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 4, 2002
Commission file number: 000-05083
Saucony, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
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(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 532-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act:
Class A Common Stock, $.33-1/3 par value
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(Title of class)
Class B Common Stock, $.33-1/3 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting and non-voting common equity stock held by
non-affiliates of the registrant, as of March 14, 2002, was approximately
$27,645,000 (based on the closing sale prices of the Class A Common Stock and
Class B Common Stock on such date as reported on the Nasdaq National Market).
Shares of Class A Common Stock and Class B Common Stock held by each executive
officer and director of the registrant and by each entity known to the
registrant to beneficially own 10% or more of the outstanding shares of either
the Class A Common Stock or the Class B Common Stock have been excluded in that
such persons may be deemed to be affiliates of the registrant. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
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 14,
2002 was 2,566,747 and 3,520,829, respectively.
Portions of the registrant's Definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders scheduled to be held on May 23, 2002 (the "2002 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after January 4, 2002, are incorporated by reference into
Part III of this Annual Report on Form 10-K. With the exception of the portions
of the 2002 Proxy Statement expressly incorporated into this Annual Report on
Form 10-K by reference, such document shall not be deemed filed as part of this
Annual Report on Form 10-K.
PART I
ITEM 1 - BUSINESS
Overview
We design and market performance-oriented athletic footwear, athletic apparel
and casual leather footwear. Our principal products are:
o technical running, walking and outdoor trail shoes, which we sell under
the Saucony brand name;
o technical running shoe models from the early 1980's, which we
reintroduced in 1998, as Saucony "Originals", our classic
footwear line;
o athletic apparel, which we sell under the Hind brand name;
o shoes for coaches and officials and casual leather walking and
workplace footwear, which we sell under the Spot-bilt brand name.
Our products are sold in the United States at more than 5,500 retail locations
and at our 11 factory outlet stores and outside the United States in 29
countries through 20 distributors located throughout the world. For the fiscal
year ended January 4, 2002, we generated total sales of $132.3 million.
On November 9, 2001, we announced the cessation of manufacturing operations at
our Bangor, Maine facility. Footwear production concluded in mid-January 2002.
During the fourth quarter of fiscal 2001, we determined to close an
underperforming retail store and relocated our Asian sourcing and quality
control function to China, resulting in the closure of our Taiwan office. As a
result of these actions, we incurred non-recurring charges of $2.1 million, $1.3
million after-tax, or $0.21 per share after-tax, in the fourth quarter of fiscal
2001. Additionally, we are phasing out our Hyde Authentics footwear line during
the first half of fiscal 2002.
Saucony(R), Spot-bilt(R), GRID(R), Hyde(R), and Hind(R) are our registered
trademarks. This annual report on Form 10-K also includes other service marks,
trademarks and trade names of ours and of companies other than us.
Segments
Our business is organized into two operating segments. The Saucony segment
consists of Saucony(R) technical and Originals footwear, and Saucony apparel.
The Other Products segment consists of Hind(R) athletic apparel, Hyde(R)
Authentics footwear and Spot-bilt(R) shoes for coaches and officials and casual
leather walking and workplace footwear, together with sales of our products at
our 11 factory outlet stores.
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the periods and geographic
areas indicated.
Net Sales
(dollars in thousands)
Fiscal 2001 Fiscal 2000 (1) Fiscal 1999 (1)
---------------------- --------------------- --------------------
$ % $ % $ %
- - - - - -
Saucony
Domestic..............$ 86,414 65% $ 126,758 75% $ 116,246 75%
International......... 23,878 18% 19,710 12% 16,814 11%
---------- ------- ---------- ------- ---------- -------
Total.................$ 110,292 83% $ 146,468 87% $ 133,060 86%
---------- ------- ---------- ------- ---------- -------
Other Products
Domestic..............$ 20,070 15% $ 19,035 12% $ 20,148 13%
International......... 1,899 2% 2,294 1% 2,250 1%
---------- ------- ---------- ------- ---------- -------
Total.................$ 21,969 17% $ 21,329 13% $ 22,398 14%
---------- ------- ---------- ------- ---------- -------
Total....................$ 132,261 100% $ 167,797 100% $ 155,458 100%
========== ======= ========== ==== ========== =======
- -----------------
(1) See Note 1 to our Consolidated Financial Statements regarding the adoption
of EITF 00-10.
For further financial information concerning our operating segments and
geographic areas, please see Notes 15 and 16 to our Consolidated Financial
Statements in this Annual Report on Form 10-K.
Products
Footwear
Technical Footwear. We sell performance running, walking and outdoor trail shoes
for athletes under the Saucony brand name, which has been marketed in the United
States for over 30 years. A substantial majority of sales are in the running
shoe category. We have several different products within each Saucony brand
category. These products have different designs and features, resulting in
different cushioning, stability, support characteristics and prices.
We design and market separate lines for men and women within most technical
footwear categories. In keeping with our emphasis on performance, we market and
sell our technical footwear to athletes who have a high participation rate in
their sport of choice. We address this market through our "Loyal to the Sport"
advertising campaign. We believe that these consumers are more brand loyal than
those who buy athletic footwear for casual use. The suggested domestic retail
prices for most of our technical footwear products are in the range of $50 to
$90 per pair, with our top-of-the-line running shoes having suggested domestic
retail prices of up to $130 per pair. During fiscal 2001 we introduced several
new shoes targeted at the mid-priced footwear segment, which is the largest
segment of the running shoe market, with retail prices ranging from $60 to $80
per pair.
The Saucony brand is recognized for its technical innovation and performance. As
a result of our application of biomechanical technology in the design process,
we believe that our Saucony footwear has a distinctive "fit and feel" that is
attractive to athletic users. A key element in the design of our shoes is an
anatomically correct toe and heel configuration that provides support and
comfort for the particular activity for which the shoe is designed.
We build a variety of technical features into our shoes. Most of our technical
running and other athletic shoes incorporate our Ground Reaction Inertia Device,
or GRID system, an innovative midsole system that employs molded strings
engineered to create a feeling similar to that of the "sweet spot" of a tennis
racquet. In contrast with conventional athletic shoe midsoles, the GRID system
is designed to react to various stress forces differently, thereby maximizing
shock absorption and minimizing rear foot motion. We have continually improved
the GRID system since it was first introduced in 1991.
During fiscal 2001, we began to incorporate our newest proprietary footwear
technology, Custom Ride Management, into our core technical footwear products.
Custom Ride Management technology allows us to tailor shoes to the individual
characteristics of a runner, including height, weight, foot size and gait
cycles. By doing so, it allows athletes to select a level of cushioning or
stability based on their need or preference. We have incorporated Custom Ride
Management into one running model, scheduled for shipment in the first quarter
of fiscal 2002 and plan to extend this technology to an additional running model
scheduled for shipment in the second quarter of fiscal 2002 and a walking model
in fiscal 2003.
We design our Saucony technical cross training, women's walking and outdoor
technical trail shoes with many of the same performance features and "fit and
feel" characteristics as are found in Saucony technical running shoes. During
fiscal 2001, our most popular non-running technical athletic shoe was a woman's
performance walking shoe.
Technical footwear accounted for approximately 61%, 51% and 48% of our fiscal
2001, fiscal 2000 and fiscal 1999 consolidated net sales, respectively.
Originals Footwear. In 1998, we reintroduced a number of our technical running
shoe models from the early 1980's under the name "Originals." These shoes are
designed to appeal to younger consumers who do not generally wear them for
athletic purposes. We believe our Originals shoes have benefited from the trend
toward "retro" products in footwear and apparel. We offer these shoes in a
variety of styles with over 100 combinations of colors and materials. The
suggested retail prices for our Originals are in the range of $40 to $60 per
pair.
Our initial Originals offering consisted of two models, the "Jazz Originals" and
the "Shadow Originals." In light of the success of these products, we expanded
the Originals product line to include color and material variations on our
initial Originals and have introduced children's models. During fiscal 2001, we
introduced additional Originals products, including contemporary-styled
reintroductions of our technical running shoe models from the early 1980's and
lifestyle footwear designed for the 12 to 25 year old footwear consumer.
Originals accounted for approximately 21%, 35% and 37% of our fiscal 2001,
fiscal 2000 and fiscal 1999 consolidated net sales, respectively.
Spot-bilt
We sell shoes for coaches and officials and casual leather walking and workplace
footwear under the Spot-bilt brand name through the same distribution channels
as our Saucony brand shoes.
Athletic Apparel
Hind
We sell a full line of technical apparel under the Hind brand name for use in a
variety of sports, including bicycling, swimming and running. We believe that
our Hind products have a reputation among athletes for delivering comfort and
performance. Most of our Hind products incorporate our moisture management
technology, which transfers moisture away from the wearer's skin to enhance
comfort. We frequently add innovations to our Hind product offerings in an
effort to incorporate the latest fabric technology.
Saucony
We also market athletic apparel under the Saucony label. We target our Saucony
apparel line at the mainstream running consumer. We believe that our Saucony
athletic apparel supports our Saucony athletic footwear products by enhancing
the visibility of the Saucony brand.
Product Design and Development
We believe that the technical performance of our Saucony footwear and other
product lines is important to the ultimate consumers of our products. We
continually strive to produce products that improve athletic performance and
maximize comfort. We use the consulting services of professional designers as
well as podiatrists, orthopedists, athletes, trainers and coaches as part of our
product development program. We maintain a staff of 16 design and development
specialists in Peabody, Massachusetts and Boulder, Colorado to undertake
continuing product development.
In fiscal 2001 we spent approximately $1.14 million on our product development
programs, compared to approximately $1.08 million in fiscal 2000 and $1.68
million in fiscal 1999. Most of our research and development expenditures relate
to Saucony brand footwear products.
