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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended January 2, 2004 Commission file number: 000-05083
Saucony, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (978) 532-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.33-1/3 par value
(Title of class)
Class B Common Stock, $.33-1/3 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ].
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant, as of July 3, 2003, which was the last
business day of the registrant's second quarter of fiscal 2003, was
approximately $55,121,000 (based on the closing sale prices of the Class A
Common Stock and Class B Common Stock on such date as reported on the Nasdaq
National Market). For purposes of the immediately preceding sentence, the term
"affiliate" consists of each director and executive officer of the registrant.
The number of shares of the registrant's Class A Common Stock, $.33-1/3 par
value, and Class B Common Stock, $.33-1/3 par value, outstanding on March 3,
2004 was 2,520,647 and 3,976,911, respectively.
Portions of the registrant's Definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders scheduled to be held on May 19, 2004 (the "2004 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after January 2, 2004, are incorporated by reference into
Part III of this Annual Report on Form 10-K. With the exception of the portions
of the 2004 Proxy Statement expressly incorporated into this Annual Report on
Form 10-K by reference, such document shall not be deemed filed as part of this
Annual Report on Form 10-K.
SAUCONY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 2, 2004
Caption Page
PART I
Item 1. Business 3
Executive Officers of the Registrant 11
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 36
Item 9A. Controls and Procedures 36
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 37
Item 13. Certain Relationships and Related Transactions 38
Item 14. Principal Accountant Fees and Services 38
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
Signatures 40
PART I
ITEM 1 - BUSINESS
Overview
We design, develop and market performance-oriented athletic footwear, athletic
apparel and casual leather footwear. Our principal products are:
o technical running, walking and outdoor trail shoes and athletic apparel,
which we sell under the Saucony brand name;
o technical running shoe models from the early 1980's, which we reintroduced
in 1998, as Saucony "Originals", our classic footwear line;
o athletic apparel, which we sell under the Hind brand name; and
o shoes for coaches and officials, football and soccer cleats 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 17 factory outlet stores. Outside the United States our products are
sold in 53 countries through 22 distributors located throughout the world and
through our subsidiary located in Canada, the Netherlands and the United
Kingdom.
For the fiscal year ended January 2, 2004, we generated total sales of $136.1
million. During fiscal 2003 we increased our ownership percentage in Saucony
Canada, Inc., our Canadian subsidiary, to 95% from 85% and sold our former
Saucony footwear manufacturing facility located in Bangor, Maine.
We are a Massachusetts corporation, founded in 1920. Our headquarters are in
Peabody, Massachusetts.
Saucony(R), Spot-bilt(R), GRID(R), Hyde(R), and Hind(R) are our registered
trademarks. This Annual Report on Form 10-K also includes other service marks,
trademarks and trade names of ours and of companies other than us. Unless the
context indicates otherwise, the terms "we", "us", "Saucony" and the "Company"
are used herein to refer to Saucony, Inc. and its consolidated subsidiaries.
Segments
Our business is organized into two operating segments, the Saucony segment and
the Other Products segment. The Saucony segment consists of Saucony technical
and Originals footwear and Saucony apparel. The Other Products segment consists
of Hind athletic apparel and Spot-bilt shoes for coaches and officials, football
and soccer cleats and casual leather walking and workplace footwear, together
with sales of our products at our 17 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 2003 Fiscal 2002 Fiscal 2001
--------------------- --------------------- --------------------
$ % $ % $ %
---------- ----- ---------- ---- ---------- ----
Saucony
Domestic..............$ 81,720 60% $ 83,182 62% $ 86,414 65%
International......... 30,991 23% 27,647 21% 23,878 18%
---------- ---- ---------- ---- ---------- ----
Total.................$ 112,711 83% $ 110,829 83% $ 110,292 83%
---------- ---- ---------- ---- ---------- ----
Other Products
Domestic..............$ 21,901 16% $ 20,171 15% $ 20,070 15%
International......... 1,454 1% 2,196 2% 1,899 2%
---------- ---- ---------- ---- ---------- ----
Total.................$ 23,355 17% $ 22,367 17% $ 21,969 17%
---------- ---- ---------- ---- ---------- ----
Total....................$ 136,066 100% $ 133,196 100% $ 132,261 100%
========== ==== ========== ==== ========== ====
_________________
For further financial information concerning geographic areas and our operating
segments, please see Notes 17 and 18 to our consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K.
Products
Footwear
Technical Footwear. We sell performance running, walking and outdoor trail shoes
for athletes under the Saucony brand name, which has been marketed in the United
States for over 30 years. A substantial majority of sales are in the running
shoe category. We have several different products within each Saucony brand
category. These products have different designs and features, resulting in
different cushioning, stability, support characteristics and prices.
We design and market separate lines for men and women within most technical
footwear categories. In keeping with our emphasis on performance, we market and
sell our technical footwear to athletes who have a high participation rate in
their sport of choice. We address this market through our "Loyal to the Sport"
advertising campaign. We believe that consumers in this market are more brand
loyal than those who buy athletic footwear for casual use. The suggested
domestic retail prices for most of our technical footwear products are in the
range of $50 to $90 per pair, with our top-of-the-line running shoes having
suggested domestic retail prices of up to $130 per pair. During fiscal 2003, 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.
We have incorporated our newest proprietary footwear technology, Custom Ride
Management, into our core technical footwear products. Custom Ride Management
technology allows us to tailor shoes to the individual characteristics of a
runner, including height, weight, foot size and gait cycles. By doing so, it
allows athletes to select a level of cushioning or stability based on their need
or preference. During fiscal 2003, we incorporated Custom Ride Management into
one running model and one walking model and commenced shipment of an additional
running model with Custom Ride Management in the first quarter of fiscal 2004.
We design our Saucony technical cross training, women's walking and outdoor
technical trail shoes with many of the same performance features and "fit and
feel" characteristics as are found in Saucony technical running shoes. During
fiscal 2003, our most popular non-running technical athletic shoe was a woman's
performance walking shoe.
Technical footwear, inclusive of full margin and closeout technical footwear,
accounted for approximately 71% of our fiscal 2003 consolidated net sales, 70%
of our fiscal 2002 consolidated net sales and 61% of our fiscal 2001
consolidated net sales.
Originals Footwear. In 1998, we reintroduced a number of our technical running
shoe models from the early 1980's under the name "Originals." These shoes are
designed to appeal to younger consumers who do not generally wear them for
athletic purposes. We believe our Originals shoes have benefited from 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 then
expanded the Originals product line to include color and material variations on
our initial Originals and also introduced children's models. During fiscal 2003,
we introduced additional Originals products, including contemporary-styled
reintroductions of our technical running shoe models from the early 1980's and
other casual footwear designed for the 12 to 25 year old footwear consumer.
Originals footwear, inclusive of full margin and closeout originals footwear,
accounted for approximately 11% of our fiscal 2003 consolidated net sales, 12%
of our fiscal 2002 consolidated net sales and 21% of our fiscal 2001
consolidated net sales. We attribute the decrease in sales of Originals footwear
primarily to a shift in consumer preference to other product categories,
primarily basketball footwear, which we do not sell.
Spot-bilt
We sell shoes for coaches and officials, football and soccer cleats and casual
leather walking and workplace footwear under the Spot-bilt brand name through
similar distribution channels as our Saucony brand shoes.
Athletic Apparel
Hind
We sell a full line of technical apparel under the Hind brand name for use in a
variety of sports, including running, fitness and bicycling. We believe that our
Hind products have a reputation among athletes for delivering comfort and
performance. Most of our Hind products incorporate our moisture management
technology, which transfers moisture away from the wearer's skin to enhance
comfort. We frequently add innovations to our Hind product offerings to
incorporate the latest available fabric technology.
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 ten design and development
specialists in Peabody, Massachusetts to undertake continuing product
development.
In fiscal 2003, we spent approximately $1.67 million on our product development
programs, compared to approximately $1.61 million in fiscal 2002 and $1.14
million in fiscal 2001. 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. One of our domestic Saucony customers accounted for
approximately 9% of our domestic Saucony segment net sales in fiscal 2003, 9% of
our domestic Saucony segment net sales in fiscal 2002 and 11% of our domestic
Saucony segment net sales fiscal 2001. We did not derive 10% or more of our
consolidated revenue from sales to one customer in any of fiscal 2003, fiscal
2002 or fiscal 2001.
We maintain a corporate sales group that is directly responsible for the sales
activity in our largest 38 accounts. We also sell our footwear and apparel to
retail outlets in the United States through 15 independent manufacturers'
agents, whose organizations employ approximately 48 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 53 countries through
19 distributors located throughout the world, through our Canadian subsidiary,
in which we hold a 95% ownership interest, and through our wholly owned
subsidiary 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", "Self", "Shape" and "Fitness",
as well as several regional running periodicals. We also sponsor sporting events
and telecasts to increase brand awareness and the image of our technical
footwear to athletes. Examples include "Saucony Running and Racing" seen monthly
on ESPN and sponsorship of the Los Angeles Marathon. To build in-store presence,
we use account-specific and in-store promotions, such as athlete appearances,
special events and discounts for store employee purchases of our products. For
our Originals line, we generally advertise in "lifestyle" magazines that target
12 to 25 year olds, such as "Seventeen" and "Maxim".
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.
Our local distributors direct our advertising and promotion efforts in foreign
markets, subject to our approval of the nature and content of those efforts.
Hind
We sell our Hind products domestically at independent sporting goods stores and
athletic footwear specialty stores through 16 independent manufacturers' agents,
whose organizations employ approximately 34 sales representatives. We sell our
Hind products outside the United States in three countries, through two
distributors and our subsidiary in Canada and the United Kingdom.
We market our Spot-bilt line through our Saucony brand distribution channels and
directly to customers through our website at Spotbilt.com.
