United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004
Commission file number: 000-05083
Saucony, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (978) 532-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.33-1/3 par value
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(Title of class)
Class B Common Stock, $.33-1/3 par value
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant, as of July 2, 2004, which was the last
business day of the registrant's second quarter of fiscal 2004, was
approximately $101,079,000 (based on the closing sale prices of the Class A
Common Stock and Class B Common Stock on such date as reported on the Nasdaq
National Market). For purposes of the immediately preceding sentence, the term
"affiliate" consists of each director and executive officer of the registrant.
The number of shares of the registrant's Class A Common Stock, $.33-1/3 par
value, and Class B Common Stock, $.33-1/3 par value, outstanding on February 28,
2005 was 2,520,647 and 4,157,376, respectively.
Portions of the registrant's Definitive Proxy Statement for its 2005 Annual
Meeting of Stockholders scheduled to be held on May 18, 2005 (the "2005 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 2004, are incorporated by reference into
Part III of this Annual Report on Form 10-K. With the exception of the portions
of the 2005 Proxy Statement expressly incorporated into this Annual Report on
Form 10-K by reference, such document shall not be deemed filed as part of this
Annual Report on Form 10-K.
SAUCONY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
Caption Page
PART I
Item 1. Business 3
Executive Officers of the Registrant 11
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 42
Item 9A. Controls and Procedures 42
Item 9B Other Information 43
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 44
Item 13. Certain Relationships and Related Transactions 44
Item 14. Principal Accountant Fees and Services 44
PART IV
Item 15. Exhibits and Financial Statement Schedules 45
Signatures 46
Index to Consolidated Financial Statements 53
Exhibit Index 80
PART I
ITEM 1 - BUSINESS
Overview
We design, develop and market performance-oriented athletic footwear, athletic
apparel and casual leather footwear. Our principal products are:
o technical running, walking, cross-training and outdoor trail shoes and
athletic apparel, which we sell under the Saucony brand name;
o technical running shoe models from the early 1980's, which we
reintroduced in 1998 as Saucony "Originals", our classic footwear
line;
o athletic apparel, which we sell under the Hind brand name; and
o shoes for coaches and officials, cleated football and multi-purpose
footwear and casual leather walking and workplace footwear, which we
sell under the Spot-bilt brand name.
Our products are sold in the United States at more than 5,500 retail locations
and at our 19 factory outlet stores. Outside the United States our products are
sold in 53 countries through 24 independent distributors located throughout the
world and through our subsidiaries located in Canada, The Netherlands and the
United Kingdom and at our two factory outlet stores in Canada.
For the fiscal year ended December 31, 2004, we generated total sales of
$166,200,000. In March 2004 we paid a special dividend on our common stock,
amounting to $25,990,000. On August 2, 2004, we announced the retention of
Chestnut Securities, Inc., Boston, Massachusetts, to assist in our analysis and
consideration of various strategic alternatives that may be available to us,
including a possible sale of our company. As of the date of this Annual Report
on Form 10-K, we have not determined whether to pursue any particular strategic
alternative. In addition, there can be no assurance that, if any transaction is
commenced, it will be completed or as to the value that any transaction may have
to our shareholders.
We are a Massachusetts corporation, founded in 1920. Our headquarters are in
Peabody, Massachusetts.
Saucony(R), GRID(R), Hind(R), Spot-bilt(R), and Hyde(R) are our registered
trademarks. This Annual Report on Form 10-K also includes other service marks,
trademarks and trade names of ours and of companies other than us. Unless the
context indicates otherwise, we use the terms "we", "us", "our", "Saucony" and
the "Company" in this Annual Report on Form 10-K to refer to Saucony, Inc. and
its consolidated subsidiaries.
Segments
Our business is organized into two operating segments, the Saucony segment and
the Other Products segment. The Saucony segment consists of Saucony technical
and Originals footwear and Saucony apparel. The Other Products segment consists
of Hind athletic apparel and Spot-bilt shoes for coaches and officials, cleated
football and multi-purpose footwear and casual leather walking and workplace
footwear, together with sales of our and other companies' products at our 21
factory outlet stores.
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the periods and geographic
areas indicated.
Net Sales
(dollars in thousands)
Fiscal 2004 Fiscal 2003 Fiscal 2002
--------------------- --------------------- --------------------
$ % $ % $ %
- - - - - -
Saucony
Domestic..............$ 103,820 63% $ 81,720 60% $ 83,182 62%
International......... 36,929 22% 30,991 23% 27,647 21%
---------- ---- ---------- ---- ---------- ----
Total.................$ 140,749 85% $ 112,711 83% $ 110,829 83%
---------- ---- ---------- ---- ---------- ----
Other Products
Domestic..............$ 23,995 14% $ 21,901 16% $ 20,171 15%
International......... 1,408 1% 1,454 1% 2,196 2%
---------- ---- ---------- ---- ---------- ----
Total.................$ 25,403 15% $ 23,355 17% $ 22,367 17%
---------- ---- ---------- ---- ---------- ----
Total....................$ 166,152 100% $ 136,066 100% $ 133,196 100%
========== ==== ========== ==== ========== ====
_________________
For further financial information concerning geographic areas and our operating
segments, please see Notes 17 and 18 to our consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K.
Products
Footwear
Technical Footwear. We sell performance running, walking and outdoor trail shoes
for athletes under the Saucony brand name, which has been marketed in the United
States for over 30 years. A substantial majority of sales are in the running
shoe category. We have several different products within each Saucony brand
category. These products have different designs and features, resulting in
different cushioning, stability, support characteristics and prices.
We design and market separate lines for men and women within most technical
footwear categories. In keeping with our emphasis on performance, we market and
sell our technical footwear to athletes who have a high participation rate,
meaning they actively and regularly participate, in their sport of choice. We
address this market through our "Loyal to the Sport" advertising campaign. We
believe that consumers in this market are more brand loyal than those who buy
athletic footwear for casual use. The suggested domestic retail prices for most
of our technical footwear products are in the range of $50 to $90 per pair, with
our top-of-the-line running shoes having suggested domestic retail prices of up
to $120 per pair. During fiscal 2004, we introduced several new shoes targeted
at the mid-priced running footwear segment, which we have defined as the
"cross-over" category with retail prices ranging from $60 to $80 per pair.
The Saucony brand is recognized for its technical innovation and performance. As
a result of our application of biomechanical technology in the design process,
we believe that our Saucony footwear has a distinctive "fit and feel" that is
attractive to athletic users. A key element in the design of our shoes is an
anatomically correct toe and heel configuration that provides support and
comfort for the particular activity for which the shoe is designed.
We build a variety of technical features into our shoes. Most of our technical
running and other athletic shoes incorporate either our Ground Reaction Inertia
Device, or GRID, system, or our Custom Ride Management technology.
Our GRID system is an innovative midsole system that employs molded strings
engineered to create a feeling similar to that of the "sweet spot" of a tennis
racquet. In contrast with conventional athletic shoe midsoles, the GRID system
is designed to react to various stress forces differently, thereby working to
maximize shock absorption and minimize rear foot motion. We have continually
improved the GRID system since it was first introduced in 1991.
Custom Ride Management technology allows us to tailor shoes to the individual
characteristics of a runner, including height, weight, foot size, foot types and
gait cycles. By doing so, it allows athletes to select a level of cushioning or
stability based on their needs or preferences. We have incorporated Custom Ride
Management into several running models and a walking model, all of which shipped
in fiscal 2004.
We design our Saucony technical cross training, women's walking and outdoor
technical trail shoes with many of the same performance features and "fit and
feel" characteristics as are found in Saucony technical running shoes. During
fiscal 2004, our most popular non-running technical athletic shoe was a woman's
performance walking shoe.
Technical footwear, inclusive of full margin and closeout technical footwear,
accounted for approximately 72% of our fiscal 2004 consolidated net sales, 71%
of our fiscal 2003 consolidated net sales and 70% of our fiscal 2002
consolidated net sales.
Originals Footwear. In 1998, we reintroduced a number of our technical running
shoe models from the early 1980's under the name "Originals." These shoes are
designed to appeal to younger consumers who do not generally wear them for
athletic purposes. We believe our Originals shoes have benefited from a trend
toward "retro" products in footwear and apparel. We offer these shoes in a
variety of styles with over 100 combinations of colors and materials. The
suggested retail prices for our Originals are in the range of $40 to $65 per
pair.
Our initial Originals offering consisted of two models, the "Jazz Originals" and
the "Shadow Originals." In light of the success of these products, we then
expanded the Originals product line to include color and material variations on
our initial Originals and also introduced children's models. During fiscal 2004,
we introduced additional Originals products including contemporary-styled
reintroductions of our technical running shoe models from the early 1980's and
other casual footwear designed for the 12 to 25-year old footwear consumer, and
expanded our offering of children's models.
Originals footwear, inclusive of full margin and closeout originals footwear,
accounted for approximately 12% of our fiscal 2004 consolidated net sales, 11%
of our fiscal 2003 consolidated net sales and 12% of our fiscal 2002
consolidated net sales.
Spot-bilt
We sell shoes for coaches and officials, cleated football and multi-purpose
footwear, casual leather walking and workplace footwear under the Spot-bilt
brand name through similar distribution channels as our Saucony brand shoes.
Athletic Apparel
Hind
We sell a full line of technical apparel under the Hind brand name for use in a
variety of sports, including running, fitness and bicycling. We believe that our
Hind products have a reputation among athletes for delivering comfort and
performance. Most of our Hind products incorporate our moisture management
technology, which transfers moisture away from the wearer's skin to enhance
comfort. We frequently add innovations to our Hind product offerings to
incorporate the latest available fabric technology. During fiscal 2004, we
introduced an innovative line of performance sport bras, designed for women's
fitness activities.
Saucony
We also market athletic apparel, internationally, under the Saucony label. We
target our Saucony apparel line at the mainstream running consumer. We believe
that our Saucony athletic apparel supports our Saucony athletic footwear
products by enhancing the visibility of the Saucony brand.
Product Design and Development
We believe that the technical performance of our Saucony footwear and other
product lines is important to the ultimate consumers of our products. We
continually strive to produce products that improve athletic performance and
maximize comfort. We use the consulting services of professional designers as
well as podiatrists, orthopedists, athletes, trainers and coaches as part of our
product development program. We maintain a staff of ten design and development
specialists in Peabody, Massachusetts to undertake continuing product
development.
In fiscal 2004, we spent approximately $1,956,000 on our product development
programs, compared to approximately $1,673,000 in fiscal 2003 and $1,611,000 in
fiscal 2002. Most of our research and development expenditures relate to Saucony
brand footwear products.
