4,310,019 $ 4,119,815 $ 1,191,819
58
Exhibit Index
Exhibit
Number Description Page
- ------ ----------- ------
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
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** Employment Agreement, as amended, between the Registrant
and John H. Fisher is incorporated herein by reference to Exhibit
10.7 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 30, 1994 (the "1994 10-K Report") *
59
10.8** Employment Agreement, as amended, between the Registrant
and Charles A. Gottesman is incorporated herein by reference
to Exhibit 10.8 of the 1994 10-K Report *
10.9** Employment Agreement, as amended, between the Registrant
and James A. Buchanan is incorporated herein by reference to
Exhibit 10.9 of the 1994 10-K Report *
10.10** Consulting Agreement, as amended, between the Registrant
and Phyllis H. Fisher is incorporated herein by reference to
Exhibit 10.10 of the 1994 10-K Report *
10.11+ License Agreement, dated as of January 1, 1994, between
Brookfield Athletic Co., Inc. and Mattel, Inc. is incorporated
herein by reference to Exhibit 10.11 to the 1993 10-K Report *
10.12+ License Agreement, dated as of December 30, 1993, between
Brookfield Athletic Co., Inc. and Mattel, Inc. (d/b/a Mattel Toys,
Europe) is incorporated herein by reference to Exhibit 10.12
to the 1993 10-K Report *
10.13+ License Agreement between Brookfield Athletic Co., Inc. and
Playskool, Inc., as amended, is incorporated herein by
reference to Exhibit 10.14 to the Form S-2 *
10.14+ Letter Agreement, dated June 3, 1993, between Brookfield
Athletic Co., Inc. and Playskool, Inc. is incorporated herein
by reference to Exhibit 10.14 to the 1993 10-K Report *
10.15+ Letter Agreement, dated January 26, 1995, between Brookfield
Athletic Co., Inc. and Hasbro, Inc. is incorporated herein by
reference to Exhibit 10.15 of the 1994 10-K Report *
10.16+ Patent Cross-License Agreement for In-Line Skates, dated
June 1993, and as amended September 1993, among the
Registrant, Brookfield Athletic Co., Inc., Rollerblade, Inc.
and David Wolf is incorporated herein by reference to
Exhibit 10.17 to the 1993 10-K Report *
10.17 License Agreement between the Registrant and Cal's Best,
Inc. (d/b/a Bangor Trading Company) is incorporated herein
by reference to Exhibit 10.27 to the Form S-2 *
10.18+ 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 *
10.19** 1993 Equity Incentive Plan, as amended, is incorporated
herein by reference to Exhibit 10.21of the 1994 10-K Report *
60
10.20** 1993 Director Option Plan is incorporated herein by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the thirteen weeks ended April 2, 1993, as amended
(the "Form 10-Q") *
10.21** VP Bonus Plan is incorporated herein by reference to
Exhibit 10.19 to the Form S-2 *
10.22** Compensation Agreement between the Registrant and
James H. Noyes, Jr. is incorporated herein by reference
to Exhibit 10.3 to the Form 10-Q *
10.23+ License and Royalty Agreement between Brookfield
Athletic Co., Inc. and Franklin Sports, Inc. is incorporated
herein by reference to Exhibit 10.25 of the 1994 10-K
Report *
10.24+ License Agreement, dated May 2, 1994, between
Brookfield Athletic Co., Inc. and The Walt Disney Company,
Inc. is incorporated herein by reference to Exhibit 10.26
of the 1994 10-K Report *
10.25++ License Agreement dated August 1, 1995 between Spalding
Sports Worldwide and Brookfield Athletic Co., Inc.
10.26++ License Agreement dated April 1, 1995 between Mattel,
Inc. and Brookfield Athletic Co., Inc.
10.27++ License Agreement dated April 1, 1995 between Hasbro,
Inc. and Brookfield Athletic Co., Inc.
10.28** Employment Agreement, dated as of June 1, 1995, betweeen
the Registrant and Wolfgang Schweim is incorporated herein by
reference to Exhibit 10.01 to the Registrant's Quarterly Report
on Form 10-Q for the twenty-six weeks ended June 30, 1995. *
10.29** Letter Agreement dated March 30, 1995, betweeen the Registrant
and Principal Mutual Life Insurance Company is incorporated herein
by reference to Exhibit 10.01 to the Registrant's Quarterly Report
on Form 10-Q for the thirteen weeks ended March 31, 1995. *
21 Subsidiaries of the Registrant
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
* 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.
++ Confidential treatment requested as to certain portions of such
document.
61