Factory Stores
We currently operate 17 factory outlet stores at which we sell our Saucony,
Hind, Spot-bilt products and the products of third parties. To avoid competing
against full margin retail outlets for these products, we generally limit the
items offered at these stores to products with cosmetic defects, discontinued
merchandise, slow moving products and special make-up footwear products. As part
of our growth strategy, we plan to open factory stores in selected, factory
outlet malls in areas in which we believe the Saucony brand is underdeveloped
and there is a significant potential for sales and profit growth. We believe
that this approach will strengthen Saucony brand name recognition. During fiscal
2003, we opened five new factory outlet stores. In addition, we opened two
factory outlet stores in the first quarter of fiscal 2004.
Suppliers
Independent overseas manufacturers produce all of our Saucony products,
including our Originals products, and our Spot-bilt products. The overseas
footwear manufacturers that supply products to us are located in Asia,
principally in China. We select footwear manufacturers in large part on the
basis of our prior experience with the manufacturer and the availability of
production capacity. We have developed long-term relationships with key footwear
manufacturers that we believe have yielded many benefits, including quality
control, favorable costs, flexible working arrangements and predictable
production capacity. Although to date we have not experienced difficulty in
obtaining manufacturing services, we seek to develop additional overseas
manufacturing sources from time to time, both to increase our sourcing capacity
and to obtain alternative sources of supply.
We perform an array of quality control procedures at various stages of the
production process, from testing of product prototypes prior to manufacture, to
inspection of finished goods prior to shipment. Our quality control program is
designed to ensure that finished goods meet our established design
specifications and high quality standards. We employ approximately 22 Saucony
footwear quality control personnel in China. Our personnel in China regularly
visit our footwear manufacturers throughout Asia to monitor, oversee and improve
the quality control and production processes.
We contract with third parties for the manufacture of our Hind apparel, the
majority of which is manufactured in Taiwan, Canada, Sri Lanka and Vietnam of
fabrics sourced primarily from the United States and Taiwan.
Raw materials required for the manufacture of our products, including leather,
rubber, nylon and other fabrics, are generally available in the country in which
our products are manufactured. We and our suppliers have not experienced
difficulty in satisfying raw material needs to date.
The number of our foreign suppliers and the percentage of products sourced by us
from particular foreign suppliers varies from time to time. During fiscal 2003,
we purchased footwear products from four overseas suppliers. One such supplier,
located in China, accounted for approximately 32% of our total overseas footwear
purchases by dollar volume.
Although we compete with other athletic shoe and apparel companies, including
companies that are much larger than we are, for access to production facilities,
we believe that our relationships with our footwear and other suppliers are
strong. We also believe that we have the ability to develop, over time,
alternative sources in various countries for footwear and other products that we
source from our current suppliers. However, in the event of a supply
interruption, our operations could be materially and adversely affected if a
substantial delay occurred in locating and securing alternative sources of
supply.
Our operations are subject to compliance with the laws and regulations enforced
by the United States Customs Service and to the customary risks of conducting
business abroad, including currency fluctuations, increases in customs duties
and related fees, import controls and trade barriers such as the imposition of
import quotas, restrictions on the transfer of funds, work stoppages and, in
certain parts of the world, political instability causing disruption of trade.
To date, these factors have not had a material adverse affect on our operations.
Distribution and Inventory
We distribute our products from our owned warehouses in Massachusetts and leased
warehouses in Canada and The Netherlands, as well as through third party
operated warehouse facilities located in California and the United Kingdom.
To accommodate our domestic customers' requirements and plan for our own product
needs, we employ a "futures" order program for most of our products under which
we take orders in advance of the selling season for a particular product and
commit to ship the product to the customer in time for the selling season. We
offer our customers price discounts and extended payment terms as an incentive
for using this ordering program. Our futures order program is similar to
programs offered by other athletic footwear companies.
We also maintain an open-stock inventory on several core technical footwear
styles, a limited number of Originals footwear styles and Hind apparel products
so that we can satisfy retailers' orders on an "at once" basis. The majority of
our Originals line of footwear is sold on a "futures" basis, with limited
planned inventory position, because we believe that demand for products from our
Originals line is more closely tied to style and fashion trends than demand for
our other products. By maintaining only limited inventory for the majority of
our Originals line, we seek to minimize the risk of inventory obsolescence that
can result from unanticipated changes in consumer preferences. We are, however,
subject to inventory risk for our Originals and technical footwear products in
the event of significant order cancellations.
Backlog
The athletic and casual footwear and athletic apparel industries in which we
compete are subject to seasonal sales fluctuations. Sales of our Saucony and
other footwear brands are generally highest in the first and second quarters.
Sales of our Hind athletic apparel are generally highest in the first and third
quarters. Because products sold on an "at once" basis are generally shipped as
orders are received, our backlog relates primarily to products sold on a
"futures" basis. The mix of "future" and "at once" orders can vary significantly
from quarter to quarter and year to year.
Our backlog of unfilled orders was approximately $59.9 million at January 2,
2004 and $52.4 million at January 3, 2003. We expect that all of our backlog at
January 2, 2004 will be shipped in fiscal 2004, provided that our customers do
not cancel their orders. However, our backlog does not necessarily represent
actual future shipments because orders may be cancelled by our customers without
financial penalty. The rate of customer order cancellations can vary quarter to
quarter and year to year. Customers may also reject nonconforming products.
We did not derive 10% or more of our consolidated revenue from sales to one
customer in any of fiscal 2003, fiscal 2002 or fiscal 2001. Approximately 44% of
our gross trade receivables balance was represented by 15 customers at January
2, 2004. We anticipate that our results of operations in any given period will
depend to a significant extent upon sales to major customers. The loss of or a
reduction in the level of sales to one or more major customers or the failure of
a major customer to proceed with a large order or to timely pay us for a large
order could materially reduce our sales.
Trade Policy
Our practice of sourcing products overseas, with subsequent importation into the
United States, exposes us to possible product supply disruptions and increased
costs in the event of actions by United States or foreign government agencies
adverse to continued trade or the enactment of legislation that restricts trade.
We are unable to predict whether additional United States customs duties, quotas
or other restrictions may be imposed in the future upon the importation of our
products. Any such occurrences might have a material adverse effect on our sales
or profitability.
For example, we import the majority of our footwear products from China. On
December 11, 2001, China acceded to the World Trade Organization 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 the cost
of our products and could restrict our supply of products from that country.
Competition
Competition is intense in the markets in which we sell our products. We compete
with a large number of other companies, both domestic and foreign. Several
competitors are large organizations with diversified product lines, well-known
brands with financial, distribution and marketing resources substantially
greater than ours. The principal competitors for our Saucony products are Nike,
New Balance and Asics. The principal competitors for our Hind products are Nike,
Pearl Izumi and Sugoi. We compete based on a variety of factors, including
price, product style, durability and quality, product design and technical
performance, brand image and awareness, marketing and promotion and our ability
to meet delivery commitments to retailers. We believe that we are competitive in
all of these areas. However, we may not be able to retain our market share or
respond timely to changing consumer preferences.
Trademarks
We use trademarks on nearly all of our products and believe that having
distinctive marks is an important factor in marketing our products. We have
registered our Saucony(R), 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 2, 2004, we employed approximately 311 people worldwide. Of these
employees, approximately 237 were in the United States and approximately 74 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 2, 2004. The collective bargaining agreement with the union which
represents our warehouse employees expires on April 30, 2008. None of our other
employees are represented by a union or are subject to a collective bargaining
agreement.
Available Information
We maintain a website at www.sauconyinc.com. We make available, free of charge
on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file those reports with,
or furnish them to, the Securities and Exchange Commission. We also similarly
make available, free of charge on our website, the reports filed with the SEC by
our executive officers, directors and 10% stockholders pursuant to Section 16
under the Exchange Act as soon as reasonably practicable after copies of those
filings are provided to us by those persons. We are not including the
information contained at www.sauconyinc.com, www.saucony.com, www.hind.com,
www.spotbilt.com or at any other Internet address as part of, or incorporating
it by reference into, this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, as of March 5, 2004 are as follows:
Name Age Position
John H. Fisher 56 Chairman of the Board, President and
Chief Executive Officer
Charles A. Gottesman 53 Vice Chairman of the Board and
Executive Vice President,
Business Development
Michael Umana 41 Executive Vice President, Finance,
Chief Operating and Financial Officer,
Treasurer and Assistant Clerk
Michael Jeppesen 44 Senior Vice President, Manufacturing
and Design
Samuel S. Ward 41 Senior Vice President, Operations
and Technology
Roger P. Deschenes 45 Vice President, Controller,
Chief Accounting Officer and
Assistant Treasurer
John H. Fisher has served as one of our directors since 1980 and as Chairman of
the Board since 1991. Mr. Fisher has served as our Chief Executive Officer since
1991 and as our President since 1985. Mr. Fisher served as our Chief Operating
Officer from 1985 to 1991, our Executive Vice President from 1981 to 1985 and as
our Vice President, Sales from 1979 to 1981. He is a member of the World
Federation of Sporting Goods Industries, is the former Chairman of the Athletic
Footwear Council of the Sporting Goods Manufacturers Association and is a member
of various civic associations. Mr. Fisher is the brother-in-law of Charles A.
Gottesman, our Vice Chairman of the Board and Executive Vice President, Business
Development.
Charles A. Gottesman has served as one of our directors since 1983. Mr.
Gottesman has served as our Vice Chairman of the Board and Executive Vice
President, Business Development since July 2001. Mr. Gottesman served as our
Executive Vice President, Chief Operating Officer and Treasurer from 1992 to
June 2001, our Executive Vice President, Finance from 1989 to 1992, our Senior
Vice President from 1987 to 1989, our Vice President from 1985 to 1987, our
Treasurer from 1983 to 1989 and in several other capacities beginning in 1977.
Mr. Gottesman is the brother-in-law of John H. Fisher, our Chairman of the
Board, President and Chief Executive Officer.
Michael Umana has served as our Executive Vice President, Finance, Chief
Operating Officer, Chief Financial Officer, Treasurer and Assistant Clerk since
May, 2003, after having served as our Senior Vice President, Finance, Chief
Operating Officer, Chief Financial Officer and Treasurer since July 2001 and our
Senior Vice President, Finance and Chief Financial Officer since May 2000. Mr.