Sales and Marketing
Saucony
We sell our Saucony footwear products at more than 5,500 retail outlets in the
United States, primarily higher-end and full-margin sporting goods chains, but
also independent sporting goods stores, athletic footwear specialty stores,
athletic mall, fashion mall, family footwear and department stores and
off-priced value chains. One of our domestic Saucony customers accounted for
approximately 15% of our domestic Saucony segment net sales in fiscal 2004, 9%
of our domestic Saucony segment net sales in fiscal 2003 and 9% of our domestic
Saucony segment net sales fiscal 2002. We did not derive 10% or more of our
consolidated revenue from sales to one customer in any of fiscal 2004, fiscal
2003 or fiscal 2002.
We maintain a corporate sales group that is directly responsible for the sales
activity in our largest accounts. We also sell our footwear and apparel to
retail outlets in the United States through 14 independent manufacturers'
agents, whose organizations employ approximately 42 sales representatives. We
coordinate the efforts of these representatives through our field sales
management group. Our web site, saucony.com, receives thousands of "hits" weekly
from ad displays for new product information and race and event data, as well as
general Saucony information.
We sell our Saucony products outside the United States in 53 countries through
22 independent distributors located throughout the world, through our Canadian
subsidiary, in which we hold a 95% ownership interest, and through our wholly
owned subsidiaries located in the Netherlands and the United Kingdom.
We strive to enhance our reputation and image in the marketplace and increase
recognition of the Saucony brand name by advertising our products through print
media and television advertising. For our technical footwear, we advertise
primarily in magazines such as "Shape", "Runner's World", "Self", "Sports
Illustrated on Campus" and "Men's Health", as well as several regional running
periodicals. We also sponsor sporting events to increase brand awareness and the
image of our technical footwear to athletes. Examples include sponsorship of the
Los Angeles Marathon and our participation as the official shoe and apparel
supplier of USA Triathlon. To build in-store presence, we use account-specific
and in-store promotions, such as athlete appearances, special events and
discounts for store employee purchases of our products. For our Originals line,
we generally advertise in "lifestyle" magazines that target 12 to 25 year olds,
such as "Seventeen" and "Teen People".
Most of our advertising and promotional programs for our Saucony brand are
directed toward the ultimate consumer. We also promote the Saucony brand to the
retail trade through attendance at trade shows and similar events. During fiscal
2004, we introduced our "Saucony 26" marketing program which profiled 26
competitors, based on the individual's contributions to the running community
and society, at the Los Angeles, Boston, Chicago and New York City marathons. We
employ a cooperative advertising program, which is intended to maximize
advertising resources by having our retailers share in the cost of promoting our
Saucony brand in print advertising, while affording our retailers the
opportunity to promote their stores.
Our local distributors direct our advertising and promotion efforts in foreign
markets, subject to our approval of the nature and content of those efforts.
Hind
We sell our Hind products domestically at independent sporting goods stores and
athletic footwear specialty stores through 14 independent manufacturers' agents,
whose organizations employ approximately 42 sales representatives. We sell our
Hind products outside the United States in five countries, through two
independent distributors and our subsidiaries in Canada, The Netherlands and the
United Kingdom.
Spot-bilt
We market our Spot-bilt line through our Saucony brand distribution channels and
directly to customers through our website at Spotbilt.com.
Factory Stores
We currently operate 19 factory outlet stores in the United States and 2 factory
outlet stores in Canada at which we sell our Saucony, Hind and Spot-bilt
products, as well as the products of third parties. To avoid competing against
full margin retail outlets for these products, we generally limit the items
offered at these stores to products with cosmetic defects, discontinued
merchandise, slow moving products, special make-up footwear products and delay
the offering of first quality products offered at these stores for a period of
six months from the product introduction date. As part of our growth strategy,
we plan to open factory stores in selected factory outlet malls in areas in
which we believe the Saucony brand is underdeveloped and there is a significant
potential for sales and profit growth. We believe that this approach will
strengthen Saucony brand name recognition. During fiscal 2004, we opened two new
factory outlet stores. During fiscal 2005, we expect to open two new factory
outlet stores and close one factory outlet store.
Suppliers
Independent overseas manufacturers produce all of our Saucony products,
including our Originals products, and our Spot-bilt products. The overseas
footwear manufacturers that supply products to us are located in Asia,
principally in China. We select footwear manufacturers in large part on the
basis of our prior experience with the manufacturer and the availability of
production capacity. We have developed long-term relationships with key footwear
manufacturers that we believe have yielded many benefits, including quality
control, favorable costs, flexible working arrangements and predictable
production capacity. Although to date we have not experienced difficulty in
obtaining manufacturing services, we do not have long-term agreements with any
of our foreign suppliers, and we seek to develop additional overseas
manufacturing sources from time to time, both to increase our sourcing capacity
and to obtain alternative sources of supply.
We perform an array of quality control procedures at various stages of the
production process, from testing of product prototypes prior to manufacture, to
inspection of finished goods prior to shipment. Our quality control program is
designed to ensure that finished goods meet our established design
specifications and high quality standards. We employ approximately 23 Saucony
footwear quality control personnel in China. Our personnel in China regularly
visit our footwear manufacturers throughout Asia to monitor, oversee and improve
the quality control and production processes.
We contract with third parties for the manufacture of our Hind apparel, the
majority of which is manufactured in Taiwan, Canada, Sri Lanka and Vietnam of
fabrics sourced primarily from the United States and Taiwan.
Raw materials required for the manufacture of our products, including leather,
rubber, nylon and other fabrics, are generally available in the country in which
our products are manufactured. We and our suppliers have not experienced
difficulty in satisfying raw material needs to date.
The number of our foreign suppliers and the percentage of products sourced by us
from particular foreign suppliers varies from time to time. During fiscal 2004,
we purchased footwear products from five overseas suppliers. One such supplier,
located in China, accounted for approximately 33% of our total overseas footwear
purchases by dollar volume.
Although we compete with other athletic shoe and apparel companies, including
companies that are much larger than we are, for access to production facilities,
we believe that our relationships with our footwear and other suppliers are
strong. We also believe that we have the ability to develop, over time,
alternative sources in various countries for footwear and other products that we
source from our current suppliers. However, in the event of a supply
interruption, our operations could be materially and adversely affected if a
substantial delay occurred in locating and securing alternative sources of
supply.
Our operations are subject to compliance with the laws and regulations enforced
by the United States Customs Service and to the customary risks of conducting
business abroad, including currency fluctuations, increases in customs duties
and related fees, import controls and trade barriers such as the imposition of
import quotas, restrictions on the transfer of funds, work stoppages and, in
certain parts of the world, political instability causing disruption of trade.
To date, these factors have not had a material adverse affect on our operations.
Distribution and Inventory
We distribute our products from our owned warehouses in Massachusetts and leased
warehouses in Canada and The Netherlands, as well as through third party
operated warehouse facilities located in California, The Netherlands and the
United Kingdom.
To accommodate our domestic customers' requirements and plan for our own product
needs, we employ a "futures" order program for most of our products under which
we take orders in advance of the selling season for a particular product and
commit to ship the product to the customer in time for the selling season. We
offer our customers price discounts and extended payment terms as an incentive
for using this ordering program. Our futures order program is similar to
programs offered by other athletic footwear companies.
We also maintain an open-stock inventory on several core technical footwear
styles, a limited number of Originals footwear styles and Hind apparel products
so that we can satisfy retailers' orders on an "at once" basis. The majority of
our Originals line of footwear is sold on a "futures" basis, with limited
planned inventory position, because we believe that demand for products from our
Originals line is more closely tied to style and fashion trends than demand for
our other products. By maintaining only limited inventory for the majority of
our Originals line, we seek to minimize the risk of inventory obsolescence that
can result from unanticipated changes in consumer preferences. We are, however,
subject to inventory risk for our Originals and technical footwear products and
our Hind apparel products in the event of significant order cancellations.
Backlog
The athletic and casual footwear and athletic apparel industries in which we
compete are subject to seasonal sales fluctuations. Sales of our Saucony and
other footwear brands are generally highest in the first and second quarters.
Sales of our Hind athletic apparel are generally highest in the first and third
quarters. Because products sold on an "at once" basis are generally shipped as
orders are received, our backlog relates primarily to products sold on a
"futures" basis. The mix of "future" and "at once" orders can vary significantly
from quarter to quarter and year to year.
Our backlog of unfilled orders was approximately $61,350,000 at December 31,
2004 and $59,901,000 at January 2, 2004. We expect that all of our backlog at
December 31, 2004 will be shipped in fiscal 2005, subject to customer
cancellations. However, our backlog does not necessarily represent actual future
shipments because orders may be cancelled by our customers without financial
penalty. The rate of customer order cancellations can vary quarter to quarter
and year to year. Customers may also reject nonconforming products.
We did not derive 10% or more of our consolidated revenue from sales to one
customer in any of fiscal 2004, fiscal 2003 or fiscal 2002. Approximately 48% of
our gross trade receivables balance was represented by 15 customers at December
31, 2004. We anticipate that our results of operations in any given period will
depend to a significant extent upon sales to major customers. The loss of or a
reduction in the level of sales to one or more major customers or the failure of
a major customer to proceed with a large order or to timely pay us for a large
order could materially reduce our sales.
Trade Policy
Our practice of sourcing products overseas, with subsequent importation into the
United States, exposes us to possible product supply disruptions and increased
costs in the event of actions by United States or foreign government agencies
adverse to continued trade or the enactment of legislation that restricts trade.
We are unable to predict whether additional United States customs duties, quotas
or other restrictions may be imposed in the future upon the importation of our
products. Any such occurrences might have a material adverse effect on our sales
or profitability.
For example, we import the majority of our footwear products from China. On
December 11, 2001, China acceded to the World Trade Organization (WTO) and thus
now enjoys Permanent Normal Trade Relations with the United States. Therefore,
China receives the same favorable tariff treatment that the United States
extends to its other "normal" trading partners. However, even though it has
joined the WTO, scrutiny of China's trading practices is not likely to subside.
There will be continuing pressure on China to honor its WTO commitments. If
China does not abide by WTO rules, the United States may come under pressure to
impose sanctions, such as duties or quotas, on imports from China. If any such
action were to include imports of footwear products from China, it could
significantly add to the cost of our products and could restrict our supply of
products from that country.
