SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended January 1, 1999 Commission file number: 000-05083
Saucony, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 532-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.33-1/3 par value
(Title of class)
Class B Common Stock, $.33-1/3 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting and non-voting stock held by non-affiliates
of the registrant, as of March 26, 1999, was approximately $39,848,000 (based on
the closing prices of the Class A Common Stock and Class B Common Stock on such
date as reported on the Nasdaq National Market).
The number of shares of the registrant's Class A Common Stock, $.33-1/3 par
value, and Class B Common Stock, $.33-1/3 par value, outstanding on March 26,
1999 was 2,679,027 and 3,549,905, respectively.
Portions of the following documents are incorporated by reference in this
Report.
Documents Incorporated by Reference
Document Form 10-K Part
Proxy Statement for Annual Meeting of Part III
Stockholders of the Registrant to
be held on May 20, 1999, to be
filed with the Securities and Exchange
Commission.
<PAGE>
PART I
ITEM 1 - BUSINESS
OVERVIEW
Saucony, Inc. and its subsidiaries (together, "Saucony" or the "Company")
design, develop, manufacture and market (i) a broad line of performance-oriented
athletic shoes for adults under the Saucony(R) brand name, (ii) high-quality
bicycles, bicycle frames and component parts under the Quintana Roo(R),
Merlin(R) and Real Design(R) names, (iii) athletic apparel under the Hind(R)
brand name and (iv) shoes for coaches and officials under the Spot-Bilt(R) name.
The Company's Saucony athletic footwear products include running, women's
walking, cross training and outdoor trail shoes. The following table sets forth
the approximate contribution to net sales (in dollars and as a percentage of net
sales) attributable to the Company's Saucony product line and other product
lines for the periods and geographic areas indicated. "Other" consists of the
Quintana Roo, Real Design, Merlin, Hind and Spot-Bilt businesses, together with
sales of the Company's products at six retail factory outlets operated by the
Company, and sales of other branded products at the Company's subsidiary in
Australia, which ceased operations in July 1998 and is in the process of
liquidation.
<TABLE>
Net Sales
<CAPTION>
(dollars in thousands)
Fiscal 1998 Fiscal 1997 Fiscal 1996
----------------------------- ------------------------------- -----------------------------
Sales Sales Co. Sales Sales Co. Sales Sales Co.
$ % % $ % % $ % %
Saucony
<S> <C> <C> <C> <C> <C> <C>
Domestic $ 67,774 79% $ 56,050 71% $ 54,445 69%
International 18,558 21% 22,580 29% 24,366 31%
---------- ------ ---------- ------ ----------- -------
Total $ 86,332 100% 82% $ 78,630 100% 84% $ 78,811 100% 86%
---------- ------ ---------- ------ ----------- -------
Other
Domestic $ 15,590 83% $ 9,552 64% $ 5,791 46%
International 3,152 17% 5,429 36% 6,739 54%
---------- ------ ---------- ------ ----------- -------
Total $ 18,742 100% 18% $ 14,981 100% 16% $ 12,530 100% 14%
---------- ------ ------ ---------- ------ ------- ----------- ------- ------
Grand Total $ 105,074 100% $ 93,611 100% $ 91,341 100%
========== ====== ========== ======= =========== ======
</TABLE>
Saucony Brand
The Company sells performance running, walking, cross training, and outdoor
trail shoes for athletes under the Saucony brand name, which has been marketed
in the United States for over 30 years. The Company assembles a large portion of
its Saucony footwear sold in the United States at its manufacturing facility in
Bangor, Maine, largely with components sourced from independent manufacturers
located overseas. The Company believes that assembly at its Bangor facility
assists in timely and flexible product delivery in the domestic market.
Saucony products are designed, developed, manufactured, distributed, marketed
and ultimately sold to athletes who who have a high participation rate in their
sport of choice. The Company calls that "Loyal to the Sport". The Company
believes that that these consumers are more brand loyal than those who buy
athletic footwear for casual use. The Company has several different offerings
within each Saucony brand category. These offerings have different designs and
features, resulting in different cushioning, stability, support characteristics
and prices.