Umana joined us in October 1999 as our Vice President, Finance and Chief
Financial Officer. From 1997 to October 1999, Mr. Umana served as Vice President
and Chief Financial Officer of the Analytical Instrument Business Unit, at
PerkinElmer, Inc., a high technology manufacturer. From 1985 to 1997, Mr. Umana
held various auditing and consulting positions, the most recent being Senior
Manager, Business Consulting, at Arthur Andersen LLP, a professional services
company. Mr. Umana is a Certified Public Accountant.
Michael Jeppesen joined us in May 2001, as Senior Vice President, Manufacturing
and Design. From October 1999 to May 2001, Mr. Jeppesen was employed as Vice
President of Operations for Coach Leatherware Inc, a leather products
manufacturer, where he was responsible for manufacturing and product
development. From December 1996 to October 1999, Mr. Jeppesen held various
senior management positions at Adidas AG, an athletic footwear manufacturer,
including Vice President of European Operations and Vice President - Global
Materials, the most recent being Vice President of European Operations, which he
held beginning in 1997. Mr. Jeppesen was employed as General Manager of Prime
Asia, a footwear manufacturer, from 1994 to 1996.
Samuel S. Ward has served as our Senior Vice President, Operations and
Technology since October 2002. Mr. Ward joined us in February 2001 as Vice
President, Enterprise Solutions, in which capacity he was responsible for
leading a continuous improvement program to improve operational efficiency
through the redesign of business processes and supporting information systems.
From 1994 to 2001, Mr. Ward held various supply chain and business process
improvement consulting positions, including Senior Consultant, Manager and
Senior Manager, which he held from 2000 to 2001, in the Business Consulting
Group at Arthur Andersen LLP, a professional services company. Mr. Ward
graduated from Duke University's Fuqua School of Business in 1994. From 1987 to
1992, Mr. Ward held various finance and operations positions at General Electric
Company and completed General Electric's Financial Management Program.
Roger P. Deschenes has served as our Vice President, Controller, Chief
Accounting Officer and Assistant Treasurer since December 2002 after having
served as our Vice President, Controller and Chief Accounting Officer since
1997, and our Controller and Chief Accounting Officer from 1995 to 1997. Mr.
Deschenes joined us in 1990 as Corporate Accounting Manager. He was employed at
a division of Allen-Bradley Company, a subsidiary of Rockwell International,
Corp., from 1987 to 1990 as Financial and Cost Reporting Supervisor. Mr.
Deschenes is a Certified Management Accountant.
Officers are elected on an annual basis and serve at the discretion of the Board
of Directors.
ITEM 2 - PROPERTIES
Our general and executive offices and our main distribution facility are located
in Peabody, Massachusetts and are owned by us. This facility consists of
approximately 126,000 square feet, of which 107,000 square feet is warehouse
space and 1,000 square feet is used for a factory outlet store. During the
second and third quarters of 2004, we plan to expand and renovate our Peabody,
Massachusetts facility, increasing our office space by approximately 15,000
square feet, at a cost of approximately $2,500,000 to $3,000,000.
We also own a facility in Brookfield, Massachusetts containing approximately
109,000 square feet, which we use for warehousing and distribution.
We lease space for our retail stores at factory outlet malls and other
locations. These stores have an aggregate of approximately 38,000 square feet of
retail space at 17 locations in several states. The terms of these leases range
from five to ten years. The aggregate effective annual commitment for our
factory outlet store leases is approximately $1,353,000. We also own a factory
outlet store containing approximately 3,000 square feet of retail space in
Bangor, Maine.
We also lease approximately 16,000 square feet of space in The Netherlands and
approximately 26,000 square feet of space in Canada, which we use for office and
warehouse space.
ITEM 3 - LEGAL PROCEEDINGS
We are involved in routine litigation incident to our business. We do not
believe that any of these proceedings will have a material adverse effect on our
financial position, operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended January 2, 2004, there were no matters submitted
to a vote of security holders of Saucony, through the solicitation of proxies or
otherwise.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A Common Stock and Class B Common Stock trade on the Nasdaq National
Market under the symbols "SCNYA" and "SCNYB", respectively. The following table
sets forth, for the periods indicated, the actual high and low sales prices per
share of the Class A Common Stock and the Class B Common Stock as reported by
the Nasdaq National Market.
Class A Class B
Common Stock Common Stock
----------------------- --------------------------
High Low High Low
---- --- ---- ---
Fiscal Year ended January 2, 2004
First quarter.........................................$ 11.250 $ 8.500 $ 11.350 $ 8.710
Second quarter........................................ 12.320 9.800 12.340 10.100
Third quarter......................................... 15.460 12.260 15.200 12.270
Fourth quarter........................................ 17.400 13.440 17.500 13.410
Fiscal Year ended January 3, 2003
First quarter.........................................$ 7.000 $ 5.400 $ 6.950 $ 5.375
Second quarter........................................ 8.400 6.710 8.590 6.600
Third quarter......................................... 7.900 5.850 7.850 5.650
Fourth quarter........................................ 10.040 6.000 10.000 5.700
On March 3, 2004, there were 228 stockholders of record of the Class A Common
Stock and 253 stockholders of record of the Class B Common Stock. In general,
only the Class A Common Stock has voting rights.
Dividend Policy
On May 21, 2003, our Board of Directors adopted a regular quarterly dividend
plan with dividends payable at an annual rate of $0.160 per share on our Class A
Common Stock and $0.176 per share on our Class B Common Stock. In 2003, the
board declared regular quarterly cash dividends on May 21, 2003, August 21, 2003
and November 6, 2003, in the amount of $0.040 per share on our Class A Common
Stock and $0.044 per share on our Class B Common Stock. Prior to May 2003, we
had never declared or paid any cash dividends on either our Class A Common Stock
or Class B Common Stock.
On February 17, 2004 our Board of Directors adopted an increase in our regular
quarterly dividend to an annual rate of $0.200 per share on our Class A Common
Stock and $0.220 per share on our Class B Common Stock. Commencing with the
quarterly dividend declared on February 17, 2004, the Board of Directors
increased the regular quarterly dividend on our Class A Common Stock to $0.050
per share and the regular quarterly dividend on our Class B Common Stock to
$0.055 per share.
Also, on February 17, 2004, our Board of Directors declared a special cash
dividend of $4.00 per share on each of our Class A Common Stock and Class B
Common Stock. The special dividend which amounted to $26,000,000 was paid on
March 17, 2004 to stockholders of record at the close of business on March 3,
2004.
As provided in the our corporate charter, regular cash dividends paid on our
Class B Common Stock are to be in an amount equal to 110% of the amount paid on
our Class A Common Stock. This charter provision does not apply to special
dividends.
Our declaration of future cash dividends will be at the discretion of our Board
of Directors and is dependent upon, among other things, future earnings,
operations, capital requirements, our general financial position and general
business conditions. The terms of our credit facility generally restrict our
ability to pay cash dividends, together with other repurchases or redemptions
of, or other specified distributions with respect to, our capital stock, in
excess of $5,000,000 in any fiscal year. Our special dividend declared in
February 2004 was excepted from this restriction.
ITEM 6 - SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
in this Annual Report on Form 10-K.
The selected consolidated financial data set forth below as of January 2, 2004
and January 3, 2003 and for the years ended January 2, 2004, January 3, 2003 and
January 4, 2002 are derived from the audited consolidated financial statements
of Saucony included in this Annual Report on Form 10-K. All other selected
consolidated financial data set forth below is derived from audited financial
statements of Saucony not included in this Annual Report on Form 10-K. Our
historical results are not necessarily indicative of its results of operations
to be expected in the future.
Year Year Year Year Year
Ended Ended Ended Ended Ended
Jan. 2, Jan. 3, Jan. 4, Jan. 5, Dec. 31,
2004 2003 2002 2001(1) 1999
------- ------ ------ ------- --------
(in thousands except per share amounts)
Selected Income Statement Data
Revenues ..............................................$ 136,445 $ 133,499 $ 132,364 $ 167,920 $ 155,887
Operating income (loss) (2), (3)....................... 12,997 8,943 (269) 16,123 18,196
Net income (loss)...................................... 8,488 5,243 (940) 8,963 10,319
Earnings (loss) per common share - basic
Class A common stock................................$ 1.31 $ 0.81 $ (0.15) $ 1.37 $ 1.55
========= ========= ========= ========= =========
Class B common stock................................$ 1.44 $ 0.89 $ (0.16) $ 1.51 $ 1.71
========= ========= ========= ========= =========
Earnings (loss) per common share - diluted
Class A common stock................................$ 1.26 $ 0.80 $ (0.15) $ 1.34 $ 1.48
========= ========= ========= ========= =========
Class B common stock................................$ 1.38 $ 0.88 $ (0.16) $ 1.47 $ 1.63
========= ========= ========= ========= =========
Weighted average common shares and
equivalents outstanding
Basic:
Class A common stock ............................. 2,521 2,563 2,567 2,606 2,679
Class B common stock ............................. 3,583 3,544 3,513 3,586 3,613
----- ----- ----- ----- -----
6,107 6,080 6,192 6,292 6,104
===== ===== ===== ===== =====
Diluted: (4)
Class A common stock ............................. 2,521 2,563 2,567 2,606 2,684
Class B common stock ............................. 3,850 3,623 3,513 3,735 3,884
----- ----- ----- ----- -----
6,186 6,080 6,341 6,568 6,371
===== ===== ===== ===== =====
Cash dividends per share of common stock:
Class A common stock..............................$ 0.120 -- -- -- --
Class B common stock..............................$ 0.132 -- -- -- --
Selected Balance Sheet Data
Jan. 2, Jan. 3, Jan. 4, Jan. 5, Dec. 31,
2004 2003 2002 2001 1999
---------- --------- --------- -------- ---------
(in thousands)
Current assets.........................................$ 92,826 $ 80,670 $ 69,538 $ 73,531 $ 66,480
Current liabilities.................................... 18,803 16,343 12,325 15,919 15,403
Working capital........................................ 74,023 64,327 57,213 57,612 51,077
Total assets........................................... 100,193 87,540 78,100 83,285 77,181
Long-term debt and capitalized lease
obligations, net of current portion................. -- -- -- 34 292
Stockholders' equity................................... 79,054 68,696 63,162 64,620 58,962
- ---------------------------
(1) See Note 1 to our Consolidated Financial Statements regarding reporting period.