Competition
Competition is intense in the markets in which we sell our products. We compete
with a large number of other companies, both domestic and foreign. Several
competitors are large organizations with diversified product lines, well-known
brands and financial, distribution and marketing resources substantially greater
than ours. The principal competitors for our Saucony products are Nike, Asics
and Brooks. The principal competitors for our Hind products are Nike, Adidas and
Sugoi. We compete based on a variety of factors, including price, product style,
durability and quality, product design and technical performance, brand image
and awareness, marketing and promotion and our ability to meet delivery
commitments to retailers. We believe that we are competitive in all of these
areas. However, we may not be able to retain our market share or respond timely
to changing consumer preferences.
Trademarks
We use trademarks on nearly all of our products and believe that having
distinctive marks is an important factor in marketing our products. We have
registered our Saucony(R), GRID(R), Hind(R), Spot-bilt(R) and Hyde(R) marks,
among others, in the United States. We have also registered some of these marks
in a number of foreign countries. Although we have a foreign trademark
registration program for selected marks, we may not be able to register or use
such marks in each foreign country in which we seek registration.
Employees
As of December 31, 2004, we employed approximately 343 people worldwide. Of
these employees, approximately 267 were in the United States and approximately
76 were in foreign locations. We believe that our employee relations are
excellent. We have never experienced a strike or other work stoppage.
Approximately 26 employees in our Peabody, Massachusetts warehouse were
represented by a union as of December 31, 2004. The collective bargaining
agreement with the union which represents our warehouse employees expires on
April 30, 2008. None of our other employees are represented by a union or are
subject to a collective bargaining agreement.
Environmental Matters
In December 2004, we discovered environmental contamination at our facility in
East Brookfield, Massachusetts. We acquired this facility as part of an asset
purchase in March 1985. We believe the contamination is the result of
manufacturing activities that took place in the facility in the early and
mid-1900s when this facility was owned and operated by an unrelated party. We
have hired environmental consultants, engineers and attorneys to assist us in
investigating and addressing our obligations under environmental laws. We have
notified state and local environmental and health authorities and will
coordinate our further investigations with them. We will continue to investigate
the extent to which our property is affected by this contamination and what
measures we must take to address those conditions.
In fiscal 2004, we recorded a charge of $2,275,000 to address the environmental
conditions at our East Brookfield, Massachusetts facility. The environmental
charge includes the estimated direct costs to investigate and address the
conditions on the property and the associated engineering, legal and consulting
costs we expect to incur as we address the environmental conditions. Our
assessment of our liability and the associated costs is an estimate based upon
currently available information after consultation with environmental engineers,
consultants and attorneys assisting us in addressing these environmental issues.
Our actual costs to address the environmental conditions may change based on
further investigations, based on the conclusions of regulatory authorities about
information gathered in those investigations and due to the inherent
uncertainties involved in estimating conditions in the environment and the costs
of addressing such conditions.
The environmental charge is included in operating expenses for our Saucony
segment. At December 31, 2004, our accrual for environmental charges was
$2,275,000 and was included on our balance sheet under current liabilities.
However, our costs to address the environmental conditions at our East
Brookfield, Massachusetts facility could vary materially from our current
estimate. Estimated costs to address the environmental conditions range from
$1,242,000 to $4,621,000.
Available Information
We maintain a website at www.sauconyinc.com. We make available, free of charge
on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file those reports with,
or furnish them to, the Securities and Exchange Commission. We also similarly
make available, free of charge on our website, the reports filed with the SEC by
our executive officers, directors and 10% stockholders pursuant to Section 16
under the Exchange Act as soon as reasonably practicable after copies of those
filings are provided to us by those persons. We are not including the
information contained at www.sauconyinc.com, www.saucony.com, www.hind.com,
www.spotbilt.com or at any other Internet address as part of, or incorporating
it by reference into, this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, as of February 28, 2005 are as follows:
Name Age Position
- -------------------- --- ----------------------------------------
John H. Fisher 57 Chairman of the Board, President and
Chief Executive Officer
Charles A. Gottesman 54 Vice Chairman of the Board and
Executive Vice President,
Business Development
Michael Umana 42 Executive Vice President, Finance,
Chief Operating and Financial Officer,
Treasurer and Assistant Clerk
Michael Jeppesen 45 Senior Vice President, Manufacturing
and Development
Samuel S. Ward 42 Senior Vice President, Operations
and Technology
Brian J. Enge 34 Senior Vice President and General Manager,
Saucony Apparel Division
Roger P. Deschenes 46 Vice President, Controller,
Chief Accounting Officer and
Assistant Treasurer
John H. Fisher has served as one of our directors since 1980 and as Chairman of
the Board since 1991. Mr. Fisher has served as our Chief Executive Officer since
1991 and as our President since 1985. Mr. Fisher served as our Chief Operating
Officer from 1985 to 1991, our Executive Vice President from 1981 to 1985 and as
our Vice President, Sales from 1979 to 1981. He is a member of the World
Federation of Sporting Goods Industries, is the former Chairman of the Athletic
Footwear Council of the Sporting Goods Manufacturers Association and is a member
of various civic associations. Mr. Fisher is the brother-in-law of Charles A.
Gottesman, our Vice Chairman of the Board and Executive Vice President, Business
Development.
Charles A. Gottesman has served as one of our directors since 1983. Mr.
Gottesman has served as our Vice Chairman of the Board and Executive Vice
President, Business Development since July 2001. Mr. Gottesman served as our
Executive Vice President, Chief Operating Officer and Treasurer from 1992 to
June 2001, our Executive Vice President, Finance from 1989 to 1992, our Senior
Vice President from 1987 to 1989, our Vice President from 1985 to 1987, our
Treasurer from 1983 to 1989 and in several other capacities beginning in 1977.
Mr. Gottesman is the brother-in-law of John H. Fisher, our Chairman of the
Board, President and Chief Executive Officer.
Michael Umana has served as our Executive Vice President, Finance, Chief
Operating Officer, Chief Financial Officer, Treasurer and Assistant Clerk since
May 2003, after having served as our Senior Vice President, Finance, Chief
Operating Officer, Chief Financial Officer and Treasurer from July 2001 to May
2003 and our Senior Vice President, Finance and Chief Financial Officer from May
2000 to July 2001. Mr. Umana joined us in 1999 as our Vice President, Finance
and Chief Financial Officer. From 1997 to 1999, Mr. Umana served as Vice
President and Chief Financial Officer of the Analytical Instrument Business Unit
at PerkinElmer, Inc., a high technology manufacturer. From 1985 to 1997, Mr.
Umana held various auditing and consulting positions, the most recent being
Senior Manager, Business Consulting, at Arthur Andersen LLP, a professional
services company. Mr. Umana is a Certified Public Accountant.
Michael Jeppesen joined us in May 2001 as Senior Vice President, Manufacturing
and Development. From 1999 to May 2001, Mr. Jeppesen was employed as Vice
President of Operations for Coach Leatherware Inc, a leather products
manufacturer, where he was responsible for manufacturing and product
development. From 1996 to 1999, Mr. Jeppesen held various senior management
positions at Adidas AG, an athletic footwear manufacturer, including Vice
President of European Operations and Vice President - Global Materials, the most
recent being Vice President of European Operations, which he held beginning in
1997. Mr. Jeppesen was employed as General Manager of Prime Asia, a footwear
manufacturer, from 1994 to 1996.
Samuel S. Ward has served as our Senior Vice President, Operations and
Technology since October 2002. Mr. Ward joined us in February 2001 as Vice
President, Enterprise Solutions, in which capacity he was responsible for
leading a continuous program to improve operational efficiency through the
redesign of business processes and supporting information systems. From 1994 to
2001, Mr. Ward held various supply chain and business process improvement
consulting positions, including Senior Consultant, Manager and Senior Manager,
which he held from 2000 to 2001, in the Business Consulting Group at Arthur
Andersen LLP, a professional services company. Mr. Ward graduated from Duke
University's Fuqua School of Business in 1994. From 1987 to 1992, Mr. Ward held
various finance and operations positions at General Electric Company and
completed General Electric's Financial Management Program.
Brian J. Enge has served as our Senior Vice President and General Manager,
Saucony Apparel Division since November 2004. Mr. Enge joined us in July 2002 as
Vice President and General Manager, Hind Apparel. From 1998 to 2002, Mr. Enge
was employed as the President of Schoffel North America, an outdoor apparel
manufacturer where he was responsible for managing the North American
operations. Mr. Enge graduated from Harvard Business School in 1998. From 1993
to 1996, Mr. Enge held various leadership positions at Cyrk, Inc., a promotion
services company, including General Manager, Retail Brands, during 1996.
Roger P. Deschenes has served as our Vice President, Controller, Chief
Accounting Officer and Assistant Treasurer since December 2002 after having
served as our Vice President, Controller and Chief Accounting Officer from 1997
to December 2002 and our Controller and Chief Accounting Officer from 1995 to
1997. Mr. Deschenes joined us in 1990 as Corporate Accounting Manager. He was
employed at a division of Allen-Bradley Company, a subsidiary of Rockwell
International, Corp., from 1987 to 1990 as Financial and Cost Reporting
Supervisor. Mr. Deschenes is a Certified Management Accountant.
Officers are elected on an annual basis and serve at the discretion of the Board
of Directors.
ITEM 2 - PROPERTIES
Our general and executive offices and our main distribution facility are located
in Peabody, Massachusetts and are owned by us. This facility consists of
approximately 141,000 square feet, of which 107,000 square feet is warehouse
space and 1,000 square feet is used for a factory outlet store. During fiscal
2004, we expended approximately $3,325,000 for the initial phase of the
expansion and renovation of our Peabody, Massachusetts facility. During the
second and third quarters of 2005, we plan to continue the renovation at this
facility, at an estimated cost of approximately $2,750,000 to $3,050,000.
We also own a facility in East Brookfield, Massachusetts containing
approximately 109,000 square feet, which we use for warehousing and
distribution. During fiscal 2004, we recorded an environmental charge of
$2,275,000 to address previously unknown environmental conditions at this
facility.
We lease space for our retail stores at factory outlet malls and other
locations. These stores have an aggregate of approximately 39,500 square feet of
retail space at 19 locations in several states and in the Province of Ontario.
The terms of these leases range from three to ten years. The aggregate effective
annual commitment for our factory outlet store leases is approximately
$1,367,000. We also own a factory outlet store containing approximately 3,000
square feet of retail space in Bangor, Maine and operate a factory outlet store
at our Peabody, Massachusetts facility.
We also lease approximately 16,000 square feet of space in The Netherlands,
approximately 26,000 square feet of space in Canada, which we use for office and
warehouse space and approximately 4,000 square feet of office space in China.