Sales and Marketing
Saucony
We sell our Saucony footwear products at more than 5,500 retail outlets in the
United States, primarily higher-end, full-margin sporting goods chains,
independent sporting goods stores, athletic footwear specialty stores and
department stores. Retail outlets include Foot Locker, Lady Foot Locker, Road
Runner Sports, The Shoe Show, Hibbett Sporting Goods, FootStar and The Finish
Line.
We maintain a corporate sales group that is directly responsible for the sales
activity in our largest 43 accounts. We also sell our footwear and apparel to
retail outlets in the United States through 12 independent manufacturers'
agents, whose organizations employ approximately 42 sales representatives. We
coordinate the efforts of these representatives through our field sales
management group. Our web site (saucony.com) receives thousands of "hits" weekly
from consumers looking for new product information and race and event data, as
well as general Saucony information.
We sell our Saucony products outside the United States in 29 countries through
20 distributors located throughout the world, through our Canadian subsidiary,
in which we hold an 85% ownership interest, and through our wholly owned
subsidiaries located in the Netherlands and the United Kingdom.
We strive to enhance our reputation and image in the marketplace and increase
recognition of the Saucony brand name by advertising our products through print
media and television advertising. For our technical footwear, we advertise
primarily in magazines such as "Runner's World," "Men's Health," "Outside",
"Shape" and "Cooking Light." We also sponsor sporting events and telecasts to
increase brand awareness and the image of our technical footwear to athletes.
Examples include "Saucony Running and Racing" seen monthly on ESPN and
sponsorship of the Los Angeles Marathon. To build in-store presence, we use
account-specific and in-store promotions, such as athlete appearances, special
events and discounts for store employee purchases of our products. For our
Originals line, we generally advertise in "lifestyle" magazines that target 12
to 25 year olds, such as "ESPN," "Maxim," "Jane", "Teen People" and "Vibe."
Most of our advertising and promotional programs for our Saucony brand are
directed toward the ultimate consumer. We also promote the Saucony brand to the
retail trade through attendance at trade shows and similar events. We employ a
cooperative advertising program, which is intended to maximize advertising
resources by having our retailers share in the cost of promoting our Saucony
brand in print advertising, while affording our retailers the opportunity to
promote their stores.
Other Products
We sell our Hind products domestically and internationally at independent
sporting goods stores and specialty sporting equipment stores through 8
independent manufacturers' agents, whose organizations employ approximately 35
sales representatives. We market our Spot-bilt line through our Saucony brand
distribution channels and directly to customers through our website at
Spotbilt.com.
Factory Stores
We currently operate 11 factory outlet stores at which we sell our Saucony, Hind
and Spot-bilt products. To avoid competing against full-margin retail outlets
for these products, we generally limit the items offered at these stores to
products with cosmetic defects, discontinued merchandise and certain slow-moving
products. As part of our growth strategy, we plan to open clusters of factory
stores in selected regions where we believe the Saucony brand is underdeveloped.
We believe that this approach will strengthen Saucony brand name recognition.
During fiscal 2001, we opened two new factory outlet stores. In January 2002, we
closed one underperforming store.
Suppliers
Prior to December 2001, we assembled a majority of our domestically sold Saucony
technical footwear at our Bangor, Maine manufacturing facility, largely with
components sourced from independent manufacturers located overseas. As a result
of our decision to cease footwear production in Maine, independent overseas
manufacturers produce all of our Saucony products, including our Originals
products, and our Spot-bilt products.
The overseas footwear manufacturers that supply products to us are located in
Asia, principally in China. We select footwear manufacturers in large part on
the basis of our prior experience with the manufacturer and the availability of
production capacity. We have developed long-term relationships with key footwear
manufacturers that we believe have yielded many benefits, including quality
control, favorable costs, flexible working arrangements and predictable
production capacity. Although to date we have not experienced difficulty in
obtaining manufacturing services, we seek to develop additional overseas
manufacturing sources from time to time, both to increase our sourcing capacity
and to obtain alternative sources of supply.
We perform an array of quality control procedures at various stages of the
production process, from testing of product prototypes prior to manufacture, to
inspection of finished goods prior to shipment. Our quality control program is
designed to ensure that finished goods meet our established design
specifications and high quality standards. During fiscal 2001, we closed our
Taiwan office and relocated our sourcing and quality control function to China.
We employ approximately 22 Saucony footwear quality control personnel in China.
Our personnel in China regularly visit our footwear manufacturers throughout
Asia to monitor, oversee and improve the quality control and production
processes.
We contract with third parties for the manufacture of our Hind apparel, most of
which is manufactured in the United States of domestically sourced fabrics.
Raw materials required for the manufacture of our products, including leather,
rubber, nylon and other fabrics, are generally available in the country in which
our products are manufactured. We and our suppliers have not experienced
difficulty in satisfying raw material needs to date.
The number of our foreign suppliers and the percentage of products sourced by us
from particular foreign suppliers varies from time to time. During fiscal 2001,
we purchased footwear products from approximately six overseas suppliers. One
such supplier, located in China, accounted for approximately 39% of our total
overseas footwear purchases by dollar volume.
In December 2001, we entered into Manufacturing and Supply Agreements with four
of our overseas footwear suppliers. The agreements which expire one year from
their effective dates and are renewable annually, create a performance
management process and provide for financial penalties should the footwear
suppliers fail to attain the requirements contained in the agreements.
Although we compete with other athletic shoe and apparel companies, including
companies that are much larger than us, for access to production facilities, we
believe that our relationships with our footwear and other suppliers are strong.
We also believe that we have the ability to develop, over time, alternative
sources in various countries for footwear and other products that we source from
our current suppliers. However, in the event of a supply interruption, our
operations could be materially and adversely affected if a substantial delay
occurred in locating and securing alternative sources of supply.
Distribution and Inventory
We distribute our products from our owned warehouses in Massachusetts and leased
warehouses in Canada and The Netherlands, as well as through third-party
operated warehouse facilities located in California and the United Kingdom.
To accommodate our domestic customers' requirements and plan for our own product
needs, we employ a "futures" order program for most of our products under which
we take orders in advance of the selling season for a particular product and
commit to ship the product to the customer in time for the selling season. We
offer our customers price discounts and extended payment terms as an incentive
for using this ordering program. Our futures order program is similar to
programs offered by other athletic footwear companies.
We also maintain an open-stock inventory of our technical and Hind apparel
products, but not our Originals products, so that we can satisfy retailers'
orders on an "at-once" basis. We sell our Originals line of footwear only on a
"futures" basis, with no planned inventory position, because we believe that
demand for products from our Originals line is more closely tied to style and
fashion trends than demand for our other products. By maintaining no planned
inventory of our Originals line, we seek to minimize the risk of inventory
obsolescence that can result from unanticipated changes in consumer preferences.
We are, however, subject to inventory risk for our Originals products in the
event of significant order cancellations.
Backlog
The athletic and casual footwear and athletic apparel industries in which we
compete are subject to seasonal sales fluctuations. Sales of our Saucony and
other footwear brands are generally highest in the first and third quarters,
while sales of our Hind athletic apparel are highest in the third and fourth
quarters. Because products sold on an "at once" basis are generally shipped as
orders are received, our backlog relates primarily to products sold on a
"futures" basis.
Our backlog of unfilled orders was approximately $42.5 million at January 4,
2002 and $66.4 million at January 5, 2001. We expect that all of our backlog at
January 4, 2002 will be shipped in fiscal 2002, provided that our customers do
not cancel their orders. Our backlog does not necessarily represent actual
future shipments, because orders may be cancelled by our customers without
financial penalty. Also, the rate of customer order cancellations can vary
quarter-to-quarter and year-to-year.
During 2001, we did not derive more than 10% of our consolidated revenue from
sales to one customer.
Trade Policy
Our practice of sourcing products overseas, with subsequent importation into the
United States, exposes us to possible product supply disruptions and increased
costs in the event of actions by United States or foreign government agencies
adverse to continued trade or the enactment of legislation that restricts trade.
For example, we import significant amounts of our footwear products from China.
On December 11, 2001, China acceded to the World Trade Organization ("WTO") and
thus now enjoys Permanent Normal Trade Relations with the United States.
Therefore, China receives the same favorable tariff treatment that the United
States extends to its other "normal" trading partners. However, even though it
has joined the WTO, scrutiny of China's trading practices is not likely to
subside. There will be continuing pressure on China to honor its WTO
commitments, particularly those relating to intellectual property protection. If
China does not abide by WTO rules, the United States may come under pressure to
impose sanctions such as duties or quotas on imports from China. If any such
action were to include imports of footwear products from China, it could
significantly add to our cost of goods and could restrict our supply of products
from that country.
We are unable to predict whether additional United States customs duties, quotas
or other restrictions may be imposed in the future upon the importation of our
products. Any such occurrences might adversely affect our sales or
profitability, possibly materially.
Competition
Competition is intense in the markets in which we sell our products. We compete
with a large number of other companies, both domestic and foreign. Several
competitors are large organizations with diversified product lines, well-known
brands and financial, distribution and marketing resources substantially greater
than ours. The principal competitors for our Saucony products are Nike, New
Balance and Asics. The principal competitors for our Hind products are Nike,
Pearl Izumi and TYR. We compete based on a variety of factors, including price,
product style, durability and quality, product design and technical performance,
brand image and awareness, marketing and promotion and our ability to meet
delivery commitments to retailers. We believe that we are competitive in all of
these areas.
Trademarks
We use trademarks on nearly all of our products and believe that having
distinctive marks is an important factor in marketing our products. We have
registered our Saucony(R), Spot-bilt(R), GRID(R), Hyde(R) and Hind(R) marks,
among others, in the United States. We have also registered some of these marks
in a number of foreign countries. Although we have a foreign trademark
registration program for selected marks, we may not be able to register or use
such marks in each foreign country in which we seek registration.