(2) See Note 15 to our Consolidated Financial Statements regarding our Bangor, Maine plant closing and other
charges incurred in fiscal 2001.
(3) In fiscal 2000 we sold substantially all of the assets and business of our former cycling division. In
connection with the sale we recorded a pre-tax loss of $2,661 which is included in the operating income
for fiscal 2000.
(4) Includes common stock and dilutive options and stock warrants, with the exception of fiscal 2001, since
the common stock equivalents were ant-dilutive.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
In the following management's discussion and analysis of financial condition and
results of operations: (1) when we refer to the 2003 fiscal year, we mean the
fiscal year ended January 2, 2004, (2) when we refer to the 2002 fiscal year, we
mean the fiscal year ended January 3, 2003, (3) when we refer to the 2001 fiscal
year, we mean the fiscal year ended January 4, 2002 and (4) all amounts are in
thousands, except share and per share amounts.
Business Overview
Our core business focus is to design, develop and market performance-oriented
athletic footwear and athletic apparel, which we sell under the Saucony brand
name, and athletic apparel, which we sell under the Hind brand name. Sales of
Saucony brand products accounted for approximately 83% of our consolidated net
sales for fiscal 2003, fiscal 2002 and fiscal 2001, the significant majority of
which are sales of Saucony footwear products. Our results of operations,
financial position and cash flows are heavily dependent upon our Saucony
footwear business. Our ability to increase Saucony footwear sales is dependent
in significant part upon increasing our share of the market for athletic
footwear sales.
We pursue different strategies for our two Saucony footwear product categories.
For our technical footwear category, we combine high quality materials and
components with technical features designed to meet the performance requirements
of athletes who have a high participation rate in their choice of sport. We
incorporate either our Ground Reaction Inertia Device, or GRID system, or our
proprietary footwear technology, Custom Ride Management, into a majority of our
technical footwear products. For our Originals footwear category, we design
fashion-oriented footwear intended to appeal to younger consumers who generally
do not wear the footwear for athletic purposes.
Our primary footwear focus is in technical footwear. As a result, we direct most
of our design and development efforts and working capital investments towards
our Saucony technical footwear. We view our Originals footwear as a market
opportunity which we must carefully manage due to rapid shifts in consumer
preferences. Accordingly, we limit our investment in working capital for, and
our spending on marketing, design and development of, our Originals footwear.
Our Saucony technical footwear and Originals footwear, along with athletic
apparel we sell under the Saucony brand name, constitute one operating segment.
We have another operating segment which consists of athletic apparel we sell
under the Hind brand name, shoes for coaches and officials, football and soccer
cleats and casual leather walking and workplace footwear we sell under the
Spot-bilt brand name and sales of all of our and third parties' products at our
17 factory outlet stores. We refer to this segment as our Other Products
segment. Sales from our Other Products segment accounted for approximately 17%
our consolidated net sales for fiscal 2003, fiscal 2002, and fiscal 2001. A
majority of these sales are sales of our Hind athletic apparel.
We compete in intensely competitive markets. Our ability to achieve sales growth
is dependent upon several factors including, product design and technical
performance, product quality, price, styling and our ability to market and
promote our brand and our products. Our business is sensitive to consumer
spending patterns, which in turn are subject to prevailing regional and national
economic patterns, such as employment levels and consumer confidence. Continued
economic uncertainty and decreased consumer confidence may restrict consumer
spending, thereby negatively affecting our sales and results of operations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results may differ materially from these
estimates. Our significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this Annual Report on
Form 10-K. Critical accounting policies are those policies that are reflective
of significant judgments and uncertainties and could potentially result in
materially different results under different assumptions and conditions. Our
most critical accounting policies are as follows:
- - Revenue Recognition
We recognize revenue from product sales when title passes and all the
rewards and risk of loss have been transferred and all the criteria for
revenue recognition described in SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, as amended by SAB 101A and
101B are met. Title generally passes upon shipment or upon receipt by the
customer. We record retail store revenues at the time of sale.
As part of our revenue recognition policy, we must make estimates for
defective product returns and other allowances related to current period
product revenue. We record a provision for defective product returns and
other allowances based upon past experience and the receipt of notification
of pending returns. While the returns have historically been within our
expectations and the provisions established, the product return rate may
not remain constant. Any significant increase in the product return rate
would require that we increase our reserves. This would reduce our net
sales and could have a material adverse effect on our results of operations
and cash flows for the period in which the returns materialize. If actual
or expected future returns and allowances were significantly greater or
lower than the reserves we established, we would record a reduction or
increase to our reserves in the period in which such determination was
made.
- - Accounts Receivable - Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts and therefore must estimate
losses resulting from the inability of our customers to make required
payments. We analyze our accounts receivable, historical bad debt trends,
customer creditworthiness, economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. As noted in Note 19 of our consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K, we have a credit
risk concentration due to the concentration of our domestic Saucony
footwear sales among a relatively small customer base. If the liquidity or
financial condition of any of our larger customers were to deteriorate,
resulting in an impairment of their ability to make payments due us, or if
payment schedules of our customers are otherwise delayed from historical
trends, we would be required to record additional allowances to our
provision for doubtful accounts. This would increase our general and
administrative expenses and could have a material adverse effect on our
results of operations and cash flows.
- - Inventories
We value our inventory at the lower of the actual cost to purchase or the
current estimated market value. We calculate the provision for excess and
obsolete inventory as the difference between the cost of the inventory and
our estimated market value of the inventory. We estimate market value based
upon estimated product demand and market conditions. We record the
provision as a charge to cost of sales. If actual future demand or market
conditions are less favorable than those we project, the estimated market
value of our inventory would decrease and additional provisions to write
down inventory may be required. This could materially reduce our amount of
current assets and increase our cost of goods sold and could have a
material adverse effect on our results of operations and cash flows.
- - Property, Plant and Equipment
We record property, plant and equipment, including buildings, leasehold
improvements, equipment and computer equipment at cost and depreciate it
over the applicable estimated useful life. Changes in circumstances, such
as technological advances or changes to our business operations, can result
in differences between the actual and estimated useful lives. In those
cases where we determine that the useful life of a long-lived asset should
be decreased, we would increase depreciation over the remaining useful life
to depreciate the asset's net book value to its salvage value. Decreasing
an assets' estimated useful life would increase general and administrative
expenses and could have a material adverse effect on our results of
operations and financial position.
- - Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets (property, plant and
equipment and trademarks) when events or changes in circumstances occur
that indicate that the carrying value of the assets may not be recoverable.
We recognize an impairment of a long-lived asset if the carrying value of
the long-lived asset is not recoverable from its estimated future cash
flows. We measure an impairment loss as the difference between the carrying
amount of the asset and its estimated fair value. During fiscal 2003 and
fiscal 2002, we recorded impairment charges of $15 and $44, respectively,
to reduce the carrying amount of long-lived assets used in our retail
operations, which carrying value we deemed to be not recoverable from its
future cash flows. The charge is included in general and administrative
expenses. Should future events and circumstances cause cash flows
associated with any of our long-lived assets to decline significantly from
our estimates, we may need to record charges for impairment of long-lived
assets, which would increase our general and administrative expenses and
could have a material adverse effect on our results of operations and
financial position.
We no longer amortize goodwill and other indefinite-lived intangible
assets. Rather, we review them for impairment. We would record an
impairment if the carrying value of the asset exceeds our estimate of its
fair market value. We record impairment charges as a component of general
and administrative expenses. We test the impairment of our goodwill
annually. We completed an annual test for impairment at January 2, 2004 and
determined that goodwill was not impaired. At January 2, 2004, the carrying
value of goodwill was $912. Our estimates of future cash flows may differ
materially from actual cash flows due to, technological changes, economic
conditions or changes to our business operations. A charge for impairment
of goodwill may be necessary if we experience a significant decline in our
future cash flows. Such a charge would affect our results of operations and
financial position.
- - Income Taxes
We estimate our income taxes in each of the jurisdictions that we operate.
This process requires us to estimate our current tax exposure, together
with assessing temporary differences, which result in deferred tax assets
and liabilities. We recognize deferred tax assets and liabilities based on
the difference between the financial statement carrying amounts and the tax
bases of assets and liabilities. We regularly review our deferred tax
assets for recoverability and establish valuation allowances when we
determine that it is more likely than not that the deferred tax assets
resulting from operating losses will not be realized. Realization of
deferred tax assets (such as net operating loss carryforwards) is dependent
upon future taxable earnings and is therefore uncertain. During fiscal
2003, we reversed $613 of deferred tax valuation allowances on loss
carryforwards that we expect to realize, decreasing our tax expense in the
period we made that reversal. At January 2, 2004, we have provided
valuation allowances in an amount equal to our long-term deferred tax
assets which have resulted from net operating losses in certain foreign and
state tax jurisdictions.
U.S. generally accepted accounting principles allow companies to defer the
recognition of tax liability on undistributed earnings of foreign
subsidiaries that are indefinitely reinvested in the foreign operation. At
January 2, 2004, we had approximately $6,604 of undistributed earnings of
foreign subsidiaries that are indefinitely reinvested in foreign operations
for which we have not recorded deferred income taxes. Were we to repatriate
foreign earnings which have been designated as indefinitely invested in
foreign operations, we would record additional tax expense at the time of
repatriation.
- - Stock-Based Compensation
We have elected to continue to measure stock-based compensation expense
using the intrinsic value method. Accordingly, we measure compensation cost
for stock options and restricted stock awards as the excess, if any, of the
quoted market price of our stock at the date of the grant over the exercise
price an employee must pay to acquire the stock. We calculate compensation
cost for common stock purchase warrants based upon the fair value at the
grant date. We amortize stock-based compensation arising from the issuance
of restricted stock warrants, below market options and stock-based
compensation resulting from common stock purchase warrants over the vesting
period of the stock grant, option term or the warrant term. Amortization of
stock-based compensation amounted to $37 for 2003, $43 for 2002 and $38 for
2001, respectively. In fiscal 2003, we accelerated the vesting of the
common stock purchase warrants which required us to record $416 of
stock-based compensation expense. Had we determined the stock-based
compensation expense for our stock options based upon the fair value at the
grant date for stock option awards our reported net income would have been
reduced by $1,138 in fiscal 2003, $684 in fiscal 2002 and $746 in fiscal
2001.