The Company builds a variety of technical features into its shoes. The Company
has been focused for many years on the applications of biomechanical technology
to the design process. This helps drive the distinctive "fit and feel" that
Saucony products are known for. Research and Development is charged with
constantly finding new ways to apply the equity in Saucony's "famous ride"
throughout the product line.
Most of the Company's technical running and other athletic shoes incorporate the
Company's GRID System, a multi-patented and innovative midsole system that
employs molded strings engineered to create a feeling similar to that of the
"sweet spot" of a tennis racquet. In contrast with conventional athletic shoe
midsoles, the GRID System is designed to react to various stress forces
differently and thereby simultaneously to maximize shock absorption and minimize
rear foot motion. First introduced in 1991, the GRID system has evolved into
many different applications. The latest, 4D GRID, will be available in the
United States marketplace beginning in mid-April of 1999. This state-of-the-art
product will retail for $140 and is anticipated to add high visability to
Saucony's technical running line.
The Company designs and markets separate lines for men and women within most
Saucony product categories. The Company currently sells approximately the same
percentage of Saucony shoes to men and women. The suggested domestic retail
prices for most Saucony footwear products are in the range of $40 to $85 per
pair, with the Company's top-of-the-line running shoes having suggested domestic
retail prices of up to $140 per pair.
The Company designs its Saucony cross training, women's walking and outdoor
trail shoes with many of the same performance features and "fit and feel"
characteristics as are found in Saucony running shoes. Currently, the Company's
most popular non-running athletic shoe is a women's performance walking shoe.
In 1998, the Company reintroduced a popular model of the Saucony running line
from 1981 called the Jazz. Renamed the Jazz Original, this product gained a wave
of popularity due to the style trend toward "retro" products in footwear and
apparel. The Jazz Original program has assisted Saucony in gaining greater
market share among the under-25 year old athletic footwear buyer. This has
traditionally been a challenge for the Company, but this popular product may
serve to be a "door opener" to greater visibility and sales of the broader
Saucony brand offering with this very large and influential consumer segment.
The Company believes that a line of athletic apparel bearing the Saucony name is
supportive of its athletic footwear products and enhances the visibility of the
Saucony brand. Saucony markets apparel under both the Dave Scott and Saucony
labels. These products carry the same commitment to quality and performance as
the Company's footwear line. The Dave Scott line is an upscale multi-sport and
triathlon collection, while the Saucony apparel line is targeted at the
mainstream running consumer.
Other Products
Hind. In December 1996, the Company purchased the trademarks and related
intellectual property of Hind, Inc., a performance athletic apparel company. The
Company distributes a full line of technical fiber garments for use in a variety
of sports.
Quintana Roo. The Company manufactures and distributes the Quintana Roo line of
triathlon bicycles, road bicycles, and wet suits, together with bicycle
component parts, through high-end bicycle retail stores and sporting goods
stores geared to tri-athletes.
Factory Outlet Stores. The Company operates six retail factory outlet stores. To
avoid competing against its customers' retail outlets, the Company generally
limits the items offered at these stores to products with cosmetic defects,
discontinued merchandise and certain slow-moving products. The Company sells
Saucony, Hind, Spot-Bilt and Quintana Roo products at these outlets, as well as
athletic accessory goods of third parties.
Merlin. In February 1998, the Company acquired substantially all of the assets
of Merlin Materials, Inc. The Company manufactures and distributes high
performance titanium bicycles and frames under the Merlin trademark.
Spot-Bilt. The Company offers Spot-Bilt shoes for coaches and officials. In
addition, the Company has licensed the Spot-Bilt name and logo to a third party
that distributes youth shoes for field sports.
Real Design. Acquired in August 1998, "Real" designs and markets bicycle
components for the mid to high end price range. Real sells through distributors
worldwide under the Real Design brand name.
Product Development
The Company believes that the technical performance (i.e., comfort, support and
stability experienced by the athlete) of its Saucony footwear is important to
purchasers of its products. The Company uses consulting services of such
professionals as podiatrists, orthopedists, athletes, trainers and coaches as
part of its Saucony product development program. The Company maintains a staff
of 17 persons located in Peabody, Massachusetts to undertake continuing product
development and design. During the years ended January 1, 1999, January 2, 1998
and January 3, 1997, the Company expended $1,681,000, $1,438,000 and $1,417,000,
respectively, in connection with its product development programs, most of which
related to Saucony products.