We believe that our properties are reasonably well-maintained and are adequate
for our present requirements.
ITEM 3 - LEGAL PROCEEDINGS
We are involved in routine litigation incident to our business. We do not
believe that any of these proceedings will have a material adverse effect on our
financial position, operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended December 31, 2004, there were no matters
submitted to a vote of security holders of Saucony, through the solicitation of
proxies or otherwise.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A Common Stock trades on the NASDAQ National Market under the symbol
"SCNYA", and our Class B Common Stock trades on the NASDAQ National Market under
the symbol "SCNYB". The following table sets forth, for the periods indicated,
the actual high and low sales prices per share of the Class A Common Stock and
the Class B Common Stock as reported by the NASDAQ National Market.
Class A Class B
Common Stock Common Stock
---------------------- --------------------------
High Low High Low
-------- ---------- ---------- ---------
Fiscal Year ended December 31, 2004
-----------------------------------
First quarter.........................................$ 25.540 $ 16.560 $ 26.000 $ 16.820
Second quarter........................................ 21.240 17.700 21.650 18.260
Third quarter......................................... 25.100 19.840 24.690 19.800
Fourth quarter........................................ 27.960 22.950 27.190 22.750
Fiscal Year ended January 2, 2004
---------------------------------
First quarter.........................................$ 11.250 $ 8.500 $ 11.350 $ 8.710
Second quarter........................................ 12.320 9.800 12.340 10.100
Third quarter......................................... 15.460 12.260 15.200 12.270
Fourth quarter........................................ 17.400 13.440 17.500 13.410
On February 28, 2005, there were 220 shareholders of record of the Class A
Common Stock and 239 shareholders of record of the Class B Common Stock. In
general, only the Class A Common Stock has voting rights.
Dividend Policy
On May 21, 2003, our Board of Directors adopted a regular quarterly dividend
plan with dividends payable at an annual rate of $0.160 per share on our Class A
Common Stock and $0.176 per share on our Class B Common Stock. In 2003, the
board declared regular quarterly cash dividends on May 21, 2003, August 21, 2003
and November 6, 2003, in the amount of $0.040 per share on our Class A Common
Stock and $0.044 per share on our Class B Common Stock. Prior to May 2003, we
had never declared or paid any cash dividends on either our Class A Common Stock
or Class B Common Stock.
On February 17, 2004 our Board of Directors adopted an increase in our regular
quarterly dividend to an annual rate of $0.200 per share on our Class A Common
Stock and $0.220 per share on our Class B Common Stock. Commencing with the
quarterly dividend declared on February 17, 2004, the Board of Directors
increased the regular quarterly dividend on our Class A Common Stock to $0.050
per share and the regular quarterly dividend on our Class B Common Stock to
$0.055 per share. Following the dividends declared on February 17, 2004, the
Board of Directors declared regular quarterly dividends in 2004 on May 19, 2004,
August 2, 2004 and November 4, 2004, each in the amount announced on February
17, 2004.
Also, on February 17, 2004, our Board of Directors declared a special cash
dividend of $4.00 per share on each of our Class A Common Stock and Class B
Common Stock. The special dividend, which amounted to $25,990,000, was paid on
March 17, 2004 to stockholders of record at the close of business on March 3,
2004.
As provided in the our corporate charter, regular cash dividends paid on our
Class B Common Stock are to be in an amount equal to 110% of the amount paid on
our Class A Common Stock. This charter provision does not apply to special
dividends.
Our declaration of future cash dividends will be at the discretion of our Board
of Directors and is dependent upon, among other things, future earnings,
operations, capital requirements, our general financial position and general
business conditions. The terms of our credit facility generally restrict our
ability to pay cash dividends, together with other repurchases or redemptions
of, or other specified distributions with respect to, our capital stock, in
excess of $5,000,000 in any fiscal year. This limitation did not apply to our
special dividend declared in February 2004, which was specifically excluded from
this limitation.
Purchases of Equity Securities
In May 1998, our Board of Directors approved a stock repurchase plan authorizing
the repurchase of up to an aggregate of 750,000 shares of our outstanding common
stock, either Class A or Class B or a combination thereof. Unless terminated
earlier by a resolution of our Board of Directors, the plan will expire when we
have repurchased all shares authorized for repurchase under the plan. We
announced this plan publicly on June 4, 1998. We did not make any repurchases
under this plan during the quarter ended December 31, 2004, and as of December
31, 2004 a maximum of 168,376 shares of our outstanding common stock, either
Class A or Class B or a combination thereof, may be purchased under the plan.
ITEM 6 - SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
in this Annual Report on Form 10-K.
The selected consolidated financial data set forth below as of December 31, 2004
and January 2, 2004 and for the years ended December 31, 2004, January 2, 2004
and January 3, 2003 are derived from the audited consolidated financial
statements of Saucony included in this Annual Report on Form 10-K. All other
selected consolidated financial data set forth below is derived from audited
financial statements of Saucony not included in this Annual Report on Form 10-K.
Our historical results are not necessarily indicative of our results of
operations to be expected in the future.
Year Year Year Year Year
Ended Ended Ended Ended Ended
Dec 31, Jan. 2, Jan. 3, Jan. 4, Jan. 5,
2004 2004(1) 2003 2002 2001
---- ------- ---- ---- ----
(in thousands except per share amounts)
Selected Income Statement Data
Revenues ..............................................$ 166,676 $136,445 $133,499 $132,364 $ 167,920
Operating income (loss) (2), (3), (4).................. 18,177 12,997 8,943 (269) 16,123
Net income (loss)...................................... 10,418 8,488 5,243 (940) 8,963
Earnings (loss) per common share - basic
Class A common stock................................$ 1.51 $ 1.31 $ 0.81 $ (0.15) $ 1.37
========= ======== ======== ======== =========
Class B common stock................................$ 1.66 $ 1.44 $ 0.89 $ (0.16) $ 1.51
========= ======== ======== ======== =========
Earnings (loss) per common share - diluted
Class A common stock................................$ 1.38 $ 1.26 $ 0.80 $ (0.15) $ 1.34
========= ======== ======== ======== =========
Class B common stock................................$ 1.52 $ 1.38 $ 0.88 $ (0.16) $ 1.47
========= ======== ======== ======== =========
Weighted average common shares and
equivalents outstanding
Basic:
Class A common stock ............................. 2,521 2,521 2,563 2,567 2,606
Class B common stock ............................. 3,972 3,583 3,544 3,513 3,586
--------- -------- -------- -------- ---------
6,493 6,104 6,107 6,080 6,192
========= ======== ======== ======== =========
Diluted: (5)
Class A common stock ............................. 2,521 2,521 2,563 2,567 2,606
Class B common stock.............................. 4,559 3,850 3,623 3,513 3,735
--------- -------- -------- -------- ---------
7,080 6,371 6,186 6,080 6,341
========= ======== ======== ======== =========
Cash dividends per share of common stock:
Class A common stock..............................$ 4.200 $ 0.120 -- -- --
========= ======== ======== ======== =========
Class B common stock..............................$ 4.220 $ 0.132 -- -- --
========= ======== ======== ======== =========
Selected Balance Sheet Data
Dec 31, Jan. 2, Jan. 3, Jan. 4, Jan. 5,
2004 2004 2003 2002 2001
---- ---- ---- ---- ----
(in thousands)
Current assets.........................................$ 84,637 $ 92,801 $ 80,670 $ 69,538 $ 73,531
Current liabilities.................................... 24,071 18,992 16,343 12,325 15,919
Working capital........................................ 60,566 73,809 64,327 57,213 57,612
Total assets........................................... 96,257 100,688 87,540 78,100 83,285
Capitalized lease
obligations, net of current portion................. 138 -- -- -- 34
Stockholders' equity................................... 68,691 79,054 68,696 63,162 64,620
- ---------------------------
(1) See Note 1 to our Consolidated Financial Statements regarding reporting
period.
(2) See Note 16 to our Consolidated Financial Statements regarding our Bangor,
Maine plant closing and other charges incurred in fiscal 2001.
(3) In fiscal 2000 we sold substantially all of the assets and business of our
former cycling division. In connection with the sale we recorded a pre-tax
loss of $2,661 which is included in the operating income for fiscal 2000.
(4) Includes environmental charge of $2,275 which is included in operating
income for fiscal 2004.
(5) Includes common stock and dilutive options and stock warrants, with the
exception of fiscal 2001, since the common stock equivalents were
anti-dilutive.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
In the following management's discussion and analysis of financial condition and
results of operations: (1) when we refer to the 2004 fiscal year, we mean the
fiscal year ended December 31, 2004, (2) when we refer to the 2003 fiscal year,
we mean the fiscal year ended January 2, 2004, (3) when we refer to the 2002
fiscal year, we mean the fiscal year ended January 3, 2003 and (4) all amounts
are in thousands, except share and per share amounts.
Business Overview
Our core business focus is to design, develop and market performance-oriented
athletic footwear and athletic apparel, which we sell under the Saucony brand
name, and athletic apparel, which we sell under the Hind brand name. Sales of
Saucony brand products accounted for approximately 85% of our consolidated net
sales for fiscal 2004 and 83% of our consolidated net sales for fiscal 2003 and
fiscal 2002, the significant majority of which are sales of Saucony footwear
products. Our results of operations, financial position and cash flows are
heavily dependent upon our Saucony footwear business. Our ability to increase
Saucony footwear sales is dependent in significant part upon increasing our
share of the market for athletic footwear sales.
We pursue different strategies for our two Saucony footwear product categories,
technical footwear and Originals footwear. For our technical footwear category,
we combine high quality materials and components with technical features
designed to meet the performance requirements of athletes who have a high
participation rate, meaning they actively and regularly participate, in their
choice of sport. We incorporate either our Ground Reaction Inertia Device, or
GRID system, or our proprietary footwear technology, Custom Ride Management,
into a majority of our technical and mid-priced cross-over footwear products.
For our Originals footwear category, we design fashion-oriented footwear
intended to appeal to younger consumers who generally do not wear the footwear
for athletic purposes.
Because our primary footwear focus is in technical footwear, we direct most of
our design and development efforts and working capital investments towards our
Saucony technical footwear. We view our Originals footwear as a market
opportunity which we must carefully manage due to rapid shifts in consumer
preferences. Accordingly, we limit our investment in working capital for, and
our spending on marketing, design and development of, our Originals footwear.
Our Saucony technical footwear and Originals footwear, along with athletic
apparel we sell under the Saucony brand name, constitute one operating segment.