- - Hedge Accounting for Derivatives
We enter into forward currency exchange contracts to hedge anticipated
foreign currency exchange transactions, as well as the resulting
intercompany liabilities which are denominated in currencies other than the
functional currency. These contracts economically function as effective
hedges of the underlying exposures; however, we are required to record
changes in the fair value of these foreign currency contracts against
earnings in the period of the change.
We estimate the fair value of our foreign currency exchange contracts based
on foreign exchange rates as of January 2, 2004. At January 2, 2004, the
notional value our foreign currency exchange contracts to purchase U.S.
dollars was $7,448. The fair value of our foreign currency exchange
contracts at January 2, 2004 was $7,028. We recorded a charge of $420
against earnings to adjust our derivatives to their fair value. Since
January 2, 2004, the value of the U.S. dollar has decreased against the
Pound Sterling and has strengthened against the Canadian dollar and the
Euro. If the U.S. dollar were to weaken in comparison to the Pound
Sterling, the Canadian dollar or the Euro, we would record additional
charges in fiscal 2004 to adjust our derivatives to their fair value. The
amount of the potential charge is dependent upon the change in foreign
exchange rates from the January 2, 2004 rates to the time that the forward
exchange contract matures or to the foreign exchange rates as of the period
end reporting date. These charges could have a material adverse effect on
our future results of operations, financial position and cash flows.
Highlights
Increase (Decrease)
-------------------
2003 vs. 2002 2002 vs. 2001
------------- -------------
Net sales.................................................$ 2,870 2.2% $ 935 0.7%
Gross profit.............................................. 6,607 14.4 3,703 8.8
Selling, general and administrative expenses.............. 2,921 7.8 (3,129) (7.7)
$ Change
--------
2003 vs. 2002 2002 vs. 2001
------------- -------------
Operating income........................................... $ 4,054 $ 9,212
Income before income taxes and minority interest........... 4,293 9,645
Net income................................................. 3,245 6,183
Percent of Net Sales
--------------------
2003 2002 2001
---- ---- ----
Gross profit............................................. 38.5% 34.4% 31.9%
Selling, general and administrative expenses............. 29.5 28.0 30.6
Operating income (loss) ................................. 9.6 6.7 (0.2)
Income (loss) before income taxes and minority interest.. 10.0 7.0 (0.3)
Net income (loss)........................................ 6.2 3.9 (0.7)
Consolidated Net Sales
Net sales increased $2,870, or 2%, to $136,066 in fiscal 2003 from $133,196 in
fiscal 2002. Net sales increased $935, or 1%, to $133,196 in fiscal 2002 from
$132,261 in fiscal 2001.
On a geographic basis, domestic sales increased $268, to $103,621 in fiscal 2003
from $103,353 in fiscal 2002. International sales increased $2,602, or 9%, to
$32,445 in fiscal 2003 from $29,843 in fiscal 2002. $2,925 of our international
sales increase in fiscal 2003 is attributable to favorable changes in foreign
exchange rates, as compared to fiscal 2002. Domestic sales decreased $3,131, or
3%, to $103,353 in fiscal 2002 from $106,484 in fiscal 2001. International sales
increased $4,066, or 16%, to $29,843 in fiscal 2002 from $25,777 in fiscal 2001.
Favorable changes in foreign exchange rates accounted for $214 of the
international sales increase in fiscal 2002.
Saucony Segment
2003 2002
Total / Change Total / Change 2001
from Prior Year from Prior Year Total
--------------- --------------- -----
Net Sales $112,711 / 2% $110,829 / 1% $110,292
Net Sales: 2003 Compared to 2002
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $1,882, or 2%, to $112,711 in fiscal 2003 from $110,829 in fiscal
2002, due primarily to favorable currency exchange resulting from a weaker U.S.
dollar against European and Canadian currencies and, to a lesser extent
increased sales of Saucony apparel and a 2% increase in domestic footwear unit
volumes, partially offset by decreased international footwear unit volumes and
lower average domestic and international wholesale per pair selling prices. The
volume of footwear sold in fiscal 2003 increased 1% to 3,761 pair from 3,707
pair in fiscal 2002, primarily due to increased domestic technical footwear unit
volumes, increased domestic Originals footwear unit volumes and increased
special makeup footwear unit volumes, partially offset by lower international
technical and lower international Originals footwear unit volumes.
Domestic net sales decreased $1,462, or 2%, to $81,720 in fiscal 2003 from
$83,182 in fiscal 2002, due primarily to a 61% decrease in closeout footwear
unit volumes and a 7% decrease in the overall domestic average domestic
wholesale per pair selling price, offset partially by a 12% increase in
technical footwear unit volumes, an 8% increase in Originals footwear unit
volumes and a 2% increase in special makeup footwear unit volumes. The volume of
domestic footwear sold in fiscal 2003 increased 2% to 2,833 pair from 2,775 pair
in fiscal 2002. The lower average wholesale selling price per pair was due to a
change in the product mix of our technical, Originals and special makeup
footwear sold to lower priced products and increased special makeup footwear
unit volumes and increased Originals footwear unit volumes, both of which sell
at prices below our first quality technical footwear.
Sales of closeout footwear accounted for approximately 2% of domestic Saucony
net sales in fiscal 2003 compared to 5% in fiscal 2002. The decrease in closeout
footwear sales was due to lower inventory quantities of past season footwear
available for sale in fiscal 2003 due to improvements in our supply chain.
Originals footwear accounted for 20% of fiscal 2003 domestic footwear unit
volume versus 19% in fiscal 2002. The unit volume increase in Originals footwear
was primarily due to increased unit volume of Jazz Originals sold into the mall
channel. Our domestic order cancellation rate for fiscal 2003 was comparable
with our historical averages.
International net sales increased $3,344, or 12%, to $30,991 in fiscal 2003 from
$27,647 in fiscal 2002, due primarily to favorable currency exchange resulting
from a weaker U.S. dollar against European and Canadian currencies and, to a
lesser extent, increased sales of Saucony apparel, partially offset by lower
average per pair wholesale selling prices and a decrease in footwear unit
volumes. The volume of international footwear sold in fiscal 2003 decreased to
928 pair from 932 pair in fiscal 2002. Footwear unit volumes decreased 3% at our
international distributor business, partially offset by a 1% increase in
footwear unit volume sold at our subsidiaries in fiscal 2003 compared to fiscal
2002. The footwear unit volume increase at our subsidiaries was due primarily to
increased special makeup footwear unit volume sold by our British subsidiary,
partially offset by decreased sales of our technical footwear at our Canadian
subsidiary and, to a lesser extent, decreased sales of technical footwear unit
volume sold at our Dutch subsidiary. Sales at our international distributor
business decreased in fiscal 2003 due primarily to decreased Originals footwear
unit volume sold in the Japanese footwear market. Distributor sales into the
Japanese footwear market accounted for 4% of international sales in fiscal 2003,
compared to 9% in fiscal 2002. International distributor footwear unit volumes
decreased 3%, due primarily to a 51% decrease in Originals footwear unit volumes
sold in Japan, offset by a 29% increase in footwear unit volumes due to
increased footwear unit volumes sold in Australia, Israel and Sweden. The
international footwear average wholesale per pair selling price decreased due to
a change in product mix to lower priced technical footwear and increased unit
volumes of special makeup footwear sold at our British subsidiary and by a
change in the international distributors product mix for technical footwear to
lower priced product.
Net Sales: 2002 Compared to 2001
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $537, or 1%, to $110,829 in fiscal 2002 from $110,292 in fiscal 2001,
due primarily to a 10% increase in international footwear unit volumes and
higher domestic wholesale per pair average sell prices, offset by decreased
overall domestic footwear unit volumes. The volume of footwear sold in fiscal
2002 decreased 9% to 3,707 pair from 4,075 pair in fiscal 2001, primarily due to
lower Originals and closeout footwear unit volumes. The overall average domestic
wholesale selling price per pair of domestic footwear increased 12% in fiscal
2002 versus fiscal 2001, due to an increase in technical footwear unit volumes
and decreased closeout footwear unit volumes and Originals footwear unit
volumes, both of which sell at prices below our first quality technical
footwear.
Domestic net sales decreased $3,232, or 4%, to $83,182 in fiscal 2002 from
$86,414 in fiscal 2001, due primarily to a 42% decrease in Originals footwear
unit volumes and a 52% decrease in closeout footwear unit volumes, offset
partially by a 16% increase in technical footwear unit volumes, a 5% increase in
special make-up footwear unit volumes and a 12% increase in the overall average
domestic wholesale per pair selling price. The volume of domestic footwear sold
in fiscal 2002 decreased 14% to 2,775 pair from 3,224 pair in fiscal 2001. The
higher average wholesale selling price per pair was due to increased unit volume
of first quality technical footwear and lower unit volumes of closeout footwear
and Originals footwear, both of which sell at prices below our first quality
technical footwear. Sales of closeout footwear accounted for approximately 5% of
domestic Saucony net sales in fiscal 2002 compared to 12% in fiscal 2001. The
decrease in closeout footwear sales was due to lower inventory quantities of
past season footwear available for sale in fiscal 2002. Originals footwear
accounted for 19% of fiscal 2002 domestic footwear unit volume versus 29% in
fiscal 2001. The unit volume decrease in Originals footwear was primarily due to
a shift in consumer preference to other product categories, primarily basketball
footwear, which we do not sell. Our domestic order cancellation rate for fiscal
2002 was comparable with our historical averages.