SALES AND MARKETING
Saucony Brand. The Company's Saucony athletic footwear products are sold at more
than 5,000 retail outlets in the United States, primarily higher-end,
full-margin sporting goods chains, independent sporting goods stores, athletic
footwear specialty stores and department stores. Retail outlets include Foot
Locker/Lady Foot Locker, Athlete's Foot, The Sports Authority, Road Runner's
Sports, Foot Action and Just For Feet. The Company maintains a corporate sales
team that is directly responsible for the sales activity in its largest 48
accounts. The Company also sells its footwear and apparel in the United States
through 13 independent manufacturer agents whose organizations employ
approximately 44 sales representatives. The Company's Websites (saucony.com) and
(sock-a-knee.com) receive thousands of "hits" weekly from consumers looking for
new product profiles, race and event data, as well as general Saucony
information.
The Company sells its Saucony products outside the United States in 26 countries
through 16 distributors located throughout the world, including a Canadian
subsidiary in which the Company holds an 85% ownership interest and the
Company's wholly-owned subsidiaries based in the United Kingdom, Germany and the
Netherlands.
To accommodate its customers' requirements and plan for its own product needs,
the Company employs a futures orders program for its Saucony and bicycle
products under which the Company takes orders well in advance of the selling
season for a particular product and commits to ship the product to the customer
in time for the selling season. The Company affords customers price discounts
and extended payment terms in respect of such advance orders.
Saucony engages in various advertising and promotional programs. The main media
vehicles used are magazines and television. The Company employs many sports
marketing initiatives to drive brand awareness and image to athletes. Examples
include Saucony Running and Racing seen monthly on ESPN, as well as sponsorship
of the L.A. Marathon and Chase Corporate Challenge race series. To build
in-store presence, the Company uses account-specific and in-store promotions,
such as athlete appearances, special events, gift with purchase programs and
discounts for store employee purchases of Company products.
Although most of the Company's advertising and promotional programs for its
Saucony brand are directed towards ultimate consumers, the Company promotes
these products to the trade through attendance at trade shows and similar
events. The Company employs an advertising program under which it reimburses
participating retailers for a portion of the costs incurred by such retailers in
advertising the Company's Saucony products.
The Company's advertising of non-Saucony products includes advertisements in
magazines and product promotion through attendance at trade shows and similar
events.
Backlog; Seasonality; Distribution. The Company's backlog of unfilled orders was
approximately $55.1 million at January 1, 1999 and $42.0 million at January 2,
1998. The Company expects that all of its backlog at January 1, 1999 will be
shipped in fiscal 1999. While the Company has not generally experienced material
cancellations of orders, orders may be cancelled by customers without financial
penalty, and backlog does not necessarily represent actual future shipments.
The Company is subject to seasonality in its product sales because of the
different selling seasons for various products and variability of weather. The
Company distributes its Saucony and Hind products from its owned warehouse in
Massachusetts and a leased warehouse in Canada, as well as through third party
operated warehouse facilities located in California, the Netherlands and the
United Kingdom. The Company distributes its Quintana Roo and Real Design
products through its leased warehouse in California and Merlin products through
its leased warehouse in Massachusetts.
MANUFACTURING
The Company assembles most of its domestically sold Saucony technical footwear
at its manufacturing facility in Maine, largely with components sourced from
independent manufacturers located overseas. Independent overseas manufacturers
produce the balance of the Company's Saucony products and all of the Company's
Spot-Bilt products. Quintana Roo and Merlin products are manufactured by the
Company in California and Massachusetts, respectively. Bicycle components under
the Real Design brand name are principally manufactured in Taiwan by third
parties. The Company outsources the production of most of its Hind products to
manufacturers in the United States.