Employees
As of January 4, 2002, we employed approximately 375 people worldwide. Of these
employees, approximately 307 were in the United States and approximately 68 were
in foreign locations. We believe that our employee relations are excellent. We
have never experienced a strike or other work stoppage. Approximately 24
employees in our Peabody, Massachusetts warehouse were represented by a union as
of January 4, 2002. None of our other employees are represented by a union or
are subject to a collective bargaining agreement. The closing of our Bangor,
Maine facility in January 2002 resulted in the termination of 104 employees, of
which 61 were terminated subsequent to January 4, 2002, reducing our worldwide
employment to 314 people.
Executive Officers of the Registrant
Our executive officers are as follows:
Name Age Position
- ---------------------- --- ---------------------------------------
John H. Fisher 54 President, Chief Executive Officer
and Director
Charles A. Gottesman 51 Executive Vice President,
Business Development
and Director
Michael Umana 39 Senior Vice President, Finance,
Chief Operating and Financial Officer
and Treasurer
Wolfgang Schweim 49 President, Saucony International
Michael Jeppesen 42 Senior Vice President, Manufacturing
and Design
Roger P. Deschenes 43 Vice President, Controller and
Chief Accounting Officer
John H. Fisher has served as our Chief Executive Officer since 1991. He was
elected our President and Chief Operating Officer in 1985 after having served as
our Executive Vice President from 1981 to 1985 and as our 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. He is the brother-in-law of
Charles A. Gottesman.
Charles A. Gottesman has served as our Executive Vice President, Business
Development since July 2001. He served as our Executive Vice President and Chief
Operating Officer from 1992 to July 2001, our Executive Vice President, Finance
from 1989 to 1992, our Senior Vice President from 1987 to 1989, our Vice
President from 1985 to 1987, and our Treasurer from 1983 to July 2001. Mr.
Gottesman became a director in 1983. He is the brother-in-law of John H. Fisher.
Michael Umana has served as our Senior Vice President, Finance, Chief Operating
Officer, Chief Financial Officer and Treasurer, since July 2001 after having
served as our Senior Vice President, Finance and Chief Financial Officer since
May 2000. Mr. Umana joined us in October 1999 as our Vice President, Finance and
Chief Financial Officer. From 1997 to October 1999, Mr. Umana served as Vice
President and Chief Financial Officer of the Analytical Instrument Business
Unit, at PerkinElmer, Inc., a high technology manufacturer. Prior to 1997, Mr.
Umana held various auditing and consulting positions, the most recent being
Senior Manager, Business Consulting, at Arthur Andersen LLP, a professional
services company from 1985 to 1997. Mr. Umana is a Certified Public Accountant.
Wolfgang Schweim became the President of Saucony International in January 1998
after serving as President of our athletic footwear division from 1994 to
January 1998. From 1993 to 1994, Mr. Schweim served as Managing Director for
Saucony Europe. From 1989 to 1993, Mr. Schweim was the German Managing Director
and Marketing Sales Manager for Europe at Asics, an athletic shoe manufacturer.
Prior to 1989, Mr. Schweim worked in sales and marketing positions with various
shoe manufacturers, including Nike International and Adidas AG.
Michael Jeppesen joined us in May 2001, as Senior Vice President, Manufacturing
and Design. Mr. Jeppesen was employed as Vice President of Operations of Coach
Leatherware Inc, a manufacturer of leather products, from 1999 to May 2001. From
1996 to 1999, Mr. Jeppesen held various senior management positions at Adidas
AG, including Vice President of European Operations and Vice President - Global
Materials, the most recent being Vice President of European Operations, which he
held from 1997. Mr. Jeppesen was employed as General Manager of Prime Asia, a
footwear manufacturer, from 1994 to 1996.
Roger P. Deschenes has served as our Vice President, Controller and Chief
Accounting Officer since 1997, after having served as our Controller and Chief
Accounting Officer from 1995 to 1997. Mr. Deschenes joined us in 1990 as
Corporate Accounting Manager. He was employed at Allen-Bradley Company, a
subsidiary of Rockwell International, Corp., from 1987 to 1990 as Financial and
Cost Reporting Supervisor. Mr. Deschenes is a Certified Management Accountant.
Officers are elected on an annual basis and serve at the discretion of the Board
of Directors.
ITEM 2 - PROPERTIES
Our general and executive offices and our main distribution facility are located
in Peabody, Massachusetts and are owned by us. This facility consists of
approximately 145,000 square feet, of which 125,000 square feet is warehouse
space.
We also own a facility in Bangor, Maine containing approximately 73,000 square
feet of space, which we previously had used for the assembly of our domestic
Saucony running shoes. We commenced seeking a buyer for this facility in
February 2002. We also own a facility in Brookfield, Massachusetts containing
approximately 109,000 square feet, which we use for warehousing and
distribution.
We lease approximately 4,000 square feet of office space in Boulder, Colorado.
We lease factory outlet stores with an aggregate of approximately 24,000 square
feet of retail space at nine locations in Massachusetts, Maine and Florida. We
also own a factory outlet store containing approximately 3,000 square feet of
retail space in Bangor, Maine.
ITEM 3 - LEGAL PROCEEDINGS
We are involved in routine litigation incident to our business. We do not
believe that any of these proceedings will have a material adverse effect on our
financial position, operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
During the fiscal quarter ended January 4, 2002, there were no matters submitted
to a vote of security holders of Saucony, through the solicitation of proxies or
otherwise.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock and Class B Common Stock trade on the Nasdaq National
Market under the symbols "SCNYA" and "SCNYB," respectively. The following table
sets forth, for the periods indicated, the actual high and low sales prices per
share of the Class A Common Stock and the Class B Common Stock as reported by
the Nasdaq National Market.
Class A Class B
Common Stock Common Stock
High Low High Low
---- --- ---- ---
Fiscal Year ended January 4, 2002
First quarter.........................................$ 10.500 $ 6.313 $ 10.125 $ 5.969
Second quarter........................................ 8.570 5.570 8.590 5.800
Third quarter......................................... 6.620 5.190 6.400 5.030
Fourth quarter........................................ 5.450 4.530 5.600 4.260
Fiscal Year ended January 5, 2001
First quarter.........................................$ 15.500 $ 9.000 $ 14.875 $ 8.625
Second quarter........................................ 14.000 8.875 14.000 8.000
Third quarter......................................... 11.500 9.250 11.500 8.625
Fourth quarter........................................ 11.250 8.000 11.125 7.359
There were 248 and 254 stockholders of record of the Class A Common Stock and
Class B Common Stock, respectively, on March 14, 2002. Only the Class A Common
Stock has voting rights.
We have not paid any cash dividends during the last two fiscal years and do not
anticipate paying any cash dividends in the foreseeable future on the shares of
Class A Common Stock or Class B Common Stock. We currently intend to retain
future earnings to fund the development and growth of our business. Our credit
facility agreement restricts the payment or declaration of any dividend without
the consent of our lender. Each share of Class B Common Stock is entitled to a
regular cash dividend equal to 110% of the regular cash dividend, if any,
payable on a share of Class A Common Stock.
ITEM 6 - SELECTED FINANCIAL DATA
The selected consolidated financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
in this Annual Report on Form 10-K.
The selected consolidated financial data set forth below as of January 4, 2002
and January 5, 2001 and for the years ended January 4, 2002, January 5, 2001 and
December 31, 1999 are derived from the audited consolidated financial statements
of Saucony included in this Annual Report on Form 10-K. All other selected
consolidated financial data set forth below is derived from audited financial
statements of Saucony not included in this Annual Report on Form 10-K. Saucony's
historical results are not necessarily indicative of its results of operations
to be expected in the future.
Selected Income Statement Data
(in thousands except per share amounts)
Year Year Year Year Year
Ended Ended Ended Ended Ended
Jan. 4, Jan. 5, Dec. 31, Jan. 1, Jan. 2,
2002 2001 (1) 1999 1999 1998
----- -------- ---- ---- ----
Revenues (2)...........................................$ 132,364 $167,920 $155,887 $105,810 $ 93,962
Operating income (loss) (3), (4)....................... (269) 16,123 18,196 5,741 (1,935)
Income (loss) from continuing operations............... (940) 8,963 10,319 3,579 (4,032)
Discontinued operations:
Loss from discontinued operations................... -- -- -- -- (394)
Gain on disposal of Brookfield business............. -- -- -- -- 96
Net income (loss)...................................... (940) 8,963 10,319 3,579 (4,330)
Earnings per common share - basic
Income (loss) from continuing operations............$ (0.15) $ 1.45 $ 1.64 $ 0.57 $ (0.65)
Loss from discontinued operations................... -- -- -- -- (0.05)
--------- --------- -------- ---------- ---------
Net income (loss) per common share - basic.............$ (0.15) $ 1.45 $ 1.64 $ 0.57 $ (0.70)
========== ========= ======== ======== =========
Earnings per common share - diluted
Income (loss) from continuing operations............$ (0.15) $ 1.41 $ 1.57 $ 0.56 $ (0.65)
Loss from discontinued operations................... -- -- -- -- (0.05)
--------- --------- -------- -------- ---------
Net income (loss) per common share - diluted ..........$ (0.15) $ 1.41 $ 1.57 $ 0.56 $ (0.70)
========== ========= ======== ======== =========
Weighted average common shares and
equivalents outstanding for diluted EPS ............ 6,080 6,341 6,568 6,373 6,240
Cash dividends per share of common stock............... -- -- -- -- --
Selected Balance Sheet Data
Jan. 4, Jan. 5, Dec. 31, Jan. 1, Jan. 2,
2002 2001 1999 1999 1998
---- ---- ---- ---- ----
Current assets.........................................$ 69,538 $ 73,531 $ 66,480 $ 58,963 $ 50,091
Current liabilities.................................... 12,325 15,919 15,403 18,840 13,315
Working capital........................................ 57,213 57,612 51,077 40,123 36,776
Total assets........................................... 78,100 83,285 77,181 69,879 61,316
Long-term debt and capitalized lease
obligations, net of current portion................. -- 34 292 559 771
Stockholders' equity................................... 63,162 64,620 58,962 48,250 45,072
- ---------------------------
(1) See Note 1 to our Consolidated Financial Statements regarding reporting period.