International net sales increased $3,769, or 16%, to $27,647 in fiscal 2002 from
$23,878 in fiscal 2001, due primarily to a 10% increase in footwear unit volumes
and, to a lesser extent the favorable impact on a weaker U.S. dollar against
European currencies, partially offset by lower average per pair wholesale
selling price. The volume of international footwear sold in fiscal 2002
increased 10% to 932 pair from 852 pair in fiscal 2001. Footwear unit volumes
increased 36% at our European and Canadian subsidiaries, which was partially
offset by a 16% unit volume decrease at our international distributor business
in fiscal 2002 compared to fiscal 2001. The footwear unit volume increase at our
European and Canadian subsidiaries was due to increased sales of our technical
footwear. Sales at our international distributor business decreased in fiscal
2002 due primarily to decreased Originals footwear unit volume sold in the
Japanese footwear market. Distributor sales into the Japanese footwear market
accounted for 9% of international sales in fiscal 2002, compared to 14% in
fiscal 2001.
Other Products Segment
2003 2002
Total / Change Total / Change 2001
from Prior Year from Prior Year Total
--------------- --------------- -----
Net Sales $23,355 / 4% $22,367 / 2% $21,969
The Other Products segment consists of our Hind athletic apparel, seventeen
factory outlet stores, Spot-bilt coaches' and officials' shoes, football and
soccer cleats and casual walking and workplace footwear and sales of our Hyde
Authentic casual footwear, the distribution of which we discontinued in fiscal
2002. Each of these businesses represented less than 10% of total revenues and,
in the aggregate, represented 17% of consolidated net sales in fiscal 2003.
Net Sales: 2003 Compared to 2002
Worldwide sales of Other Products increased $988, or 4%, to $23,355 in fiscal
2003 from $22,367 in fiscal 2002 due primarily to increased sales at our factory
outlet division and increased domestic sales of our Hind brand apparel,
partially offset by lower international sales of our Hind brand apparel and the
discontinuance of our Hyde Authentics footwear line.
Domestic net sales of Other Products increased $1,730, or 9%, to $21,901 in
fiscal 2003 from $20,171 in fiscal 2002 due primarily to a 21% increase in sales
at our factory outlet division, resulting primarily from the addition of five
outlet stores in fiscal 2003 and, to a lesser extent, a 5% increase in Hind
brand apparel sales, reflecting primarily an 18% increase in unit volume of our
Hind apparel, due primarily to increased special makeup unit volumes and
increased volume in our running and fitness product categories, partially offset
by an 11% decrease in the average wholesale unit selling price of our Hind
apparel brand and, to a lesser extent, decreased sales of Hyde Authentics
footwear as a result of our discontinuing this product line. The decrease in the
average wholesale unit selling price for our Hind apparel brand was due
primarily to increased special makeup unit volumes sold in fiscal 2003, which
products we sell at unit prices below our first quality apparel, and increased
unit volume in our running and fitness product categories, which carry lower
selling prices than our cycling category. Partially offsetting the sales
increase at our factory outlet division were a 2% decrease in sales at our
factory stores open for more than one year and decreased sales as a result of
the closing of a factory outlet store in May 2002. Spot-bilt brand sales
increased 12% in fiscal 2003, compared to fiscal 2002, due primarily to
increased wholesale per pair selling prices, partially offset by a decrease in
footwear unit volumes.
International net sales of Other Products decreased $742, or 34%, to $1,454 in
fiscal 2003 from $2,196 in fiscal 2002, due primarily to decreased Hind apparel
sales at our European and Canadian subsidiaries.
Net Sales: 2002 Compared to 2001
Worldwide sales of Other Products increased $398, or 2%, to $22,367 in fiscal
2002 from $21,969 in fiscal 2001 due primarily to increased domestic and
international sales of our Hind brand apparel, partially offset by lower sales
of our Hyde Authentics footwear and lower sales at our factory outlet division.
Domestic net sales of Other Products increased $101, or 1%, to $20,171 in fiscal
2002 from $20,070 in fiscal 2001 due primarily to a 5% increase in unit volume
of our Hind apparel and, to a lesser extent, a 4% increase in the average
wholesale unit selling price of our Hind apparel, partially offset by decreased
sales of Hyde Authentics footwear due to lower unit volume and a lower average
per pair wholesale selling price and a 2% decrease in sales at our factory
outlet division due to reduced closeout sales. The increase in the average
wholesale unit selling price for our Hind apparel brand was due to new product
introductions, which generally carry higher selling prices. Sales at our factory
outlet division decreased due to lower closeout sales volume in fiscal 2002
compared to fiscal 2001. Close out sales accounted for approximately 3% of
fiscal 2002 sales compared to approximately 9% in fiscal 2001.
International net sales of Other Products increased $297, or 16%, to $2,196 in
fiscal 2002 from $1,899 in fiscal 2001, due primarily to increased Hind apparel
sales at our European and Canadian subsidiaries.
Costs and Expenses
Our gross margin increased 4.1% to 38.5%, in fiscal 2003 from 34.4% in fiscal
2002 due primarily to lower Saucony footwear product costs, improved margins on
Hind brand apparel, due to increased sales of first quality product at higher
margins, as well as lower inventory reserve provisions taken in 2003, favorable
currency exchange due to the impact of a weaker U.S. dollar against European and
Canadian currencies, lower sales of closeout footwear and improved margins at
our factory outlet stores. Offsetting these margin increases in 2003 are a
pre-tax charge of $416 recorded in cost of goods sold due to accelerating the
vesting on common stock purchase warrants held by five footwear suppliers,
increased rebates provided to certain Saucony domestic customers and increased
inventory reserve provisions taken on certain slow moving Spot-bilt brand
inventory.
Our gross margin in fiscal 2002 increased 2.5% to 34.4% from 31.9% in fiscal
2001 due primarily to increased Saucony domestic sales of first quality footwear
products at full margin. Other factors contributing to the fiscal 2002 margin
increase were proportionately lower sales of closeout footwear products, reduced
cost resulting from the closing of our Bangor, Maine manufacturing operations,
improved margins on several domestic footwear products and higher levels of
domestic at once shipments, which shipments carry lower discounts, partially
offset by increased inventory provisions for obsolete Hind raw material and for
some slow moving Hind apparel finished goods.
The ratio of selling, general and administrative expenses as a percentage of net
sales increased to 29.5% compared to 28.0% in fiscal 2002. The increase in the
ratio resulted from increased advertising, selling and administrative expenses
in fiscal 2003. Selling, general and administrative expenses increased to
$40,199, or 8%, from $37,278 in fiscal 2002, due primarily to increased
administrative and selling payroll, incentive compensation, operating expenses
associated with the factory outlet division expansion, employee healthcare
costs, print media advertising, severance costs, business insurance costs and
professional fees and, to a lesser extent, due to the effects of foreign
exchange rate changes, which increased selling and administrative expenses by
$674 in fiscal 2003, compared to fiscal 2002. These increases were partially
offset by lower provisions for bad debt expense, due to the favorable litigation
settlement which reduced bad debt expense by $566 and, to a lesser extent,
decreased account specific advertising and promotion and lower depreciation
expense.
The ratio of selling, general and administrative expenses as a percentage of net
sales decreased 2.6% to 28.0% in fiscal 2002 from 30.6% in 2001. The decrease in
the ratio resulted from decreased advertising, selling and administrative
expenses in fiscal 2002. Selling, general and administrative expenses decreased
to $37,278 in 2002, or 8%, from $40,407 in fiscal 2001. Decreased spending in
fiscal 2002 was due primarily to decreased print media advertising, lower
provisions for bad debts and, to a lesser extent, decreased promotional
spending, decreased account specific advertising, decreased depreciation
expense, decreased professional fees and lower selling payroll, partially offset
by increased incentive compensation, due to improved operating profit, increased
administrative payroll and increased insurance costs.
Plant Closing and Other Charges
On November 9, 2001 we announced the cessation of manufacturing and the closing
of our Bangor, Maine facility. During the fourth quarter of fiscal 2001, we
relocated our Asian sourcing and quality control office to China, resulting in
the closure of our Taiwan office, and negotiated an early termination and exit
of a retail store lease. As a result of these actions, we recorded pre-tax
charges of $2,108 in fiscal 2001. The closing of our Bangor, Maine facility in
January 2002 resulted in the termination of 104 employees, of which 61 were
terminated subsequent to January 4, 2002. Assets used by our Bangor, Maine
manufacturing facility, the Taiwan office and our retail store were written down
to fair market value.
Expenses associated with the plant closing and other charges were as follows:
Bangor Taiwan Retail
Plant Office Store Total
----- ------ ----- -----
Employee severance and termination benefits.......................$ 1,121 $ 150 $ 4 $ 1,275
Facility and equipment lease exit costs and
other non-cancelable contractual commitments..................... 228 -- 200 428
Writedown of machinery and equipment
to fair market value............................................. 248 25 77 350
Professional fees and other transaction costs..................... 47 -- 8 55
------- ------ ------- -------
Total............................................................$ 1,644 $ 175 $ 289 $ 2,108
======= ====== ======= =======
During fiscal 2002, we recorded a pre-tax net benefit of $214 to reduce expenses
accrued in the fourth quarter of fiscal 2001 associated with the closing of our
Bangor, Maine manufacturing facility and the early termination and exit of a
retail store lease. Partially offsetting this pre-tax benefit was a pre-tax
charge of $142 incurred to close an underperforming retail store. Expenses
associated with the store closing included lease termination and other
contractual costs of $51 and $91 to write-off leasehold improvements.
Included in accrued expenses at January 3, 2003 are $36 of costs associated with
the plant closing and other charges. A pre-tax benefit of $35 was recorded in
fiscal 2003 to terminate the plant-closing accrual. The charge recorded for the
Bangor, Maine plant closing and the Taiwan office closing were included in
income before tax for the Saucony segment, and the retail store closing charge
was included in income before tax for the Other Products segment.
Gain on Sale of Former Manufacturing Facility
On November 7, 2003, we completed the sale of our Bangor, Maine real property
which had previously been used in the assembly of domestic Saucony footwear. The
following table summarizes the sale of the Bangor, Maine real property:
Gross proceeds.............................. $ 763
Transaction expenses........................ 77
------
Net proceeds................................ 686
Net book value of facility.................. 357
------
Gain on sale................................ $ 329
======
The gain realized from the sale was recorded in operating income for the Saucony
segment.