The overseas manufacturers that supply products and components to the Company
are located in the Far East, primarily in China, but also in Taiwan and
Thailand. The Company seeks to develop additional overseas manufacturing sources
from time to time, both to increase its sourcing capacity and to obtain
alternative sources of supply. All products and components produced by foreign
suppliers are manufactured in accordance with product specifications furnished
by the Company. The Company carefully monitors foreign manufacturing operations
and imported products and components to assure compliance with the Company's
design, production and quality requirements.
Raw materials required for the manufacture of the Company's products, including
leather, rubber, nylon, titanium, aluminum and other fabrics, are generally
available in the country in which the products are manufactured. The Company and
its suppliers have not experienced any difficulty in satisfying their raw
material needs to date.
The number of foreign suppliers and the percentage of the Company's total
foreign production requirements produced by each such supplier vary from time to
time. During fiscal 1998, the Company purchased footwear products from 24
overseas suppliers. One such supplier, located in China, accounted for
approximately 49% of the Company's total overseas footwear purchases by dollar
volume.
The Company is subject to the potential risks of a business involving foreign
suppliers, such as government regulation of fund transfers, export and import
duties and political and labor instability. The Company has not been materially
affected by any of these factors to date. Substantially all purchases from
foreign suppliers to date have been denominated in United States dollars in
order to reduce the Company's risk from currency fluctuations.
Although the Company has no long-term manufacturing agreements with its overseas
suppliers and competes with other athletic shoe (including companies that are
much larger than the Company) for access to production facilities, management
believes that the Company's relationships with its footwear and other suppliers
are strong and that it has the ability to develop, over time, alternative
sources in various countries for footwear, footwear components and other
products obtained from its current suppliers. However, in the event of a supply
interruption, the Company's operations could be materially and adversely
affected if a substantial delay occurred in locating and obtaining alternative
sources of supply.
TRADE POLICY
The Company's practice of sourcing products and components overseas, with
subsequent importation into the United States, exposes it to possible product
supply disruptions and increased costs in the event of actions by United States
or foreign government agencies adverse to continued trade or the enactment of
legislation that restricts trade.
As an example, the Company imports significant amounts of product and components
from China. The United States provides China with most-favored nation ("MFN")
status, allowing China to receive the same tariff treatment that the United
States extends to its "most favored" trading partners. Notwithstanding this
current policy, Congress could seek to revoke MFN for China or condition its
renewal on factors such as China's human rights accord. Any cancellation of MFN
status with China would significantly add to the Company's cost of goods and/or
restrict the supply of product from that country.
The Company is unable to predict whether additional U.S. customs duties, quotas
or other restrictions may be imposed in the future upon the importation of its
products and/or components as a result of any of the matters discussed above, or
because of similar foreign government actions. Any such occurrences might
adversely affect the sales or profitability of the Company, possibly materially.
COMPETITION
Competition is intense in the markets in which the Company sells its products.
The Company competes with a large number of other companies, both domestic and
foreign. Several competitors are large organizations with diversified product
lines, well-known brands and financial resources substantially greater than
those of the Company. The principal competitors for the Company's Saucony
products are Nike, New Balance and ASICS. The principal competitors for the
Company's Hind products are Nike, Pearl Izumi and TYR. The principal competitors
for the Company's Quintana Roo and Merlin products are Cannondale and Trek. The
Company believes that the key competitive factors as to for all of its products
are styling, durability, technical performance, product identification through
promotion, brand awareness and price. Customer support services and E.D.I.
(Electronic Data Interchange) are also important competitive factors. The
Company believes that it is competitive in all of these areas.
TRADEMARKS
The Company utilizes trademarks on nearly all of its products and believes that
having distinctive marks is an important factor in marketing its goods. The
Company has registered its Saucony(R), Spot-Bilt(R), G.R.I.D.(R), Quintana
Roo(R), Merlin(R) and Hind(R) marks, among others, in the United States. The
Company has also registered some of these marks in a number of foreign
countries. Although the Company has a foreign trademark registration program for
selected marks, no assurance can be given that it will be able to register or
use such marks in each foreign country in which registration is sought.