(2) See Note 1 to our Consolidated Financial Statements regarding the adoption of EITF 00-10 in fiscal 2001.
(3) See Note 14 to our Consolidated Financial Statements regarding our Bangor, Maine plant closing and other non-recurring
charges incurred in fiscal 2001.
(4) See Note 13 to our Consolidated Financial Statements regarding the sale of our cycling division in fiscal 2000.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Dollar amounts throughout this Item 7 are in thousands, except per share
amounts.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results may differ materially from these
estimates. Our significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this Annual Report on
Form 10-K. Critical accounting policies are those policies that are reflective
of significant judgments and uncertainties and potentially result in materially
different results under different assumptions and conditions. Our most critical
accounting policies are as follows:
- - Revenue Recognition - Defective Products Returns and Other Allowances
We recognize revenue from product sales when title passes and all the
rewards and risk of loss have been transferred and all the criteria for
revenue recognition described in SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB 101), as amended by SAB
101A and 101B are met. We must make estimates for defective product returns
and other allowances related to current period product revenue. We record a
provision for defective product returns and other allowances based upon
past experience and the receipt of notification of pending returns. While
the returns have historically been within our expectations and the
provisions established, we cannot guarantee that the product return rate
will remain constant. Any significant increase in the product return rate
and resulting reduction in our net sales could have a material adverse
impact on our results of operations for the period in which the returns
materialize.
- - Accounts Receivable - Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts and therefore must estimate
losses resulting from the inability of our customers to make required
payments. We analyze our accounts receivable, historical bad debt trends,
customer credit worthiness, economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. As noted in Note 17 of the consolidated financial statements, we
have a credit risk concentration, due to the concentration of our domestic
Saucony footwear sales amongst a relatively small customer base. If the
liquidity or financial condition of any of our larger customers were to
deteriorate, resulting in an impairment of their ability to make payments
due us or if payment schedules of our customers are otherwise delayed from
historical trends, additional allowances might be required, which could
materially increase our allowance for doubtful accounts.
- - Inventories
We value our inventory at the lower of the actual cost to purchase or the
current estimated market value. Provision for excess and obsolete
inventory, equal to the difference between the cost of the inventory and
the estimated market value, must be estimated by us. Our provision is based
upon estimated product demand and market conditions. If actual future
demand or market conditions are less favorable than those projected by us,
additional provisions to write-down inventory may be required, which could
materially reduce our amount of current assets.
- - Income Taxes
We estimate our income taxes in each of the jurisdictions that we operate.
This process requires us to estimate our current tax exposure, together
with assessing temporary differences, which result in deferred tax assets
and liabilities. We recognize deferred tax assets and liabilities based on
the difference between the financial statement carrying amounts and the tax
bases of assets and liabilities. We regularly review our deferred tax
assets for recoverability and establish valuation allowances when we
determine that it is more likely than not that the deferred tax assets
resulting from operating losses will not be realized. During fiscal 2001,
we recorded deferred tax valuation allowances of $387.
United States federal tax laws allow companies to defer the recognition of
tax liability on undistributed earnings of foreign subsidiaries that are
indefinitely reinvested in the foreign operation. At January 4, 2002, we
had approximately $3,076 of undistributed earnings of foreign subsidiaries
that are indefinitely reinvested in foreign operations for which we have
not recorded deferred income taxes.
Highlights
Increase (Decrease)
-------------------
2001 vs. 2000 2000 vs. 1999
------------- -------------
Net sales.............................................$ (35,536) (21.2)% $ 12,339 7.9%
Gross profit.......................................... (20,059) (32.3) 3,360 5.7
Selling, general and administrative expenses.......... (3,134) (7.2) 2,466 6.0
$ Change
--------
2001 vs. 2000 2000 vs. 1999
------------- -------------
Operating income.........................................$ (16,392) $ (2,073)
Income before income taxes............................... (15,877) (2,076)
Net income............................................... (9,903) (1,356)
Percent of Net Sales
--------------------
2001 2000 1999
---- ---- ----
Gross profit............................................. 31.9% 37.1% 37.9%
Selling, general and administrative expenses............. 30.6 25.9 26.4
Operating income (loss) ................................. (0.2) 9.6 11.7
Income (loss) before income taxes........................ (0.3) 9.2 11.3
Net income (loss)........................................ (0.7) 5.3 6.6
Consolidated Net Sales
Fiscal 2001, fiscal 2000 and fiscal 1999 consisted of 52, 53 and 52 weeks,
respectively. Our net sales and results of operations for each of fiscal 2001,
fiscal 2000 and fiscal 1999 are comparable. Net sales decreased $35,536, or 21%,
to $132,261 in fiscal 2001 from $167,797 in fiscal 2000. Excluding sales from
our former cycling division, the net sales decrease in fiscal 2001 would have
been 20% lower than fiscal 2000. Net sales increased $12,339, or 8%, to $167,797
in fiscal 2000 from $155,458 in fiscal 1999. Excluding sales from our former
cycling division, the net sales increase in fiscal 2000 would have been 11%
higher than fiscal 1999.
On a geographic basis, domestic sales decreased $39,309, or 27%, to $106,484 in
fiscal 2001 from $145,793 in fiscal 2000. International sales increased $3,773,
or 17%, to $25,777 in fiscal 2001 from $22,004 in fiscal 2000. At constant
exchange rates, the international sales increase in fiscal 2001 would have been
21%. Domestic sales increased $9,399, or 7%, to $145,793 in fiscal 2000 from
$136,394 in fiscal 1999. International sales increased $2,940, or 15%, to
$22,004 in fiscal 2000 from $19,064 in fiscal 1999. At constant exchange rates,
the international sales increase in fiscal 2000 would have been 23%.
Saucony Segment
2001 2000 1999
---- ---- ----
Net Sales $110,292 (-25%) $146,468 (+10%) $133,060
2001 Compared to 2000
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
decreased $36,176, or 25%, to $110,292 in fiscal 2001 from $146,468 in fiscal
2000, due primarily to a 22% decrease in footwear unit volumes and lower
domestic and international wholesale per pair average sell prices. The overall
average domestic wholesale selling prices per pair of domestic footwear
decreased 2% in fiscal 2001 versus fiscal 2000, due to a 33% increase in special
make-up footwear unit volumes and a 34% increase in closeout footwear unit
volumes, both of which sell at prices below our first quality technical footwear
and, a change in the product mix for technical footwear to lower priced
products.
Domestic net sales decreased $40,344, or 32%, to $86,414 in fiscal 2001 from
$126,758 in fiscal 2000, due primarily to a 62% decrease in Originals footwear
unit volumes, a 13% decrease in technical footwear unit volumes, lower average
wholesale per pair selling prices, partially offset by a 34% increase in
closeout footwear unit volumes and a 33% increase in special make-up footwear
unit volumes. The lower average wholesale selling prices per pair is due to
higher unit volumes of closeout footwear and special make-up footwear, both of
which sell at prices below our first quality technical footwear. Sales of
closeout footwear accounted for approximately 12% of domestic Saucony net sales
in fiscal 2001 compared to 5% in fiscal 2000. The Originals footwear accounted
for 29% of fiscal 2001 domestic footwear unit volume versus 53% in fiscal 2000.
The unit volume decrease in Originals footwear is primarily due to a shift in
consumer preference to other product categories, primarily basketball footwear,
which we do not sell. During the second half of fiscal 2001, the order
cancellation rate for our Saucony footwear decreased from the order cancellation
rate in the first half of fiscal 2001 and was comparable with our historical
average.
International net sales increased $4,168, or 21%, to $23,878 in fiscal 2001 from
$19,710 in fiscal 2000, due primarily to a 40% increase in footwear unit
volumes, partially offset by lower average per pair wholesale selling prices and
the negative impact of the stronger U.S. dollar against European currencies.
Footwear unit volumes increased 73% at our international distributor business
and 17% at our European and Canadian subsidiaries, respectively, in fiscal 2001
versus fiscal 2000. The footwear unit volume increase in our international
distributor business is due primarily to the success of our Originals footwear
product in the Japanese footwear market in 2001, which accounted for
approximately 91% of the international distributor unit volume increase, and
increased market penetration in the Pacific Rim.
2000 Compared to 1999
Worldwide net sales of Saucony branded footwear and apparel increased $13,408,
or 10%, to $146,468 in fiscal 2000 from $133,060 in fiscal 1999, due primarily
to a 6% increase in footwear unit volumes and higher domestic and international
wholesale per pair average sell prices. The overall average domestic wholesale
selling prices per pair of domestic footwear increased 5% in fiscal 2000 versus
fiscal 1999, due to an 11% increase in technical footwear unit volumes and a
change in the product mix for technical and Originals footwear to higher priced
products that resulted in higher average sell prices for both categories.