We have another operating segment which consists of athletic apparel we sell
under the Hind brand name, shoes for coaches and officials, cleated football and
multi-purpose footwear, casual leather walking and workplace footwear we sell
under the Spot-bilt brand name and sales of all of our and third parties'
products at our 21 factory outlet stores. We refer to this segment as our Other
Products segment. Sales from our Other Products segment accounted for
approximately 15% our consolidated net sales for fiscal 2004 and 17% of our
consolidated net sales for each of fiscal 2003 and fiscal 2002. A majority of
these sales are sales of our Hind athletic apparel.
We compete in intensely competitive markets. Our ability to achieve sales growth
is dependent upon several factors including, product design and technical
performance, product quality, price, styling and our ability to market and
promote our brand and our products. Our business is sensitive to consumer
spending patterns, which in turn are subject to prevailing regional and national
economic patterns, such as employment levels and consumer confidence. Economic
uncertainty and decreased consumer confidence may restrict consumer spending,
thereby negatively affecting our sales and results of operations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results may differ materially from these
estimates. Our significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this Annual Report on
Form 10-K. Critical accounting policies are those policies that reflect
significant judgments and uncertainties and could potentially result in
materially different results under different assumptions and conditions. Our
most critical accounting policies are as follows:
- - Revenue Recognition
We recognize revenue from product sales when title passes and all the
rewards and risk of loss have been transferred and all the criteria for
revenue recognition described in SEC Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition in Financial Statements. Title generally passes
upon shipment or upon receipt by the customer. We record retail store
revenues at the time of sale. We recognize royalty revenue as we earn the
royalties during the terms of our license agreements.
As part of our revenue recognition policy, we must make estimates for
defective product returns and other allowances related to current period
product revenue. We record a provision for defective product returns and
other allowances based upon past experience and the receipt of notification
of pending returns. While the returns have historically been within our
expectations and the provisions established, the product return rate may
not remain constant. Any significant increase in the product return rate
would require that we increase our reserves. This would reduce our net
sales and could have a material adverse effect on our results of operations
and cash flows for the period in which the returns materialize. If actual
or expected future returns and allowances were significantly greater or
lower than the reserves we established, we would record a reduction or
increase to our reserves in the period in which such determination was
made.
- - Accounts Receivable - Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts and therefore must estimate
losses resulting from the inability of our customers to make required
payments. We analyze our accounts receivable, historical bad debt trends,
customer creditworthiness, economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. As noted in Note 18 of our consolidated financial statements
included in Item 8 of this Annual Report on Form 10-K, we have a credit
risk concentration due to the concentration of our domestic Saucony
footwear sales within a relatively small customer base. If the liquidity or
financial condition of any of our larger customers were to deteriorate,
resulting in an impairment of their ability to make payments due us, or if
payment schedules of our customers are otherwise delayed from historical
trends, we would be required to record additional allowances to our
provision for doubtful accounts. This would increase our general and
administrative expenses and could have a material adverse effect on our
results of operations and cash flows.
- - Cooperative Advertising
We engage in cooperative advertising programs whereby our retailers are
allowed to receive a set percentage of their purchases of our products as
reimbursement for their advertising or marketing costs in jointly promoting
our products within their businesses. The purpose of our cooperative
advertising programs is to encourage advertising and promotions for the
sale of our products. We acquire costs as selling expense on the basis of
sales to qualifying retailers at the time of the revenue recognition. Our
retailers will develop specific marketing programs, subject to our
approval, to utilize the funds in a manner intended to best promote both
themselves and our products. On a quarterly basis, we evaluate the adequacy
of our cooperative advertising accrual. Further, we evaluate the
classification of these costs in accordance with Emerging Issues Task Force
Issue 01-09, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)." We account for
cooperative advertising costs as a selling expense provided that the
cooperative advertising costs meet the requirements defined in EITF 01-09.
EITF 01-09 requires that we account for consideration given to a retailer
as a reduction of revenue unless we receive an identifiable benefit, which
is separable from the retailer's original purchase and can reasonably
estimate the fair value of this benefit. For the arrangements that do not
meet these requirements, we account for the cooperative advertising costs
as a reduction of net sales.
At December 31, 2004, our cooperative advertising accruals totaled $1,281,
compared to $1,002 at January 2, 2004. The increase in the cooperative
advertising reserves at December 31, 2004 was due primarily to increased
participation by our retailers in fiscal 2004. As part of our reserve
valuation, we must make estimates for retailer participation and determine
the income statement classification of the cooperative advertising
allowances. Our estimates are based primarily on our past experience with
the retailers. When possible, we base these estimates on past experience
with the specific retailers, as well as our experience with retailers
generally. If retailer participation were to increase, selling costs and
cooperative advertising accruals would increase.
- - Volume Incentive Reserves
We utilize volume incentive rebates whereby certain retailers receive a
volume incentive rebate equal to a specified percentage of shipments to the
retailer provided that the retailer achieves a cumulative level of revenue
transactions with us. The purpose of our volume incentive rebates programs
is to encourage our retailers to increase the amount of their purchases of
our products. We recognize the rebate obligation as a reduction of net
sales based on a systematic and rational allocation of the cost of honoring
the rebates earned and claimed to each of the underlying revenue
transactions that results in progress by the retailer toward earning the
rebate. During fiscal 2004 and fiscal 2003 we recorded $1,442 and $522 of
volume incentive rebates, respectively, as a reduction of net sales.
At December 31, 2004, our volume incentive rebate reserve totaled $843,
compared to $442 at January 2, 2004. The increase in the volume incentive
rebates reserve at December 31, 2004 was due primarily to offering volume
incentive rebates to additional domestic retailers in fiscal 2004. As part
of our reserve valuation, we must make estimates for anticipated cumulative
revenue transactions with our retailers. We estimate cumulative revenue
levels by adding period-to-date net sales and expected future net sales
based on our order backlog, as well as our past experience with specific
retailers and our experience with retailers generally. If net sales were to
exceed our estimated net sales, we would be required to record adjusting
entries to increase our volume incentive rebate reserves. This would reduce
our net sales and could have a material adverse effect on our results of
operation, financial position and cash flows.
- - Inventories
We value our inventory at the lower of the actual cost to purchase or the
current estimated market value. We calculate the provision for excess and
obsolete inventory as the difference between the cost of the inventory and
our estimated market value of the inventory. We estimate market value based
upon estimated product demand and market conditions. We record the
provision as a charge to cost of sales. If actual future demand or market
conditions are less favorable than those we project, the estimated market
value of our inventory would decrease and additional provisions to write
down inventory may be required. This could materially reduce our amount of
current assets and increase our cost of goods sold and could have a
material adverse effect on our results of operations and cash flows.
- - Property, Plant and Equipment
We record property, plant and equipment, including buildings, leasehold
improvements, equipment and computer equipment at cost and depreciate it
over the applicable estimated useful life. Changes in circumstances, such
as technological advances or changes to our business operations, can result
in differences between the actual and estimated useful lives. In those
cases where we determine that the useful life of a long-lived asset should
be decreased, we would increase depreciation over the remaining useful life
to depreciate the asset's net book value to its salvage value. Decreasing
an assets' estimated useful life would increase general and administrative
expenses and could have a material adverse effect on our results of
operations and financial position.
- - Impairment of Long-Lived Assets
We review the recoverability of our long-lived assets (property, plant and
equipment and deferred charges) when events or changes in circumstances
occur that indicate that the carrying value of the assets may not be
recoverable. We recognize an impairment of a long-lived asset if the
carrying value of the long-lived asset is not recoverable from its
estimated future cash flows. We measure an impairment loss as the
difference between the carrying amount of the asset and its estimated fair
value. During both fiscal 2004 and fiscal 2003, we recorded impairment
charges of $15 to reduce the carrying amount of long-lived assets used in
our retail operations, which carrying value we deemed to be not recoverable
from its future cash flows. The charge is included in general and
administrative expenses. Should future events and circumstances cause cash
flows associated with any of our long-lived assets to decline significantly
from our estimates, we may need to record charges for impairment of
long-lived assets, which would increase our general and administrative
expenses and could have a material adverse effect on our results of
operations and financial position.
We no longer amortize goodwill and other indefinite-lived intangible
assets. Rather, we review them for impairment. We would record an
impairment if the carrying value of the asset exceeds our estimate of its
fair market value. We record impairment charges as a component of general
and administrative expenses. We test the impairment of our goodwill
annually. We completed an annual test for impairment at December 31, 2004
and determined that goodwill was not impaired. At December 31, 2004, the
carrying value of goodwill was $912. Our estimates of future cash flows may
differ materially from actual cash flows due to, technological changes,
economic conditions or changes to our business operations. A charge for
impairment of goodwill may be necessary if we experience a significant
decline in our future cash flows. Such a charge could have a significant
adverse effect on our results of operations and financial position.
- - Income Taxes
We estimate our income taxes in each of the jurisdictions that we operate.
This process requires us to estimate our current tax exposure, together
with assessing temporary differences, which result in deferred tax assets
and liabilities. We recognize deferred tax assets and liabilities based on
the difference between the financial statement carrying amounts and the tax
bases of assets and liabilities. We regularly review our deferred tax
assets for recoverability and establish valuation allowances when we
determine that it is more likely than not that the deferred tax assets
resulting from operating losses will not be realized. Realization of
deferred tax assets (such as net operating loss carryforwards) is dependent
upon future taxable earnings and is therefore uncertain. During fiscal
2003, we reversed $613 of deferred tax valuation allowances on loss
carryforwards that we expect to realize, decreasing our tax expense in the
period we made that reversal. At December 31, 2004, we have provided
valuation allowances in an amount equal to our long-term deferred tax
assets which have resulted from net operating losses in certain foreign and
state tax jurisdictions.
In evaluating exposures associated with various tax filing positions, we
have accrued $951 for probable tax contingencies as of December 31, 2004.
In 2004, we provided an additional $235 related to 2004 tax filing
positions. We believe that our tax contingencies have been adequately
provided for in the accompanying financial statements. To the extent the we
prevail in matters for which accruals have been established or are required
to pay amounts in excess of these accruals, our effective tax rate in a
given financial statement period could be materially affected.
U.S. generally accepted accounting principles allow companies to defer the
recognition of tax liability on undistributed earnings of foreign
subsidiaries that are indefinitely reinvested in the foreign operation. At
December 31, 2004, we had approximately $9,522 of undistributed earnings of
foreign subsidiaries that are indefinitely reinvested in foreign operations
for which we have not recorded deferred income taxes. Were we to repatriate
foreign earnings which have been designated as indefinitely invested in
foreign operations, we would record additional tax expense at the time of
repatriation.