Non-Operating Income (Expense)
Non-operating income (expense), excluding interest, increased to $337 in fiscal
2003 from $11 in fiscal 2002. The increase was due primarily to foreign currency
gains of $288 in fiscal 2003, compared to foreign currency gains of $20 in
fiscal 2002. Non-operating income (expense), excluding interest, increased to
$11 in fiscal 2002 from a loss of $18 in fiscal 2001, due primarily to losses on
foreign currency in fiscal 2001.
Interest Income
Interest income decreased to $245 in fiscal 2003 from $332 in fiscal 2002, due
to lower interest rates on invested cash balances and short-term investments.
Interest income increased to $332 in fiscal 2002 from $136 in fiscal 2001, due
primarily to higher average cash balances invested in money market funds.
Interest Expense
Interest expense remained constant at $5 in fiscal 2003 and fiscal 2002.
Interest expense decreased to $5 in fiscal 2002 from $213 in fiscal 2001 due
primarily to the absence of borrowings under our domestic and foreign credit
facilities.
Income (Loss) Before Taxes and Minority Interest
Segment 2003 2002 2001
------- ---- ---- ----
Saucony...................$ 11,910 $ 10,288 $ (296)
Other Products............ 1,664 (1,007) (68)
--------- --------- -------
Consolidated..............$ 13,574 $ 9,281 $ (364)
========= ========= =======
We evaluate segment performance and the performance of key managers based on
profit or loss before income taxes and minority interest. Income before tax and
minority interest increased $4,293 in fiscal 2003 to $13,574 compared to $9,281
in fiscal 2002 due primarily to increased pre-tax income realized by our Other
Products segment and, to a lesser extent, increased pre-tax income realized by
our Saucony segment. The improvement in our Other Products segment income before
tax and minority interest was due primarily to improved profitability at our
Hind apparel brand due to increased sales, improved gross margins and lower
operating expenses and, to a lesser extent, improved profitability at our
factory outlets stores due to increased sales and improved gross margins.
Pre-tax income at our Saucony segment increased due to lower product costs and
favorable currency exchange, both of which improved gross margins.
Income before tax and minority interest increased $9,645 in fiscal 2002 to a
profit of $9,281 compared to a loss of $364 in fiscal 2001, due primarily to the
significant improvement in the domestic Saucony segment due to higher gross
margins, reduced selling, general and administrative expenses, the charges of
$1,819 incurred in fiscal 2001 in connection with the closure of our Bangor,
Maine manufacturing facility and the closure of our Taiwan office and improved
profitability at our Saucony international business due to increased sales and
improved margins at our Canadian and European subsidiaries. The decrease in our
Other Products segment income before tax in 2002, as compared to 2001, was due
primarily to lower gross margins realized by our Hind apparel brand due to an
increase in provisions for obsolete raw material and some slow moving finished
goods inventory, partially offset by increased profitability at our factory
outlet division due to higher gross margins, lower operating expenses due to the
closing of underperforming retail stores in fiscal 2002 and the charge of $289
incurred in fiscal 2001 due to the early termination and exit of a retail store
outlet.
Income Taxes
The provision for income taxes increased to $4,940 in fiscal 2003 from $3,865 in
fiscal 2002 due primarily to increased domestic and international pre-tax
income. The effective tax rate decreased to 36.4% in fiscal 2003, compared to
41.6% in fiscal 2002, due primarily to the reversal of valuation allowances on
foreign loss carryforwards that we expect to realize in fiscal 2004. We credited
income tax benefit of options exercised of $162 during fiscal 2003 and $21
during fiscal 2002 to additional paid-in capital. Therefore that benefit did not
impact our provision for income taxes or the effective tax rate in either
period.
The provision for income taxes increased to $3,865 in fiscal 2002 from $475 in
fiscal 2001 due primarily to increased domestic and international pre-tax
income. The effective tax rate decreased to 41.6% in fiscal 2002, compared to
130.5% in fiscal 2001, due primarily to an increase in fiscal 2001 in valuation
allowances on foreign loss carryforwards that we did not expect to realize. We
credited income tax benefit of options exercised of $21 during fiscal 2002 and
$8 during fiscal 2001 to additional paid-in capital. Therefore that benefit did
not impact our provision for income taxes or the effective tax rate in either
period.
Minority Interest in Income of Consolidated Subsidiary
Minority interest expense represents a minority shareholders' allocable share of
our Canadian subsidiary's earnings after deducting for income tax. In July 2003,
we entered into a Share Purchase Agreement with the minority shareholder of
Saucony Canada, Inc. whereby we increased our ownership percentage of Saucony
Canada, Inc. to 95% from 85% effective as of July 4, 2003. The purchase price of
$547, equaled the net book value of Saucony Canada, Inc. as of July 4, 2003.
Minority interest expense decreased to $146 in fiscal 2003 from $173 in fiscal
2002 due primarily to increasing our ownership in Saucony Canada, Inc. Minority
interest expense increased to $173 in fiscal 2002 from $101 in fiscal 2001 due
primarily to increased sales and, to a lesser extent improved gross margins at
Saucony Canada, Inc.
Net Income (Loss)
Net income for fiscal 2003 was $8,488, or $1.26 per Class A share and $1.38 per
Class B share on a diluted basis, compared to $5,243, or $0.80 per Class A share
and $0.88 per Class B share on a diluted basis for 2002. We used weighted
average common shares and common stock equivalents of 6,371,000 for fiscal 2003
and 6,186,000 for fiscal 2002 to calculate diluted earnings per share.
Net income for fiscal 2002 was $5,243, or $0.80 per Class A share and $0.88 per
Class B share on a diluted basis, compared to a net loss of $940, or ($0.15) per
Class A share and ($0.16) per Class B share on a diluted basis, in fiscal 2001.
We used weighted average common shares and common stock equivalents of 6,186,000
to calculate diluted earnings per share for fiscal 2002. We used weighted
average common shares of 6,080,000 to calculate diluted earnings per share for
fiscal 2001. Common stock equivalents were not used in fiscal 2001 to calculate
diluted earnings per share because they were anti-dilutive.
Liquidity and Capital Resources
Fiscal 2003
As of January 2, 2004, our cash and cash equivalents totaled $41,781, an
increase of $7,298 from January 3, 2003. The increase was due primarily to the
generation of $15,045 of cash from operations and, to a lesser extent, the
receipt of $686 from the sale of our former manufacturing facility in Bangor,
Maine, the receipt of $644 from the issuance of shares of our common stock as a
result of option exercises, partially offset by the purchase of $5,769 of
short-term investments, cash outlays for purchases of capital assets of $1,667,
the purchase of additional common shares of Saucony Canada, Inc. of $547, the
payment of cash dividends of $518 on our common stock and the repurchase of
shares of our common stock of $126.
Our accounts receivable at January 2, 2004 increased $3,075, net of the
provision for bad debts and discounts (which was reduced by $566 due to a
litigation settlement), as compared to at January 3, 2003, due primarily to
increased net sales of our Saucony products in the fourth quarter of fiscal 2003
and an increase in our days' sales outstanding for our accounts receivable. Our
days' sales outstanding for our accounts receivable increased to 51 days in
fiscal 2003 from 42 days in fiscal 2002. Days' sales outstanding is defined as
the number of average daily net sales in our accounts receivable as of the
period end date and is calculated by dividing the end of period accounts
receivable by the average daily net sales. Our days' sales outstanding increased
in fiscal 2003 due to the timing of our shipments in the fourth quarter of 2003,
much of which shipped in December 2003. The provision for bad debts and doubtful
accounts decreased to $4,453 in fiscal 2003 from $4,752 in fiscal 2002 due to a
decrease in the provision for doubtful accounts and was partially offset by an
increase in discounts in fiscal 2003. The decrease in the provision for doubtful
accounts in fiscal 2003 was due primarily to the favorable litigation settlement
with a former customer.
Inventories decreased $6,163, at January 2, 2004, as compared to at January 3,
2003, due primarily to continued improvements in our supply chain intended to
reduce on hand inventory and lower Hind brand apparel inventory due to sourcing
changes. Our inventory turns ratio increased to 3.4 turns in fiscal 2003 from
3.1 turns in fiscal 2002. The number of days' sales in inventory decreased to 98
days in fiscal 2003 from 113 days in fiscal 2002. The inventory turns ratio
represents our net sales for a period divided by our inventory at the end of the
period. Days' sales in inventory is defined as the number of average daily cost
of sales in our inventory as of the period end date and is calculated by
dividing the end of period inventories by the average daily cost of sales.
Principal factors, other than net income, accounts receivable, provision for bad
debts and discounts and inventory, affecting our operating cash flows in fiscal
2003, included an increase of $638 in accounts payable due to extended payment
terms provided by our footwear suppliers, a $121 decrease in accrued income
taxes payable due to the timing of tax payments and a $1,378 increase in accrued
expenses due primarily to increased accruals for incentive compensation.
On May 21, 2003, our Board of Directors adopted a regular quarterly dividend
plan with dividends payable at an annual rate of $0.160 per share on our Class A
Common Stock and $0.176 per share on our Class B Common Stock. In 2003, the
board declared regular quarterly cash dividends on May 21, 2003, August 21, 2003
and November 6, 2003, in the amount of $0.040 per share on our Class A Common
Stock and $0.044 per share on our Class B Common Stock. We paid a total of $518
in dividends in 2003. On January 15, 2004, we paid the regular quarterly cash
dividends declared by the Board on November 6, 2003. As of January 2, 2004, we
recorded $260 in current liabilities, under accrued expenses, representing the
dividend liability for the January 15, 2004 dividend.
On February 17, 2004 our Board of Directors adopted an increase in our regular
dividend to an annual rate of $0.200 per share on our Class A Common Stock and
$0.220 per share on our Class B Common Stock. Commencing with the quarterly
dividend declared on February 17, 2004, the Board of Directors increased the
regular quarterly dividend on our Class A Common Stock to $0.050 per share and
the regular quarterly dividend on our Class B Common Stock to $0.055 per share.