Domestic net sales increased $10,512, or 9%, to $126,758 in fiscal 2000 from
$116,246 in fiscal 1999, due primarily to the 11% increase in technical footwear
unit volumes, a 103% increase in closeout footwear unit volumes and the higher
average wholesale selling prices per pair for both technical and Originals
footwear, partially offset by a 4% decrease in Originals footwear unit volumes
and lower special make-up footwear volume. Sales of closeout footwear accounted
for approximately 5% of domestic Saucony net sales in fiscal 2000 compared to 3%
in fiscal 1999. The Originals footwear accounted for 53% of fiscal 2000 domestic
footwear unit volume versus 58% in fiscal 1999. The unit volume decrease in
Originals footwear was primarily due to a lack of sell-through on the
"new-school" products, which resulted in order cancellations. During the fourth
quarter of fiscal 2000, the order cancellation rate for our Saucony footwear was
higher than our historical average.
International net sales increased $2,896, or 17%, to $19,710 in fiscal 2000 from
$16,814 in fiscal 1999, due primarily to a 23% increase in technical footwear
unit volumes and higher average wholesale per pair sell prices, partially offset
by the negative impact of the stronger U.S. dollar against European currencies.
Footwear unit volumes at our international distributor business, and our
European and Canadian subsidiaries, increased 45% and 11%, respectively, in
fiscal 2000 versus fiscal 1999. The footwear unit volume increase in our
international distributor business was due primarily to our entry into the
Japanese footwear market in 2000, which accounted for approximately 64% of the
international distributor unit volume increase.
Other Products Segment
2001 2000 1999
---- ---- ----
Net Sales $21,969 (+3%) $21,329 (-5%) $22,398
The Other Products segment consists of our Hind athletic apparel, eleven factory
outlet stores, Spot-bilt coaches' and official shoes and casual walking and
workplace footwear, sales of our Hyde Authentics casual footwear, which will be
discontinued in fiscal 2002, and sales from our former cycling division. Each of
these businesses represented less than 10% of total revenues and, in the
aggregate, represented 17% of total net sales in fiscal 2001.
2001 Compared to 2000
Worldwide sales of Other Products increased $640, or 3%, to $21,969 in fiscal
2001 from $21,329 in fiscal 2000 due primarily to increased sales at our factory
outlet stores, increased Hyde Authentic unit volume and increased sales of our
Hind brand apparel, partially offset by the elimination of sales resulting from
the cycling division divestiture in fiscal 2000.
Domestic net sales of Other Products increased $1,035, or 5%, to $20,070 in
fiscal 2001 from $19,035 in fiscal 2000 due primarily to increased sales at our
factory outlet division, reflecting the net addition of one factory outlet store
and increased sales at stores open for more than one year, increased Hyde
Authentics footwear unit volume, increased unit volume of our Hind apparel
brand, partially offset by the elimination of sales from our former cycling
division, which was divested in fiscal 2000. International net sales of Other
Products decreased $395, or 17%, to $1,899 in fiscal 2000 from $2,294 in fiscal
2000, primarily due to decreased Hind apparel sales in Europe.
2000 Compared to 1999
Worldwide sales of Other Products decreased $1,069, or 5%, to $21,329 in fiscal
2000 from $22,398 in fiscal 1999 due primarily to the elimination of sales
resulting from the cycling division divestiture, partially offset by increased
sales of our Hind brand apparel and increased sales at our factory outlet
stores.
Domestic net sales of Other Products decreased $1,113, or 6%, to $19,035 in
fiscal 2000 from $20,148 in fiscal 1999 due primarily to the elimination of
sales from our former cycling division, which was divested in fiscal 2000,
partially offset by increased unit volume of our Hind apparel brand and
increased sales at our factory outlet division stores due to the net addition of
two factory outlet stores. International net sales of Other Products increased
$44, or 2%, to $2,294 in fiscal 2000 from $2,250 in fiscal 1999, due to
increased Hind apparel sales in Europe.
Costs and Expenses
Our gross margin in fiscal 2001 decreased 5.2% to 31.9% from 37.1% in fiscal
2000 due primarily to the significant decline in Saucony domestic sales of first
quality footwear products at full margin. Other factors contributing to the
fiscal 2001 margin decrease were proportionately higher sales of closeout
products, due to our decision to reduce inventory levels and of special make-up
footwear, both of which carry lower margins and, to a lesser extent,
manufacturing inefficiencies, domestic pricing pressures, changes in the
geographic mix of sales and the negative impact of the U.S. dollar on our
European margins.
For the 2000 fiscal year, the gross margin decreased 0.8% to 37.1%, from 37.9%
in fiscal 1999, due primarily to a change in domestic Saucony product mix to
higher levels of closeout sales at comparatively lower margins, domestic pricing
pressures, increased inventory reserves and, to a lesser extent, the negative
impact of the stronger U.S. dollar on our European margins and a change in the
Saucony international sales mix to increased distributor sales.
The SG&A ratio increased 4.7% to 30.6% of net sales in fiscal 2001 from 25.9% in
1999. The increase in the ratio resulted from advertising, selling and
administrative expenses decreasing at a lower rate than the rate of the sales
decrease. In absolute dollars, selling, general and administrative expenses
decreased to $40,407 in 2001, or 7%, from $43,541 in fiscal 2000. Decreased
spending in fiscal 2001 was due primarily to reduced operating expenses
resulting from the cycling division divestiture, decreased television and print
media advertising, decreased account-specific advertising, promotion and event
sponsorship and decreased variable selling expenses and incentive compensation,
offset partially by increased operating expenses associated with the factory
outlet division expansion and higher provisions for doubtful accounts.
The SG&A ratio improved 0.5% to 25.9% of net sales in fiscal 2000 from 26.4% in
1999. The improvement in the ratio resulted from the continued management of
advertising, selling and administrative expenses below the rate of sales growth.
In absolute dollars, selling, general and administrative expenses increased to
$43,541 in 2000, or 6%, from $41,075 in fiscal 1999. Increased spending in
fiscal 2000 was attributable to increased television and print media
advertising, increased account-specific advertising and promotion, increased
event sponsorship, increased variable selling expenses, administrative staffing
increases, increased operating expenses associated with the factory outlet
division expansion and increased professional fees, partially offset by reduced
operating expenses resulting from the cycling division divestiture and lower
provisions for doubtful accounts. The higher provision for doubtful accounts in
fiscal 1999 in comparison with fiscal 2000 was due primarily to the bankruptcy
filing by Just for Feet, Inc.
Plant Closing and Other Non-Recurring Charges
On November 9, 2001 we announced the cessation of manufacturing and closing of
our Bangor, Maine facility. During the fourth quarter of fiscal 2001, we
relocated our Asian sourcing and quality control office to China, resulting in
the closure of our Taiwan office and negotiated an early termination and exit of
a retail store lease. As a result of these actions, we recorded pre-tax
non-recurring charges of $2,108, or $1,277 after-tax or $0.21 per diluted share
after-tax. The closing of our Bangor, Maine facility in January 2002 resulted in
the termination of 104 employees, of which 61 were terminated subsequent to
January 4, 2002. Assets used by our Bangor, Maine manufacturing facility, the
Taiwan office and our retail store have been written down to fair market value.
Expenses associated with the plant closing and other non-recurring charges are
as follows: Bangor Taiwan Retail Plant Office Store Total
Employee severance and termination benefits.......................$ 1,121 $ 150 $ 4 $ 1,275
Facility and equipment lease exit costs and
other non-cancelable contractual commitments..................... 228 -- 200 428
Writedown of machinery and equipment
to fair market value............................................. 248 25 77 350
Professional fees and other transaction costs..................... 47 -- 8 55
------- ------ ------- --------
Total............................................................$ 1,644 $ 175 $ 289 $ 2,108
======= ====== ======= ========
Included in accrued expenses at January 4, 2002 are $1,461 of costs associated
with the plant closing and other non-recurring charges, the majority of which we
expect will be paid by the end of the first quarter of fiscal 2002. The charge
recorded for the Bangor, Maine plant closing and the Taiwan office closing are
included in income before tax for the Saucony segment, while the retail store
closing is included in income before tax for the Other Products segment.
As of January 4, 2002, our Bangor, Maine real property had a net book value of
$357 and is included on the balance sheet under the caption "Property, plant and
equipment". We commenced marketing the property for sale in February 2002 and
have received market valuations for the property in the range of $875 to $1,250.
Beginning in the first quarter of fiscal 2002, we will reclassify the real
property to current assets as "Held For Sale."
Sale of Cycling Division
On June 29, 2000, we sold substantially all of the assets and business of our
cycling division, consisting of inventory, prepaid expenses, equipment and
tradenames, to QR Merlin Acquisition LLC for $1,350 in cash and the assumption
of $39 in liabilities. In connection with the sale, we recorded a pre-tax loss
of $2,661, inclusive of $1,012 of expenses associated with the transaction and
expenses resulting from our exit of the cycling business, or $1,553 after-tax or
$0.24 per diluted share after-tax. As a result of the transaction, a majority of
the cycling division employees were severed and assets used exclusively in the
cycling business were deemed impaired and have been written off. Expenses
associated with the sale and exit of the cycling division are as follows:
Transaction costs............................................$ 358
Costs to exit facility and equipment leases and
other non-cancelable contractual commitments............... 142
Employee severance and termination benefits.................. 210
Writeoff leasehold improvements.............................. 84
Writeoff goodwill and other deferred charges................. 218
--------
Total........................................................$ 1,012
========
Included in accrued expenses at January 5, 2001 are $144 of costs associated
with the sale and the exit of the cycling business, which were paid in fiscal
2001.
Net sales from the cycling division, which are included in our Other Products
segment, represented approximately 1.9% and 4.7% of consolidated net sales for
fiscal years 2000 and 1999, respectively. The loss on the sale of the cycling
division is included in the income before tax for the Other Products segment.