In December 2004, the FASB issued FASB Staff Position No. 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004. FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 should
be accounted for as a special deduction in accordance with SFAS 109 and not
as a tax rate reduction. The adoption of FSP 109-1 will have no impact on
our results of operations or financial position for fiscal 2005 because the
manufacturer's deduction is not available to us until fiscal year 2006. We
are evaluating the effect that the manufacturer's deduction will have in
subsequent years.
The FASB also issued FASB Staff Position No. 109-2, Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004. The AJCA introduces a special
one-time dividends received deduction on the repatriation of foreign
earnings to a U.S. taxpayer, provided specified criteria are met. FSP 109-2
provides accounting and disclosure guidance with respect to this deduction.
Until the Treasury Department or Congress provides additional clarifying
guidance on key elements, the amount of foreign earnings to be repatriated
by us, if any, cannot be determined; however, the presumption that such
unremitted earnings will be repatriated cannot be overcome. FSP 109-2
grants an enterprise additional time beyond the year ended December 31,
2004, in which the AJCA was enacted, to evaluate the effects of the AJCA on
its plan for reinvestment or repatriation of unremitted earnings.
- - Stock-Based Compensation
We have elected to continue to measure stock-based compensation expense
using the intrinsic value method. Accordingly, we measure compensation cost
for stock options and restricted stock awards as the excess, if any, of the
quoted market price of our stock at the date of the grant over the exercise
price an employee must pay to acquire the stock. We calculate compensation
cost for common stock purchase warrants based upon the fair value at the
grant date. We amortize stock-based compensation arising from the issuance
of restricted stock warrants, below market options and stock-based
compensation resulting from common stock purchase warrants over the vesting
period of the stock grant, option term or the warrant term. Amortization of
stock-based compensation amounted to $0 for 2004, $37 for 2003 and $43 for
2002, respectively. In fiscal 2003, we accelerated the vesting of the
common stock purchase warrants which required us to record $416 of
stock-based compensation expense. Had we determined the stock-based
compensation expense for our stock options based upon the fair value at the
grant date for stock option awards our reported net income would have been
reduced by $1,400 in fiscal 2004, $1,138 in fiscal 2003 and $684 in fiscal
2002.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123R, "Share-Based Payment". This statement is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS 123R requires all
share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values. The provisions of this statement are effective for interim or
annual periods beginning after June 15, 2005. We are evaluating the
provisions of this revision to determine its effect on our consolidated
financial statements. We expect that the adoption of this statement will
have a material adverse effect on our results of operations.
- - Hedge Accounting for Derivatives
We enter into forward currency exchange contracts to hedge anticipated
foreign currency exchange transactions, as well as the resulting
intercompany liabilities which are denominated in currencies other than the
functional currency of our foreign operations. These contracts economically
function as effective hedges of the underlying exposures; however, we are
required to record changes in the fair value of these foreign currency
contracts against earnings in the period of the change.
We estimate the fair value of our foreign currency exchange contracts based
on foreign exchange rates as of December 31, 2004. At December 31, 2004,
the notional value of our foreign currency exchange contracts to purchase
U.S. dollars was $8,570. The fair value of our foreign currency exchange
contracts at December 31, 2004 was $8,150. We recorded a charge in 2004 of
$420 against earnings to adjust our derivatives to their fair value. Since
December 31, 2004, the value of the U.S. dollar has strengthened against
the Canadian dollar, the Euro and the Pound Sterling. If the U.S. dollar
were to weaken in comparison to the Pound Sterling, the Canadian dollar or
the Euro, we would record additional charges in fiscal 2005 to adjust our
derivatives to their fair value. The amount of the potential charge is
dependent upon the change in foreign exchange rates from the December 31,
2004 rates to the time that the forward exchange contract matures or to the
foreign exchange rates as of the period end reporting date. These charges
could have a material adverse effect on our future results of operations,
financial position and cash flows.
- - Environmental Costs
We accrue for costs associated with environmental obligations when these
costs are probable and reasonably estimable in accordance with American
Institute of Certified Public Accountants Statement of Position 96-1,
"Environmental Remediation Liabilities (Including Auditing Guidance)". We
generally recognize accruals to address estimated costs for environmental
obligations no later than the date when we learn what cleanup measures, if
any, are likely to occur to address the environmental conditions at issue.
In the year ended December 31, 2004, we recorded a charge of $2,275 to
address environmental conditions at our East Brookfield, Massachusetts
distribution facility. SoP 96-1 defines the costs to be included among
environmental liabilities. In accordance with SoP 96-1, the environmental
charge includes the estimated direct costs to investigate and address the
conditions on the East Brookfield, Massachusetts property and the
associated engineering, legal and consulting costs we expect to incur as we
address those environmental conditions. We discovered the conditions
resulting in this accrual in December 2004. Our investigation is in its
early stage. Our assessment of our liability and the associated costs is an
estimate based upon currently-available information after consultation with
environmental consultants, engineers and attorneys assisting us in
addressing these environmental issues. Our actual costs to address the
environmental conditions may change based on further investigations, based
on the conclusions of regulatory authorities about information gathered in
those investigations and due to the inherent uncertainties involved in
estimating conditions in the environment and the costs of addressing such
conditions. We do not discount costs of expenditures for environmental
obligation to their present value. At December 31, 2004 our accrual for
environmental charges was $2,275. Our costs to address the environmental
conditions at our East Brookfield, Massachusetts could vary materially from
our current estimate. Estimated costs to address the environmental
conditions range from $1,242 to $4,621. If, based upon additional
investigation and study, our actual costs to address the environmental
conditions were to exceed our estimate, we would be required to record
additional environmental charges, which could have a material adverse
effect on our results of operations and cash flows. As of December 31,
2004, we have not identified or made a claim against parties that caused or
are otherwise responsible for the conditions at our facility, and we have
not determined whether such parties exist; nor does our accrual include
legal costs to investigate or pursue potential recoveries from such
parties.
Highlights
Increase (Decrease)
---------------------------------------
2004 vs. 2003 2003 vs. 2002
------------- -------------
Net sales..............................$ 30,086 22.1% $ 2,870 2.2%
Gross profit........................... 15,490 29.5 6,607 14.4
Selling, general and
administrative expenses.............. 7,816 19.4 2,921 7.8
$ Change
------------------------------------------
2004 vs. 2003 2003 vs. 2002
------------- -------------
Operating income.......................$ 5,180 $ 4,054
Income before income taxes
and minority interest................ 4,185 4,293
Net income............................. 1,930 3,245
Percent of Net Sales
------------------------------------
2004 2003 2002
---- ---- ----
Gross profit........................... 40.9% 38.5% 34.4%
Selling, general and
administrative expenses.............. 28.9 29.5 28.0
Operating income ...................... 10.9 9.6 6.7
Income before income taxes
and minority interest................ 10.7 10.0 7.0
Net income ............................ 6.3 6.2 3.9
Consolidated Net Sales
Net sales increased $30,086, or 22%, to $166,152 in fiscal 2004 from $136,066 in
fiscal 2003. Net sales increased $2,870, or 2%, to $136,066 in fiscal 2003 from
$133,196 in fiscal 2002.
On a geographic basis, domestic sales increased $24,194, or 23%, to $127,815 in
fiscal 2004 from $103,621 in fiscal 2003. International sales increased $5,892,
or 18%, to $38,337 in fiscal 2004 from $32,445 in fiscal 2003. $2,623 of our
international sales increase in fiscal 2004 is attributable to favorable changes
in foreign exchange rates, as compared to fiscal 2003. Domestic sales increased
$268, to $103,621 in fiscal 2003 from $103,353 in fiscal 2002. International
sales increased $2,602, or 9%, to $32,445 in fiscal 2003 from $29,843 in fiscal
2002. $2,925 of our international sales increase in fiscal 2003 is attributable
to favorable changes in foreign exchange rates, as compared to fiscal 2002.
Saucony Segment
2004 2003
Total / Change Total / Change 2002
from Prior Year from Prior Year Total
--------------- --------------- -----
Net Sales $140,749 / 25% $112,711 / 2% $110,829
Net Sales: 2004 Compared to 2003
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $28,038, or 25%, to $140,749 in fiscal 2004 from $112,711 in fiscal
2003, due to $27,942 of increased sales of Saucony footwear and $96 of increased
sales of Saucony apparel. In addition, favorable changes in foreign exchange
rates resulting from a weaker U.S. dollar against European and Canadian
currencies in fiscal 2004, as compared to fiscal 2003, increased Saucony
footwear sales by $2,503. The increase in sales of Saucony footwear was due
primarily to a 20% increase in footwear unit volumes partially offset by a 3%
decrease in average wholesale per pair footwear selling prices. The volume of
footwear sold in fiscal 2004 increased 29%, to 4,841 pair from 3,761 pair in
fiscal 2003, primarily due to increased domestic mid-priced cross-over footwear
unit volumes and increased domestic Originals footwear unit volumes and, to a
lesser extent, increased domestic closeout footwear unit volumes, increased
domestic technical footwear unit volumes, increased international technical
footwear unit volumes and increased special makeup footwear unit volumes,
partially offset by lower international Originals footwear unit volumes. Average
domestic and international wholesale per pair footwear selling prices in fiscal
2004 decreased 3%, compared to fiscal 2003. The increase in sales of Saucony
apparel was due primarily to favorable currency exchange, resulting from a
weaker U.S. dollar against European and Canadian currencies, partially offset by
lower domestic apparel sales and decreased apparel sales at our Dutch and
Canadian subsidiaries.