Also on February 17, 2004, our Board of Directors declared a special cash
dividend of $4.00 per share on each of our Class A Common Stock and Class B
Common Stock. The special dividend was paid on March 17, 2004 to stockholders of
record at the close of business on March 3, 2004. The aggregate dividend payout
for the special dividend amounted to approximately $26,000.
Our corporate charter provides that regular cash dividends paid on our Class B
Common Stock are to be in an amount equal to 110% of the amount paid on our
Class A Common Stock. This charter provision does not apply to special
dividends.
In January 2004, we amended our credit facility to reduce the restrictions in
the facility on our ability to pay cash dividends, make other distributions on
our common stock and repurchase or redeem our capital stock. As amended, the
credit facility permits us to pay cash dividends, and make repurchases or
redemptions of, or other specified distributions with respect to, our capital
stock, in a total amount of up to $5,000 in any fiscal year. Our special
dividend declared in February 2004 was excepted from this $5,000 restriction.
Our declaration of future cash dividends will be at the discretion of our Board
of Directors and is dependent upon, among other things, future earnings,
operations, capital requirements, our general financial position and general
business conditions.
During fiscal 2003, we repurchased 12,000 shares of our common stock for a total
expenditure of $126. Since the approval of the stock buyback program by our
Board of Directors in May 1998, we have repurchased a total of 574,000 shares of
our common stock for a total expenditure of $5,370. As of January 2, 2004, we
remained authorized to repurchase up to 176,000 shares under the May 1998 stock
buyback program.
Fiscal 2002
As of January 3, 2003, our cash and cash equivalents totaled $34,483, an
increase of $12,256 from January 4, 2002. The increase was due primarily to the
generation of $13,230 of cash from operations and, to a lesser extent, the
receipt of payment on notes receivable of $312, the receipt of $329 from the
issuance of shares of our common stock, the conversion of $197 in marketable
securities to cash and the receipt of $90 from the sale of capital assets,
partially offset by cash outlays for the repurchase of shares of our common
stock of $880, purchases of capital assets of $777, the repayment of long-term
debt of $88 and debt financing costs of $87.
Our accounts receivable at January 3, 2003 increased to $622, net of the
provision for bad debts and discounts, as compared to at January 4, 2002 due
primarily to increased net sales of our Saucony products in the fourth quarter
of fiscal 2002 and an increase in our days' sales outstanding for our accounts
receivable. Our days' sales outstanding for our accounts receivable increased to
42 days in fiscal 2002 from 41 days in fiscal 2001. The provision for bad debts
and doubtful accounts decreased to $4,752 in fiscal 2002 from $5,767 in fiscal
2001 due to a decrease in the provision for doubtful accounts in fiscal 2002 and
a change in pricing programs for several of our larger customers to net pricing,
which reduced discounts in fiscal 2002.
Inventories decreased $1,848 at January 3, 2003, as compared to at January 4,
2002, due primarily to improvements in our supply chain which we intended to
reduce on-hand inventory and our decision to reduce inventory of our Hind brand
apparel and Spot-bilt footwear products. Our inventory turns ratio increased to
3.1 turns in fiscal 2002 from 2.7 turns in fiscal 2001. The number of days'
sales in inventory decreased to 113 days in fiscal 2002 from 115 days in fiscal
2001.
Principal factors, other than net income, accounts receivable, provision for bad
debts and discounts and inventory, affecting our operating cash flows in fiscal
2002, included an increase of $1,862 in accounts payable due to extended payment
terms provided by our footwear suppliers, a $1,754 increase in accrued income
taxes payable due to higher pre-tax profits and the timing of tax payments and a
$1,295 increase in accrued expenses due primarily to increased accruals for
incentive compensation.
During fiscal 2002, we repurchased approximately 95,000 shares of our common
stock for a total expenditure of $880.
Credit Facility
In August 2002, we entered into a revolving credit agreement under the terms of
which a bank committed up to a maximum of $15,000 to us for cash borrowings and
letters of credit. The credit facility terminates on August 31, 2004. Maximum
borrowings under the credit facility are limited to the lesser of $15,000 or the
sum of 65% of eligible receivables plus 20% of eligible finished goods
inventory. Borrowings under the credit facility are made at our election at the
bank's prime rate of interest less 1.0% or at the LIBOR rate plus 1.5%. In
addition, we pay a quarterly commitment fee of 0.25% on the average daily unused
credit line. The credit facility contains restrictions and financial covenants
including: restrictions on additional indebtedness, restrictions on the annual
amount of equipment financing and capital lease indebtedness and limits on
repurchases of our common stock. As amended in January 2004, the credit facility
permits us to pay cash dividends, and make repurchases or redemptions of, or
other specified distributions with respect to, our capital stock, in a total
amount of up to $5,000 in any fiscal year. Furthermore, for any fiscal quarter
during the term of the credit facility, any consolidated pre-tax loss may not
exceed $2,500, and for any two consecutive fiscal quarters, consolidated pre-tax
loss may not exceed $1,000.
We were in compliance with all covenants of the credit facility at January 2,
2004. As of January 2, 2004 we had open commitments under letters of credit of
$747 and as of March 12, 2004 we had open commitments under letters of credit of
$150. As of January 2, 2004, $14,253, and as of March 12, 2004, $14,850, was
available for borrowing under the credit facility.
One of our foreign subsidiaries maintains a credit facility for cash borrowings
and letters of credit in the amount of $1,123. At January 2, 2004 and March 12,
2004, $1,123 was available for borrowing under the facility. See Note 8 to the
consolidated financial statements included in Item 8 to this Form 10-K.
Capital Expenditures
We anticipate capital expenditures to range between $4,000 to $4,500 in fiscal
2004. Of this amount, we expect to expend approximately $2,500 to $3,000 to
expand and renovate our Peabody, Massachusetts facility, $1,000 to $1,300 on
computer hardware and software and $150 to $200 to open two factory outlet
stores.
Contractual Obligations
Below is a table which presents our contractual obligations and commitments at
January 2, 2004.
Payments due by period
--------------------------------------------------------
Less One Three More
Contractual than one to three to five than
Obligations Total year years years five years
----------- ----- ---- ----- ----- ----------
Operating leases................................$ 5,782 $ 1,881 $ 2,351 $ 1,298 $ 252
Other long-term obligations (1)................. 1,820 1,519 281 20 --
Purchase obligations (2)........................ 23,555 23,555 -- -- --
-------- -------- ------- ------- -----
Total contractual obligations...................$ 31,157 $ 26,955 $ 2,632 $ 1,318 $ 252
======== ======== ======= ======= =====
_______________
(1) Other long-term obligations include athlete and event sponsorship and employment contracts with two key
executives. The amounts included for athlete sponsorship represent base compensation consist of $200 for less
than one year and $141 for one to three years. Actual payments may be higher than the amounts included as these
contracts provide for bonus payments to the athletes based upon athletic achievements in future periods. Maximum
aggregate bonus payments to athletes are as follows: less than one year, $233 and one to three years, $120.
(2) Purchase order obligations consist of open purchase orders for sourced footwear and apparel and open purchase
orders for U.S. operating expenses ordered in the normal course of business.
Off-Balance Sheet Arrangements
We had letters of credit outstanding of $747 at January 2, 2004 and $348 at
January 3, 2003. All of the letters of credit were issued for the purchase of
inventory. We had forward foreign exchange contracts of $7,448 at January 2,
2004 and $5,685 at January 3, 2003, all of which are due to settle within the
next 12 months (see Note 19 to the consolidated financial statements included in
Item 8 to this Annual Report Form 10-K).
Amounts
Committed
January 2, 2004
---------------
Letters of credit...............................$ 747
Forward foreign exchange contracts.............. 7,448
---------
Total...........................................$ 8,195
=========
We use letters of credit to facilitate a limited number of supplier arrangements
for our Hind apparel inventory. We do not believe our use of letters of credit
materially affects our liquidity. If we did not use letters of credit we would
make alternative arrangements with these Hind apparel inventory suppliers. Our
primary market risk is the risk of exposure to unfavorable movements in exchange
rates between the U.S. dollar and the Canadian dollar, the British Pound
Sterling and the Euro. We use forward exchange contracts to hedge firm and
anticipated purchase and sale commitments denominated in currencies other than
our subsidiaries' local currencies. The purpose of our currency hedging
activities is to protect our local subsidiaries' cash flows related to these
commitments from fluctuations in currency exchange rates, the loss of which
would expose us to increased market risk and fluctuations in our liquidity.
Overall Liquidity
Our liquidity is contingent upon a number of factors, principally our future
operating results. Our liquidity fluctuates during the course of a fiscal year.
For instance, we generally use cash from operations in the first quarter, due to
working capital requirements, but generate cash from operations for the balance
of the fiscal year. We believe that our current cash and cash equivalents,
credit facilities and internally generated funds will be adequate to meet our
working capital requirements and other operating expenses and to fund our
capital investment needs and dividend payments for at least the next 12 months
in the near term. During fiscal 2003 we generated $15,045 in cash from operating
cash flows due to our operating profit, a decrease in inventories and an
increase in accounts payable. In 2002, we generated $13,230 in cash from
operating cash flows, due primarily to our operating profit, an increase in our
accrued liabilities and accounts payable.
As of January 2, 2004, we had $41,781 in cash, $5,788 in short-term investments,
$19,167 in accounts receivable and $22,421 in inventories. As approved by our
Board of Directors on February 17, 2004, we paid a special, cash dividend of
$4.00 per share on each of our Class A Common Stock and Class B Common Stock on
March 17, 2004. The aggregate dividend payout for the special dividend amounted
to approximately $26,000. We paid the dividend from available cash and cash
equivalents and short-term investments.
At January 2, 2004, we had no borrowings outstanding and $15,376 available under
our credit facilities. As of March 12, 2004, we had no borrowings outstanding
and $15,973 available under our credit facilities. Our short-term liquidity
could potentially be adversely impacted should demand for our products decline
significantly, which could result in extended payment terms for our customers
and the increased use of price concessions to induce customers to purchase our
products.
Inflation and Currency Risk
The effect of inflation on our results of operations over t