Interest Expense
Net interest expense totaled $153, $626 and $683 in fiscal years 2001, 2000 and
1999, respectively. Interest expense decreased 76% in fiscal 2001 due to lower
average debt levels and increased interest income. In fiscal 2000, interest
expense decreased 8% due to lower average debt levels and increased interest
income, partially offset by higher interest rates on our domestic borrowings.
Income (Loss) Before Taxes
Segment 2001 2000 1999
------- ---- ---- ----
Saucony....................$ (296) $ 18,507 $ 18,965
Other Products............. (68) (2,994) (1,376)
----------- ----------- -----------
Consolidated...............$ (364) $ 15,513 $ 17,589
=========== ========== ==========
We evaluate business performance and the performance of key managers based on
profit or loss before income taxes. Income before tax decreased by $15,877 in
fiscal 2001 to a loss of $364 compared to a profit of $15,513 in fiscal 2000,
due primarily to the significant reduction in the domestic Saucony segment due
to lower sales and lower gross margins and, to a lesser extent, non-recurring
charges of $2,108 incurred in connection with the closure of our Bangor, Maine
manufacturing facility, early termination and exit of a retail store outlet and
the closure of our Taiwan office.
Income before tax decreased by $2,076 in fiscal 2000 to $15,513 compared to
$17,859 in fiscal 1999, due primarily to the loss on the sale of the cycling
division, which impacted the Other Products segment, and lower domestic pre-tax
income realized by the domestic Saucony segment due to lower gross margins and
higher selling expenses, partially offset by improved profitability in our
Saucony international and Hind apparel business.
Income Taxes
The provision for income taxes decreased to $475 in fiscal 2001 from $6,461 in
fiscal 2000 due primarily to a decrease in domestic pre-tax income, offset
partially by an increase in deferred valuation allowances on foreign loss
carryforwards that are not expected to be realized and a shift in the
composition of domestic and foreign pre-tax earnings.
The provision for income taxes decreased to $6,461 in fiscal 2000 from $7,194 in
fiscal 1999, due primarily to the loss on the sale of the cycling division which
reduced domestic pre-tax income. The effective tax rate increased 0.7% to 41.6%
in fiscal 2000 from 40.9% in fiscal 1999 due to a shift in the composition of
domestic and foreign pre-tax earnings and an increase in deferred valuation
allowances on foreign loss carryforwards that are not expected to be realized.
Net Income (Loss)
The net loss for fiscal 2001 was $940, or $0.15 per diluted share, compared to
net income of $8,963, or $1.41 per diluted share, in fiscal 2000. The plant
closing and other non-recurring charges reduced net income and diluted earnings
per share by $1,277 and $0.21, respectively in fiscal 2001. Excluding the effect
of the non-recurring charges, our net income would have been $337, or $0.05 per
diluted share. Weighted average common shares of 6,080 were used to calculate
diluted earnings per in fiscal 2001, while weighted average common shares and
equivalent shares of 6,341 were used to calculate diluted earnings per share for
fiscal 2000. Equivalent shares were not used in fiscal 2001 to calculate diluted
earnings per share because they were anti-dilutive.
Net income for fiscal 2000 decreased to $8,963, or $1.41 per diluted share,
compared to $10,319, or $1.57 per diluted share, in fiscal 1999. The loss on the
sale of our cycling division reduced net income and diluted earnings per share
by $1,553 and $0.24, respectively, in fiscal 2000. Excluding the effect of the
loss on the sale of our cycling division, our net income in fiscal 2000 would
have been $10,516, or $1.66 per diluted share. Weighted average common shares
and equivalent shares used to calculate diluted earnings per share were 6,341
and 6,568, respectively, in fiscal 2000 and 1999.
Liquidity and Capital Resources
Fiscal 2001
As of January 4, 2002, our cash and cash equivalents totaled $22,227, an
increase of $17,489 from January 5, 2001. The increase is due primarily to the
generation of $21,556 of cash from operations, partially offset by cash outlays
for capital assets of $1,326 and the repayment of short-term borrowings under
our credit facilities of $2,474 and the repayment of long-term debt of $226.
The decrease in accounts receivable of $11,827, net of the provision for bad
debt and discounts, was due primarily to decreased net sales of our Saucony and
other products in the fourth quarter of fiscal 2001 and a decrease in our days
sales outstanding for our accounts receivable. Our days sales outstanding for
our accounts receivable decreased to 41 days in fiscal 2001 from 58 days in
fiscal 2000, due primarily to a reduction in payment date sales terms due to
increased sales of special make-up and closeout footwear and increased foreign
distributor volume, of which dating programs are shorter. In addition, the
increased provisions for doubtful accounts reduced days sales outstanding by
approximately two days in fiscal 2001. The provision for bad debts and discounts
increased to $5,767 in fiscal 2001 from $5,525 in fiscal 2000 due to an increase
in the provision for doubtful accounts. Inventories decreased $9,418 in fiscal
2001 due primarily to our decision to reduce domestic Saucony footwear
inventories, which had increased in the fourth quarter of fiscal 2000 due to
increased order cancellations, and lower factory outlet inventories, which had
increased due to the expansion of the factory outlet division. The increase in
domestic Saucony footwear inventory in fiscal 2000 resulted from increased order
cancellations in the fourth quarter of 2000 for both technical and Originals
footwear. The decision to reduce domestic Saucony footwear inventories
negatively impacted fiscal 2001 gross margins. Our inventory turns ratio
decreased to 2.7 turns in fiscal 2001 from 2.9 turns in fiscal 2000. The number
of days sales in inventory decreased to 115 days in fiscal 2001 from 132 days in
fiscal 2000.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting our operating cash flows in fiscal
2001 included a decrease of $3,472 in accrued letters of credit (due to new
inventory supplier payment terms), an increase of $3,484 in accounts payable
(due to a change in inventory purchase terms), a decrease of $2,286 in accrued
expenses (due to decreased performance-based compensation accruals and lower
operating spending levels), and an increase of $344 in income tax payable (due
to the timing of income tax payments).
During fiscal 2001, we repurchased approximately 19,000 shares of our common
stock for a total expenditure of $132. Since the approval of the stock buyback
program by the Board of Directors in May 1998, we have repurchased a total of
467,000 shares of our common stock for a total of expenditure of $4,364. We
cannot repurchase additional shares of our common stock without the consent of
the primary lender under our credit facility.
Fiscal 2000
As of January 5, 2001, our cash and cash equivalents totaled $4,738, an increase
of $1,223 from December 31, 1999. The increase was due primarily to the
generation of $4,100 of cash from operations, the receipt of $1,350 from the
sale of our former cycling division and an increase of $335 in short-term
borrowings, principally under our credit facilities. This increase was partially
offset by cash outlays for capital assets of $1,669, the repurchase of shares of
our common stock of $2,688 and the repayment of long-term debt of $360.
The increase in accounts receivable of $3,074, net of the provision for bad debt
and discounts, was due primarily to increased net sales of our Saucony and other
products in the fourth quarter of fiscal 2000 and an increase in our days sales
outstanding for our accounts receivable. Our days sales outstanding for our
accounts receivable increased to 58 days in fiscal 2000 from 56 days in fiscal
1999, due primarily to the reserve of $1,525 provided for on the receivable due
from Just for Feet, Inc. in fiscal 1999, which reduced the fiscal 1999 days
sales outstanding by 3 days, and, to a lesser extent, the timing of shipments in
the fourth quarter of fiscal 2000. Inventories increased $6,018 in fiscal 2000
due to increased domestic Saucony footwear inventory, increased Hind apparel
inventory and increased inventory at the our factory outlet stores, due to the
net addition of two stores in 2000. The increase in domestic Saucony footwear
inventory resulted from increased order cancellations in the fourth quarter of
2000 for both technical and Originals footwear. Our inventory turns ratio
remained constant at 2.9 turns for both fiscal 2000 and fiscal 1999. The number
of days sales in inventory decreased to 132 days in fiscal 2000 from 133 days in
fiscal 1999.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting our operating cash flows in fiscal
2000 included an increase of $1,210 in accrued letters of credit (due to
increased direct-ship inventory purchases), a decrease of $1,185 in accrued
expenses (due to decreased performance-based compensation accruals and the
payment of expenses resulting from the cycling division divestiture), a decrease
of $412 in accounts payables (due to the timing of inventory purchases) and a
decrease of $889 in income taxes payable (due to domestic tax payments made in
the fourth quarter of 2000).
During fiscal 2000, we repurchased approximately 300,000 shares of our common
stock for a total expenditure of $3,106, $418 of which was financed with
borrowed funds. At January 5, 2001, this borrowing and accrued interest thereon
of $15 are included in notes payable.
Credit Facility
We maintain a revolving credit line of $15,000 for cash borrowings and letters
of credit. We reduced the amount available for cash borrowings and letters of
credit under the credit facility from $20,000 to $15,000 in February 2002. We
and certain of our subsidiaries have guaranteed our obligations under the credit
facility. The credit facility is unsecured. The credit facility contains certain
restrictions and financial covenants with which we are required to comply,
whether or not there are any borrowings outstanding. The credit facility has
been extended through June 30, 2002. Under the most restrictive covenant, we
were required to maintain a minimum tangible net worth of $50,961 as of January
4, 2002. The credit facility is also subject to the bank's periodic review of
our operations. We may not pay cash dividends and repurchase shares of common
stock without the consent of our primary lender under the credit facility. As of
January 4, 2002 and March 14, 2002, $19,640 and $15,000, respectively, were
available for borrowing under the credit facility.