Domestic net sales increased $22,100, or 27%, to $103,820 from $81,720 in fiscal
2003, due primarily to $11,312 of increased sales of mid-priced cross-over
footwear, $5,791 of increased sales of Originals footwear, $2,926 of increased
sales of technical footwear and $2,700 of increased sales of closeout footwear,
offset partially by $598 of decreased sales of special makeup footwear and $31
of decreased sales of Saucony apparel. The volume of domestic footwear sold in
fiscal 2004 increased 36% to 3,857 pair from 2,833 pair in fiscal 2003,
including a 66% increase in mid-priced cross-over footwear unit volumes to 1,130
pair, a 57% increase in Originals footwear unit volumes to 904 pair, an 11%
increase in technical footwear unit volumes to 864 pair, a 151% increase in
closeout footwear unit volumes to 243 pair and a 2% increase in special makeup
footwear unit volumes to 715 pair. The cross-over footwear volume increase was
due primarily to the introduction of several mid-priced models in 2004,
including the Grid T4 and the Grid Aura TR6, along with additional color
variations of the Grid Aura TR5, which we introduced in 2003, sold into the
athletic mall, fashion mall, sporting goods and value channels. The Originals
footwear volume increase was due primarily to our introduction of color
variations of the Jazz Original and Shadow Original models, for both adults and
children, sold into the athletic mall, sporting goods and value channels. The
average domestic wholesale per pair footwear selling price in fiscal 2004
decreased 4%, as compared to fiscal 2003. The lower average wholesale selling
price per pair was due to a change in the product mix of our cross-over,
technical, Originals and special makeup footwear sold to lower price products
and increased cross-over, special makeup and Originals footwear unit volumes,
both of which sell at prices below our first quality technical footwear. Also
contributing to the decreased domestic wholesale per pair selling price decrease
in fiscal 2004 were a $923 increase in volume rebates provided to domestic
customers and a $434 increase in cooperative advertising allowances that did not
meet the requirements of EITF 01-09, which costs are accounted for as a
reduction of net sales.
During the fourth quarter of fiscal 2004, our sales into the athletic and
fashion mall channels of our cross-over footwear decreased 11% and our Originals
footwear decreased 6% from the comparable period in fiscal 2003. We expect
further significant declines in sales of cross-over and Originals footwear into
these channels through the first half of fiscal 2005.
Sales of closeout footwear accounted for approximately 4%, or $4,394, of
domestic Saucony net sales in fiscal 2004 compared to 2%, or $1,694, in fiscal
2003. The increase in closeout footwear sales in fiscal 2004 was primarily due
to increased closeout unit volume sold in the fourth quarter of 2004 to reduce
excess inventory supply of cross-over footwear.
Originals footwear accounted for approximately 23% of fiscal 2004 domestic
footwear unit volume versus 20% in fiscal 2003. The unit volume increase in
Originals footwear in fiscal 2003 was primarily due to increased unit volume of
Jazz Originals and Shadow Originals, for both adults and children, sold into the
athletic mall, sporting goods and value channels.
Our domestic order cancellation rate for fiscal 2004 was comparable with our
historical averages.
International net sales increased $5,938, or 19%, to $36,929 in fiscal 2004 from
$30,991 in fiscal 2003, due to $2,503 attributable to favorable currency
exchange, primarily resulting from a weaker U.S. dollar against European and
Canadian currencies, $2,225 of increased footwear sales at our subsidiaries due
primarily to higher footwear unit volume and, to a lesser extent, higher average
wholesale per pair footwear selling prices, and a $1,291 increase in footwear
sales at our international distributor business due to higher average wholesale
per pair footwear selling prices and a $127 increase in Saucony apparel sales at
our Canadian and British subsidiaries due to favorable currency exchange. The
volume of international footwear sold in fiscal 2004 increased 6%, to 984 pair,
from 928 pair in fiscal 2003. Footwear unit volumes increased 8%, to 620 pair,
from 571 pair, sold at our subsidiaries in fiscal 2004 compared to fiscal 2003.
Our international distributor footwear unit volume increased 2%, to 364 pair,
from 356 pair in fiscal 2004, compared to fiscal 2003. The footwear unit volume
increase at our subsidiaries was due primarily to increased technical footwear
unit volume at our Canadian subsidiary and, to a lesser extent, increased
technical footwear unit volume sold at our Dutch subsidiary, partially offset by
a decrease in special makeup footwear unit volume sold at our British
subsidiary. The international footwear average wholesale per pair selling price
increased due to a change in the product mix to higher priced technical footwear
and decreased unit volume of special makeup footwear sold at our British
subsidiary and a change in the international distributors product mix for
technical footwear to higher priced product.
The footwear unit volume increase at our international distributor business in
fiscal 2004 was due primarily to the expansion by three new distributors of
distribution into China, Taiwan and Russia and increased technical unit volume
sold to European distributors. Footwear unit volume sold into Japan decreased
12% due to a 77% decrease in Originals footwear unit volume, partially offset by
an increase in technical footwear unit volume. Distributor sales into the
Japanese footwear market accounted for $1,364, or 4%, of international sales in
fiscal 2004, compared to $1,357, or 4%, in fiscal 2003.
Net Sales: 2003 Compared to 2002
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $1,882, or 2%, to $112,711 in fiscal 2003 from $110,829 in fiscal
2002, due to $1,073 of increased sales of Saucony footwear and, $809 of
increased sales of Saucony apparel. The increase in sales of Saucony footwear
was due to $2,859 attributable to favorable currency exchange, resulting
primarily from a weaker U.S. dollar against European and Canadian currencies,
partially offset by a $1,456 decrease in domestic footwear sales. The volume of
footwear sold in fiscal 2003 increased 1%, to 3,761 pair from 3,707 pair in
fiscal 2002, primarily due to increased domestic technical footwear unit
volumes, increased domestic Originals footwear unit volumes and increased
special makeup footwear unit volumes, partially offset by lower international
technical and lower international Originals footwear unit volumes. Average
domestic and international wholesale per pair footwear selling prices in 2003
decreased 3% as compared to 2002. The increase in sales of Saucony apparel was
due primarily to sales of new products by our Canadian and British subsidiary.
Domestic net sales decreased $1,462, or 2%, to $81,720 from $83,182 in fiscal
2002, due primarily to $2,565 of decreased sales of closeout footwear, $168 of
decreased sales of special makeup footwear and $6 of decreased sales of Saucony
apparel, offset partially by $995 of increased sales of technical footwear and
$284 of increased sales of Originals footwear. The volume of domestic footwear
sold in fiscal 2003 increased 2% to 2,833 pair from 2,775 pair in fiscal 2002,
including a 12% increase in technical footwear unit volumes to 1,460 pair, an 8%
increase in Originals footwear unit volumes to 578 pair and a 2% increase in
special makeup footwear unit volumes to 698 pair, partially offset by a 61%
decrease in closeout footwear unit volumes to 97 pair. The technical footwear
volume increase was due primarily to our introduction of the Grid Aura TR 5, a
mid-priced model, in 2003. The average domestic wholesale per pair footwear
selling price in 2003 decreased 7% in fiscal 2003, as compared to fiscal 2002.
The lower average wholesale selling price per pair was due to a change in the
product mix of our technical, Originals and special makeup footwear sold to
lower price products and increased special makeup footwear and increased
Originals footwear unit volumes, both of which sell at prices below our first
quality technical footwear.
Sales of closeout footwear accounted for approximately 2%, or $1,694, of
domestic Saucony net sales in fiscal 2003 compared to 5%, or $4,249, in fiscal
2002. The decrease in closeout footwear sales was due to lower inventory
quantities of past season footwear available for sale in fiscal 2003 due to
improvements in our supply chain.
Originals footwear accounted for approximately 20% of fiscal 2003 domestic
footwear unit volume versus 19% in fiscal 2002. The unit volume increase in
Originals footwear was primarily due to increased unit volume of Jazz Originals
sold into the mall channel.
Our domestic order cancellation rate for fiscal 2003 was comparable with our
historical averages.
International net sales increased $3,344, or 12%, to $30,991 in fiscal 2003 from
$27,647 in fiscal 2002, due to $2,859 attributable to favorable currency
exchange, primarily resulting from a weaker U.S. dollar against European and
Canadian currencies, $815 of increased sales of Saucony apparel and $13 of
increased footwear sales at our subsidiaries due to higher footwear unit volume,
partially offset by a $343 decrease in footwear sales at our international
distributor business. Our international Saucony apparel sales increased
primarily due to sales of new products by our Canadian and British subsidiaries.
The footwear unit volume increase at our subsidiaries was due primarily to
increased special makeup footwear unit volume sold by our British subsidiary,
partially offset by decreased technical footwear unit volume at our Canadian
subsidiary and, to a lesser extent, decreased technical footwear unit volume
sold at our Dutch subsidiary. The overall volume of international footwear sold
in fiscal 2003 decreased to 928 pair from 932 pair in fiscal 2002. Footwear unit
volumes decreased 3%, to 357 pair, at our international distributor business,
partially offset by a 1% increase in footwear unit volume, to 571 pair, sold at
our subsidiaries in fiscal 2003 compared to fiscal 2002. Footwear unit volume at
our international distributor business decreased in fiscal 2003 due primarily to
a 5% decrease in Originals footwear unit volume sold in the Japanese footwear
market partially offset by a 29% increase in technical footwear unit volumes
sold in Australia, Israel and Sweden. Distributor sales into the Japanese
footwear market accounted for $1,357, or 4%, of international sales in fiscal
2003, compared to $2,494, or 9%, in fiscal 2002. The international footwear
average wholesale per pair selling price decreased due to a change in the
product mix to lower priced technical footwear and increased unit volume of
special makeup footwear sold at our British subsidiary and by a change in the
international distributors product mix for technical footwear to lower priced
product.
Other Products Segment
2004 2003
Total / Change Total / Change 2002
from Prior Year from Prior Year Total
--------------- --------------- -----
Net Sales $25,403 / 9% $23,355 / 4% $22,367
The Other Products segment consists of our Hind athletic apparel, twenty-one
factory outlet stores, Spot-bilt coaches' and officials' shoes, cleated football
and multi-purpose footwear, casual walking and workplace footwear and sales of
our Hyde Authentic casual footwear, the distribution of which we discontinued in
fiscal 2002. Each of the businesses represented less than 10% of total revenues.
In the aggregate, these businesses represented 15% of consolidated net sales in
fiscal 2004.
Net Sales: 2004 Compared to 2003
Worldwide sales of Other Products increased $2,048, or 9%, to $25,403 in fiscal
2004 from $23,355 in fiscal 2003 due primarily to $2,250 of increased sales at
our factory outlet division, $135 of increased domestic sales of our Hind brand
apparel and, to a lesser extent, $133 of increased sales of our Spot-bilt brand
footwear and $120 attributable to favorable currency exchange, primarily
resulting from a weaker U.S. dollar against European and Canadian currencies,
partially offset by $583 of decreased international sales of our Hind brand
apparel and $7 of decreased sales due to the discontinuance of our Hyde
Authentics footwear line.