In February 2002, our primary lender amended the definition of EBIT, earnings
before interest and taxes under the credit facility. The amendment modified the
calculation of minimum interest expense coverage in relation to EBIT to exclude
the non-recurring charges of $2,108 incurred by us in the fourth quarter of
fiscal 2001. The amendment applied with the minimum interest expense coverage
covenant under the credit facility with respect to the fiscal quarters ended
January 4, 2002 and April 5, 2002. We were in compliance with all other
covenants of the credit facility at January 4, 2002.
Several of our foreign subsidiaries maintain credit facilities in the aggregate
principal amount of approximately $3,450. At March 1, 2002 an aggregate of
approximately $3,391 was available for borrowing under the facilities of our
foreign subsidiaries. See Note 8 to the Consolidated Financial Statements.
Capital Expenditures Commitments
At January 4, 2002, our commitments for capital expenditures were not material.
Contractual Obligations
Below is a table which presents our contractual obligations and commitments at
January 4, 2002.
Payments due by year
-------------------------------------------------------------------
2006
Contractual and
Obligations Total 2002 2003 2004 2005 thereafter
----------- ----- ---- ---- ---- ---- ----------
Long-term debt..................................$ -- $ -- $ -- $ -- $ -- $ --
Capital lease obligations....................... 92 92 -- -- -- --
Operating leases................................ 4,949 1,480 1,244 1,071 628 526
Other long-term obligations (1)................. 2,903 1,307 913 183 -- 500
------- ------- -------- -------- ------- --------
Total contractual cash obligations..............$ 7,944 $ 2,879 $ 2,157 $ 1,254 $ 628 $ 1,026
======= ======= ======== ======== ======= ========
- ---------------
(1) Other long-term obligations include athlete and event sponsorship and
employment contracts with two key executives.
Overall Liquidity
Our liquidity is contingent upon a number of factors, principally our future
operating results. Management believes that our current cash and cash
equivalents, credit facilities and internally generated funds are adequate to
meet our working capital requirements and to fund our capital investment needs
and debt service payments in the near term. During fiscal 2001 we generated
$21,556 in cash from operating cash flows, due primarily to a decrease in our
accounts receivable and inventories. In 2000, we generated $4,100 in cash from
operating cash flows. As of January 4, 2002, we had $14,742 in accounts
receivable and $28,404 in inventories.
At January 4, 2002, we had no borrowings outstanding under our credit facilities
and had $88 due under capital leases. Our short-term liquidity could potentially
be adversely impacted should demand for our products decline significantly,
which could result in extended payment terms for our customers and the increased
use of price concessions to induce customers to purchase our products. Since
July 31, 2001, the original expiration date of our primary credit facility, our
lender has extended the facility on several occasions. The credit facility is
scheduled to terminate on June 30, 2002. Our ability to fund future operations
could be adversely impacted if we are not able to renew this credit facility
under the current terms and conditions. In addition, although we are currently
in compliance with the effective covenants under the credit facility, if we were
to fall out of compliance with those covenants or the covenants under a renewal
of the facility, the credit facility would not be available to us and our lender
may declare a default under the credit facility.
INFLATION AND CURRENCY RISK
The effect of inflation on our results of operations over the past three years
has been minimal. The impact of currency fluctuation on our purchase of
inventory from foreign suppliers has been minimal as the transactions were
denominated in U.S. dollars. We are, however, subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. During fiscal 2001 the gross
margins of our European subsidiaries were negatively impacted due to currency
fluctuation. We have entered into forward foreign exchange contracts to minimize
certain transaction currency risks. We believe that our forward foreign currency
contracts function as economic hedges of our cash flows and that our foreign
exchange management program effectively minimizes certain transaction currency
risks.
ACCOUNTING PRONOUNCEMENTS
SFAS 141
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141). SFAS
141 addresses financial reporting and accounting for business combinations and
supersedes Accounting Principles Board Opinion No. 16, (APB 16) "Business
Combinations", and Statement of Financial Accounting Standards No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises" (SFAS
38). SFAS 141 requires that business combinations in the scope of this Statement
are to be accounted for using one method, the purchase method. The provisions of
SFAS 141 apply to all business combinations initiated after June 30, 2001 and is
also applicable to all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later. The adoption
of SFAS 141 did not have a material effect on earnings or on our financial
position.
SFAS 142
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
(SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets acquired individually or with a group of
other assets (excluding those acquired in a business combination) at
acquisition. The statement also addresses financial accounting and reporting for
goodwill and other intangibles subsequent to their acquisition. SFAS 142
supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" (APB
17). All of the provisions of SFAS 142 will be applied to goodwill and other
intangible assets effective in the fiscal years beginning after December 15,
2001. Under SFAS 142 goodwill and other indefinite-lived intangibles will no
longer be amortized, but rather will be reviewed for impairment. An impairment
loss will be recognized if the carrying value of an intangible asset is not
recoverable and its carrying value exceeds its fair value. Impairment losses for
goodwill and indefinite-lived intangible assets that arise due to the initial
application of this Statement are to be reported as resulting from a change in
accounting principle. At January 4, 2002, the net book value of goodwill was
$912. Amortization expense amounted to $131 in fiscal 2001 and we would have
been reported amortization expense of $113 in fiscal 2002. We will adopt SFAS in
the first quarter of fiscal 2002 and are assessing the impact of the provisions
of SFAS 142. We do not anticipate that the adoption of SFAS 142 will have a
material impact on earnings or on our financial position.
SFAS 143
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations", (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement cost. SFAS 143 applies to all companies that
incur legal obligations to retire tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We
have not determined the impact on our results of operations or financial
position on the initial adoption of SFAS 143.
SFAS 144
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and supercedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
(SFAS 121), and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", (APB 30) for the disposal of a
segment of a business as previously defined in APB 30. SFAS 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", (ARB
51) to eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. The provisions of SFAS 144 are to be applied
to all long-lived assets, with the exception of goodwill. SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss only if the carry
amount of the long-lived asset is not recoverable from its undiscounted cash
flows and measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. SFAS 144 expands upon the criteria,
beyond that previously specified in SFAS 121 to determine when a long-lived
asset is held for sale and provides guidance on the accounting for long-lived
assets classified as held for sale if the asset is being reclassified as held
and used. The provisions of SFAS 144 are effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years, with
early adoption permitted. The provisions of SFAS 144 generally are to be applied
prospectively. We will adopt SFAS 144 in the first quarter of fiscal 2002 and do
not anticipate that the adoption will have a material impact on earnings or on
our financial position.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated by reference in
this annual report on Form 10-K contain forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will," and "would," or similar
words. You should read statements that contain these words carefully because
they discuss future expectations, contain projections of future results of
operations or of financial position or state other "forward-looking"
information. The important factors listed below, as well as any cautionary
language elsewhere in this annual report on Form 10-K, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations described in these forward-looking statements.
You should be aware that the occurrence of the events described in the risk
factors below and elsewhere in this annual report on Form 10-K could have an
adverse effect on our business, results of operations and financial position.
Any forward-looking statements in this annual report on Form 10-K are not
guarantees of future performance, and actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements,
possibly materially. We disclaim any duty to update any forward-looking
statements.
CERTAIN OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
We face intense competition
Competition is intense in the markets in which we sell our products. We compete
with a large number of other companies, both domestic and foreign, several of
which are large organizations with diversified product lines, well-known brands
and financial, distribution and marketing resources substantially greater than
ours. The principal competitors for our Saucony products are Nike, New Balance
and Asics. The principal competitors of our Hind products are Nike, Pearl Izumi
and TYR. We compete based on a variety of factors, including price, product
style, durability and quality, product design and technical performance, brand
image and awareness, marketing and promotion and the ability to meet delivery
commitments to retailers. A technological breakthrough or marketing or
promotional success by one of our competitors could adversely affect our
competitive position. The intensity of the competition that we face constitutes
a significant risk to our business.
We depend on foreign suppliers
A number of manufacturers located in Asia, primarily in China, supply products
to us. During fiscal 2001, one of our suppliers, located in China, accounted for
approximately 39% of our total footwear purchases by dollar volume. We are
subject to the usual risks of a business involving foreign suppliers, such as
currency fluctuations, government regulation of fund transfers, export and
import duties, administrative trade cases, trade limitations imposed by the
United States or foreign governments and political and labor instability. There
are a number of trade-related and other issues creating significant friction
between the governments of the United States and China, and the imposition of
punitive import duties on certain categories of Chinese products has been
threatened in the past and may be implemented in the future. In addition, we
have no long-term manufacturing agreements with our foreign suppliers and
compete with other athletic shoe and apparel companies, including companies that
are much larger than us, for access to production facilities.
We need to anticipate and respond to consumer preferences and merchandise trends
The footwear and apparel industries are subject to rapid changes in consumer
preferences. Demand for our products, particularly our Originals line, may be
adversely affected by changing fashion trends and consumer style preferences. We
believe that our success depends in substantial part on our ability to
anticipate, gauge and respond to changing consumer demands and fashion trends in
a timely manner. In addition, our decisions concerning new product designs often
need to be made several months before we can determine consumer acceptance. As a
result, our failure to anticipate, identify or react appropriately to changes in
styles or features could lead to problems such as excess inventories and higher
markdowns, lower gross margins due to the necessity of providing discounts to
retailers and the inability to sell such products through our own factory outlet
stores.
Our quarterly results may fluctuate
Our revenues and quarterly operating results may vary significantly depending on
a number of factors, including:
o the timing and shipment of individual orders;
o market acceptance of footwear and other products offered by us;
o changes in our operating expenses;
o personnel changes;
o mix of products sold;
o changes in product pricing;
o general economic conditions; and,
o weather.
In addition, a substantial portion of our revenue is realized during the last
few weeks of each quarter. As a result, any delays in orders or shipments are
more likely to result in revenue not being recognized until the following
quarter, which could adversely impact our results of operations for a particular
quarter.
Our current expense levels are based in part on our expectations of future
revenue. As a result, net income for a given period could be disproportionately
affected by any reduction in revenue. It is possible that in some future quarter
our revenue or operating results will be below the expectations of stock market
securities analysts and investors. If that were to occur, the market price of
our common stock could be materially adversely affected.
Our revenues are subject to foreign currency exchange fluctuations
We conduct operations in various international countries, and a portion of our
sales is transacted in local currencies. As a result, our revenues are subject
to foreign exchange rate fluctuations. From time to time, our financial results
have been adversely affected by fluctuations in foreign currency exchange rates.
We enter into forward currency exchange contracts to protect us from the effect
of changes in foreign exchange rates. However, our efforts to reduce currency
exchange losses may not be successful, and currency exchange rates may have an
adverse impact on our future operating results and financial condition.
Our business is affected by seasonal consumer buying patterns
The athletic and casual footwear and athletic apparel industries in which we
compete are generally characterized by significant seasonality of sales and
results of operations. Sales of our Saucony brand products have historically
been seasonal in nature, with the strongest sales generally occurring in the
first and third quarters. In addition, sales of our Hind brand products are
generally strongest in the third and fourth quarters. We believe that sales of
our products will continue to follow this seasonal cycle. Therefore, our results
of operations for any one quarter may not necessarily be indicative of the
results that we may achieve for a full fiscal year or any future quarter.
Our operating results may be affected by order cancellations
Customers may cancel orders of our products at any time without financial
penalty. As a result, our backlog does not necessarily represent actual future
shipments. The rate of customer cancellations can vary quarter-to-quarter and
year-to-year. If the retail market continues to be weak or weakens again in the
future, our customers could cancel further orders of our products, which could
have a material adverse effect on our operating results.
We are susceptible to financial difficulties of retailers
We sell our products primarily to major retailers, some of whom have experienced
financial difficulties, including bankruptcy. We cannot predict what effect the
future financial condition of such retailers will have on our business. In
particular, we cannot guarantee that our bad debt expenses will not be material
in future periods.
We need effective marketing and advertising programs
Because consumer demand for our products is heavily influenced by brand image,
our business requires substantial investments in marketing and advertising.
Failure of such investments to achieve the desired effect in terms of increased
retailer acceptance or consumer purchase of our products could adversely affect
our financial results. In addition, we believe that our success depends in part
upon our ability to periodically launch new marketing and advertising programs.
If we are unable to successfully design or execute new marketing and
advertising, or if such programs are ineffective, our business will suffer.
We depend on certain key customers
Approximately 45% of our gross trade receivables balance was represented by 16
customers at January 4, 2002. We anticipate that our results of operations in
any given period will depend to a significant extent upon sales to major
customers. The loss of or a reduction in the level of sales to one or more major
customers could have a material adverse effect on our business, financial
condition and results of operations. Furthermore, if a major customer were
unable or unwilling to proceed with a large order or to pay us for a large order
on a timely basis, our business, financial condition and results of operations
could be materially adversely affected.
Changes in general economic conditions may adversely affect our business
Our business is sensitive to consumers' spending patterns, which in turn are
subject to prevailing regional and national economic conditions, such as
interest and taxation rates, employment levels and consumer confidence. Adverse
changes in these economic factors may restrict consumer spending, thereby
negatively affecting our growth and profitability.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
exchange rates. Our objective in managing our exposure to interest rates and
foreign currency rate changes is to limit the impact of these changes on cash
flows and earnings and to lower our overall borrowing costs. In order to achieve
these objectives we identify the risks and manage them by adjusting fixed and
variable rate debt positions and selectively hedging foreign currency risks.
Almost all of our borrowings are based on floating rates, which would increase
interest expense in an environment of rising interest rates. We have a policy of
selectively hedging foreign currency risks, but there are no assurances that
this program will fully insulate us against short-term fluctuations in financial
results.
The fair value of our forward exchange contracts as of January 4, 2002 was
$2,300. We have calculated the effect of a 10% change in interest rates over a
one-month period from January 4, 2002 and also a 10% change in certain foreign
currency rates over the same period and determined the effects to be immaterial.
We do not expect to make any significant changes in our management of foreign
currency or interest rate exposures or in the strategies we employ to manage
such exposures in the foreseeable future.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to our Consolidated Financial Statements in Item 14 and the
Consolidated Financial Statements, notes and schedules that are filed as part of
this Form 10-K following the signature page and incorporated herein by this
reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required to be reported in this Item was previously reported in
Saucony's Current Report on Form 8-K dated April 11, 2001, filed with the
Securities and Exchange Commission on April 17, 2001.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Executive Officers of the Registrant" in Part I of this Annual Report on
Form 10-K. The information required by Items 401 and 405 of Regulation S-K and
appearing in our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 23, 2002, which will be filed with the Securities
and Exchange Commission not later than 120 days after January 4, 2002, is
incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 23, 2002, which will be filed with the Securities and Exchange Commission
not later than 120 days after January 4, 2002, is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 23, 2002, which will be filed with the Securities and Exchange Commission
not later than 120 days after January 4, 2002, is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND RELATED
STOCKHOLDER MATTERS
The information required by Item 404 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 23, 2002, which will be filed with the Securities and Exchange Commission
not later than 120 days after January 4, 2002, is incorporated herein by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Consolidated Financial Statements
The following Consolidated Financial Statements of Saucony,
Inc. and its subsidiaries are included in this report
immediately following the signature page:
- Report of Independent Accountants - Arthur Andersen LLP
- Report of Independent Accountants - PricewaterhouseCoopers LLP -
Consolidated balance sheets at January 4, 2002 and January 5, 2001
- Consolidated statements of income for the years ended January 4,
2002, January 5, 2001, and December 31, 1999
- Consolidated statements of stockholders' equity for the years
ended January 4, 2002, January 5, 2001 and December 31, 1999
- Consolidated statements of cash flows for the years ended
January 4, 2002, January 5, 2001 and December 31, 1999
- Notes to the Consolidated Financial Statements
2. Index to Consolidated Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
not required, or because the required information is included in
the Consolidated Financial Statements or notes thereto.
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 Annual Report on Form 10-K are
listed on the Exhibit Index immediately preceding such exhibits,
which Exhibit Index is incorporated herein by this reference.
(b) 1. Reports on Form 8-K
-------------------
Saucony did not file any Current Reports on Form 8-K during the
fiscal quarter ended January 4, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SAUCONY, INC.
--------------------------------------------
(Registrant)
By: /s/ John H. Fisher
--------------------------------------------
John H. Fisher
President and Chief Executive Officer
Date: April 3, 2002
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 3, 2002
- ------------------------- Chief Executive Officer and
John H. Fisher Director
(Principal Executive Officer)
/s/ Charles A. Gottesman Executive Vice President, April 3, 2002
- ------------------------- Business Development and
Charles A. Gottesman Director
/s/ Michael Umana Senior Vice President, April 3, 2002
- ------------------------- Chief Operating and Financial
Michael Umana Officer
(Principal Financial Officer)
/s/ Roger P. Deschenes Vice President, Controller and April 3, 2002
- ------------------------- Chief Accounting Officer
Roger P. Deschenes (Principal Accounting Officer)
/s/ John M. Connors, Jr. Director April 3, 2002
- -------------------------
John M. Connors, Jr.
/s/ Phyllis H. Fisher Director April 3, 2002
- -------------------------
Phyllis H. Fisher
/s/ Jonathan O. Lee Director April 3, 2002
- -------------------------
Jonathan O. Lee
/s/ Robert J. LeFort, Jr. Director April 3, 2002
- -------------------------
Robert J. LeFort, Jr.
/s/ John J. Neuhauser Director April 3, 2002
- -------------------------
John J. Neuhauser
Report of Independent Public Accountants
To the Board of Directors of Saucony, Inc.:
We have audited the accompanying consolidated balance sheet of Saucony, Inc. (a
Massachusetts corporation) and subsidiaries as of January 4, 2002, and the
related consolidated statement of income, stockholders' equity and cash flow for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Saucony, Inc. and
subsidiaries as of January 4, 2002, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Boston, Massachusetts
February 14, 2002
Report of Independent Accountants
To The Board of Directors and Shareholders of
Saucony, Inc.
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) present fairly, in all material respects,
the financial position of Saucony, Inc. and its subsidiaries at January 5, 2001
and the results of their operations and their cash flows for each of the two
years in the period ended January 5, 2001, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2001
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 4, 2002 AND JANUARY 5, 2001
ASSETS
(in thousands, except share and per share amounts)
January 4, January 5,
2002 2001
---- ----
Current assets:
Cash and cash equivalents...........................................................$ 22,227 $ 4,738
Accounts receivable, net of allowance for doubtful accounts
and discounts (2001, $2,457; 2000, $2,047)....................................... 14,742 26,706
Inventories ........................................................................ 28,404 38,404
Deferred income taxes............................................................... 2,098 1,366
Prepaid expenses and other current assets........................................... 2,067 2,317
---------- ---------
Total current assets.............................................................. 69,538 73,531
---------- ---------
Property, plant and equipment, net of accumulated depreciation and amortization........ 6,989 7,581
---------- ---------
Other assets:
Goodwill, net of accumulated amortization (2001, $551; 2000, $420).................. 912 1,043
Deferred charges, net of accumulated amortization (2001, $1,249; 2000, $1,366)...... 217 294
Marketable securities............................................................... 296 343
Deferred income taxes............................................................... -- 266
Other............................................................................... 148 227
---------- ---------
Total other assets................................................................$ 1,573 $ 2,173
---------- ---------
Total assets...........................................................................$ 78,100 $ 83,285
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................$ 6,635 $ 3,173
Accrued expenses...........................................................