Domestic net sales of Other Products increased $2,094, or 10%, to $23,995 in
fiscal 2004 from $21,901 in fiscal 2003 due primarily to a 22% increase in sales
at our factory outlet division, to $10,152 in 2004, compared to $8,318 in 2003,
resulting primarily from the addition of two outlet stores in fiscal 2004 and,
to a lesser extent, a 1% increase in Hind brand apparel sales, to $12,861 in
2004, compared to $12,726 in 2003. Hind apparel sales increased $135 due
primarily to a 1% increase in the average wholesale unit selling price of our
Hind apparel brand. Unit volumes of our Hind apparel decreased to 874 units in
fiscal 2004, compared to 877 units in fiscal 2003. The increase in the average
wholesale per item selling price for our Hind apparel brand was due primarily to
increased special makeup unit volumes sold in fiscal 2003, which products we
sell at unit prices below our first quality apparel, and increased unit volume
in our running and fitness product categories, which carry lower selling prices
than our cycling category. The decreased Hind apparel unit volume was due
primarily to decreased special makeup unit volumes sold in fiscal 2004. Both the
decrease in Hind apparel unit volume and the increase in the average wholesale
per item selling price of our Hind apparel are due to lower special makeup unit
volumes sold in fiscal 2004, compared to fiscal 2003. Sales of special makeup
apparel accounted for approximately 10% of Hind apparel domestic net sales in
fiscal 2004, compared to 23% of Hind domestic net sales in fiscal 2003. The
decrease in special makeup sales in fiscal 2004 is due to the production and
sale during fiscal 2003 of surplus special makeup closeout apparel from
remaining raw materials in connection with our change in product sourcing.
Domestic sales at our factory outlet stores open for more than one year
increased 6%, or $497, in fiscal 2004, compared to fiscal 2003. Spot-bilt brand
sales increased 16% in fiscal 2004 to $982, compared to $850 in fiscal 2003, due
primarily to a 42% increase in footwear unit volumes, primarily due to increased
cleated and walking/duty footwear unit volumes, partially offset by a 19%
decrease in wholesale per pair selling prices due to closing out certain
walking/duty styles.
International net sales of Other Products decreased $46, or 3%, to $1,408 in
fiscal 2004 compared to $1,454 in fiscal 2003, due primarily to $583 of
decreased Hind apparel sales, due primarily to discontinuing Hind apparel
distribution at our Dutch subsidiary and decreased Hind apparel sales at our
Canadian and British subsidiaries, partially offset by $416 of increased sales
at our Canadian factory outlet stores and, to a lesser extent, $120 attributable
to favorable currency exchange primarily resulting from a weaker U.S. dollar
against European and Canadian currencies.
Net Sales: 2003 Compared to 2002
Worldwide sales of Other Products increased $988, or 4%, to $23,355 in fiscal
2003 from $22,367 in fiscal 2002 due primarily to $1,439 of increased sales at
our factory outlet division, $599 of increased domestic sales of our Hind brand
apparel and, to a lesser extent, $89 of increased sales of our Spot-bilt brand
footwear and $66 attributable to favorable currency exchange, primarily
resulting from a weaker U.S. dollar against European and Canadian currencies.
These effects were partially offset by $808 of decreased international sales of
our Hind brand apparel and $397 of decreased sales due to the discontinuance of
our Hyde Authentics footwear line.
Domestic net sales of Other Products increased $1,730, or 9%, to $21,901 in
fiscal 2003 from $20,171 in fiscal 2002, due primarily to a 21% increase in
sales at our factory outlet division, to $8,318 in 2003, compared to $6,879 in
2002, resulting primarily from the addition of five outlet stores in fiscal 2003
and, to a lesser extent, a 5% increase in Hind brand apparel sales, to $12,726
in 2003, compared to $12,127 in 2002. Hind apparel sales increased $599 due
primarily to an 18% increase in unit volume of our Hind apparel, partially
offset by an 11% decrease in the average wholesale unit selling price of our
Hind apparel brand. The increased Hind apparel unit volume was due primarily to
increased special makeup unit volumes and increased volume of our running and
fitness product categories. The decrease in the average wholesale unit selling
price for our Hind apparel brand was due primarily to increased special makeup
unit volumes sold in fiscal 2003, which products we sell at unit prices below
our first quality apparel, and increased unit volume in our running and fitness
product categories, which carry lower selling prices than our cycling category.
2003 results also reflect $397 of decreased sales of Hyde Authentics footwear as
a result of our discontinuing this product line. Partially offsetting the sales
increase at our factory outlet stores were a $124, or 2%, decrease in 2003, as
compared to 2002, in sales at our factory outlet stores open for more than one
year and $203 of decreased sales as a result of closing a factory outlet store
in May 2002. Spot-bilt brand sales increased 12% in fiscal 2003 to $850,
compared to $760 in fiscal 2002, due primarily to increased wholesale per pair
selling prices, partially offset by a decrease in footwear unit volumes.
International net sales of Other Products decreased $742, or 34%, to $1,454 in
fiscal 2003 compared to $2,196 in fiscal 2002, due primarily to $808 of
decreased Hind apparel sales at our European and Canadian subsidiaries,
partially offset by $66 attributable to favorable currency exchange primarily
resulting from a weaker U.S. dollar against European and Canadian currencies.
Cost and Expenses
2004 Compared to 2003
Our gross margin percentage increased 2.4% to 40.9% in fiscal 2004 from 38.5% in
fiscal 2003 due primarily to a reduction in our product costs. Our product costs
decreased primarily due to a $2.973 decrease in international footwear product
costs due to favorable currency exchange reflecting the impact of a weaker U.S.
dollar against European and Canadian currencies, a $929 decrease in Saucony
domestic footwear product costs reflecting negotiated price reductions and lower
mold costs, $639 of volume rebates provided by two of our Saucony footwear
suppliers, a $287 decrease in Hind product costs reflecting a change in our
product sourcing to finished goods, a $193 decrease in our factory outlet
product costs reflecting increased factory direct footwear purchases, and a $179
decrease in Spot-bilt inventory provisions taken in fiscal 2004. Other factors
contributing to our gross margin increase in fiscal 2004 are a 57% increase in
lower margin Hind special makeup closeout apparel sales and a 27% increase in
Saucony domestic footwear at once shipments, which carry lower discounts.
Offsetting these decreases in cost of sales were a $923 increase in volume
rebates provided to Saucony domestic customers in 2004, a $732 increase in sales
discounts at our International subsidiaries, due primarily to increased
incentives offered by our British and Dutch subsidiaries to increase sales, and
a $434 increase in cooperative advertising allowances which were accounted for
as a reduction of net sales. Other factors offsetting the increase in gross
margin in fiscal 2004 were increased footwear unit volume of mid-priced
cross-over footwear sold into the athletic mall, sporting goods and value
channels at lower gross margins and increased closeout footwear unit volume sold
in the fourth quarter of fiscal 2004 at lower gross margins. Included in our
fiscal 2003 gross margin is a charge of $416 recorded in cost of sales due to
accelerating the vesting on common stock purchase warrants held by five footwear
suppliers.
Selling, general and administrative expenses as a percentage of net sales
decreased to 28.9% in fiscal 2004 compared to 29.5% in fiscal 2003. The decrease
in the percentage resulted from net sales increasing at higher rate than the
increased advertising, selling and administrative expenses in fiscal 2004.
Selling, general and administrative expenses increased to $48,015, or 19%, from
$40,199 in fiscal 2003, due primarily to a $1,854 increase in professional fees,
$1,095 increase in administrative and selling payroll and related fringe
benefits due to increased staffing, $881 increase in bad debt expense, $702
increase in incentive compensation, $550 increase in advertising, primarily in
print media, $440 of operating expenses associated with the factory outlet
division expansion, $432 increase in variable selling expenses, $400 increase in
marketing communication costs, $380 increase in promotion costs due to increased
participation at running and triathlon events and a $197 increase in
depreciation. The effects of foreign exchange rate changes increased selling and
administrative expenses by $575 in fiscal 2004, compared to fiscal 2003.
Included in professional fees in fiscal 2004 were $1,119 of professional fees
associated with our assessment of internal controls as required under Section
404 of the Sarbanes-Oxley Act of 2002 and $592 of legal and professional fees
related to our review of strategic alternatives and related matters. Bad debt
expense increased primarily due to the favorable litigation settlement which
reduced bad debt expense by $566 in fiscal 2003 and the bankruptcy filings by
two accounts.
2003 Compared to 2002
Our gross margin percentage increased 4.1% to 38.5% in fiscal 2003 from 34.4% in
fiscal 2002 due primarily to a reduction in our product costs. Our product costs
decreased primarily due to a $1,930 decrease in international footwear product
costs reflecting favorable currency exchange due to the impact of a weaker U.S.
dollar against European and Canadian currencies, a $1,311 decrease in Hind
product costs, reflecting a change in our product sourcing to finished goods, a
$996 decrease in Saucony domestic footwear product costs, reflecting negotiated
price reductions and lower mold costs, a $395 reduction in Hind inventory
reserve provisions taken in 2003 and a $225 decrease in our factory outlet
product costs, reflecting increased factory direct footwear purchases.
Offsetting these decreases in cost of sales were a pre-tax charge of $416
recorded in cost of sales due to accelerating the vesting on common stock
purchase warrants held by five footwear suppliers, a $139 increase in Spot-bilt
inventory reserve provisions taken on slow-moving Spot-bilt brand inventory and
a $300 increase in volume incentive rebates provided to Saucony domestic
customers in 2003.
Selling, general and administrative expenses as a percentage of net sales
increased to 29.5% in fiscal 2003 compared to 28.0% in fiscal 2002. The increase
in the percentage resulted from increased advertising, selling and
administrative expenses in fiscal 2003. Selling, general and administrative
expenses increased to $40,199, or 8%, from $37,278 in fiscal 2002, due primarily
a $1,636 increase in administrative and selling payroll and related employment
taxes, a $480 increase in employee healthcare costs, $426 in increased incentive
compensation, $424 of increased operating expenses associated with the factory
outlet division expansion, $363 in increased print media advertising, $217
increase in severance costs, $220 in increased professional fees and $175 in
increased business insurance costs. The effects of foreign exchange rate changes
increased selling and administrative expenses by $674 in fiscal 2003, compared
to fiscal 2002. These increases were partially offset by lower provisions for
bad debt expense, due to the favorable litigation settlement which reduced bad
debt expense by $566, and, to a lesser extent, a $300 reduction in variable
selling expense, $260 in lower depreciation expense and a $257 decrease in
account specific advertising and promotion expense.
Environmental Charge
In fiscal 2004, we recorded a charge of $2,275 to address environmental
conditions at our East Brookfield, Massachusetts distribution facility. We
acquired this facility as part of an asset purchase in March 1985. We believe
the contamination is the result of manufacturing activities that took place in
the facility in the early and mi