EMPLOYEES
At January 1, 1999, the Company employed approximately 471 people worldwide: 409
in the United States and 62 at foreign locations. The Company believes that its
employee relations are excellent. The Company has never experienced a strike or
other work stoppage. There were approximately 25 employees in the Company's
Massachusetts warehouse who were represented by a union at January 1, 1999. None
of the Company's other employees are represented by a union or subject to a
collective bargaining agreement.
ITEM 2 - PROPERTIES
The Company's general and executive offices and its main distribution facility
are located in Peabody, Massachusetts, and are owned by the Company. This
facility consists of approximately 175,000 square feet, of which 145,000 square
feet is warehouse space.
The Company owns a facility in Bangor, Maine, containing approximately 82,000
square feet of space, substantially all of which is used for the assembly of the
Company's Saucony running shoes, mostly with imported components. The Company
also owns an inactive warehouse in East Brookfield, Massachusetts, containing
approximately 100,000 square feet.
The Company also leases approximately 15,000 square feet of manufacturing and
office space in San Marcos, California, 13,600 square feet of manufacturing and
office space in Cambridge, Massachusetts and an additional 4,000 square feet of
office space is leased in Boulder, Colorado.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in routine litigation incident to its business. In
management's opinion, none of these proceedings will have a material adverse
effect on the Company's financial position, operations or cash flows.
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Age Position
John H. Fisher 51 President, Chief Executive Officer
and Director
Charles A. Gottesman 48 Executive Vice President,
Chief Operating Officer, Treasurer
and Director
Terence P. Chin 43 Senior Vice President,
Chief Financial Officer
Arthur E. Rogers, Jr. 36 President, Saucony North America
Wolfgang Schweim 46 President, Saucony International
Kenneth W. Graham 45 Senior Vice President,
Research & Development/Textiles
Roger P. Deschenes 40 Vice President, Controller and
Chief Accounting Officer
Daniel J. Horgan 43 Vice President, Operations
Andrew M. James 42 Vice President, MIS
John H. Fisher has served as Chief Executive Officer of the Company since 1991.
He was elected President and Chief Operating Officer in 1985 after having served
as Executive Vice President from 1981 to 1985 and as Vice President, Sales from
1979 and 1981. Mr. Fisher is a member of the World Federation of Sporting Goods
Industries, is the former Chairman of the Athletic Footwear Council of the
Sporting Goods Manufacturers Association, and is a member of various civic
associations. Mr. Fisher became a director in 1980.
Charles A. Gottesman has served as Executive Vice President and Chief Operating
Officer of the Company since 1992, and served as Executive Vice President,
Finance from 1989 to 1992, Senior Vice President from 1987 to 1989, Vice
President from 1985 to 1987, and Treasurer since 1983. Mr.
Gottesman became a director in 1983 and is the brother-in-law of John H. Fisher.
Terence P. Chin joined the Company in March 1999 as Senior Vice President and
Chief Financial Officer. Prior to joining the Company, Mr. Chin was an
independent consultant and from 1996 to 1998 was Treasurer of Lexmark
International, Inc., a manufacturer of computer printers and supplies. Mr. Chin
was also Assistant Treasurer of Joseph E. Seagram & Sons, Inc., a manufacturer
of distilled spirits and beverages, and Merck, Inc., a pharmaceutical
manufacturer, from 1993 to 1995 and 1989 to 1992, respectively.
Arthur E. Rogers, Jr. became the President of Saucony North America in January
1998. Mr. Rogers re-joined the Company as Senior Director of Global Marketing in
1994, having previously served as Brand Manager from 1990 to 1992. Most
recently, Mr. Rogers has been the Vice President of North American Sales and
Worldwide Marketing. Prior to joining the Company, Mr. Rogers held various sales
and marketing positions at Proctor & Gamble, Inc., a diversified consumer
products company, as well as Converse Shoe, Inc., an athletic shoe company.
Wolfgang Schweim became the President of Saucony International in January 1998
after serving as President of the Company's athletic footwear division from June
1994 to January 1998. From 1993 to 1994, Mr. Schweim served as Managing Director
for Saucony Europe. From 1989 to 1993, Mr. Schweim was the German Managing
Director and Marketing Sales Manager for Europe at Asics, an athletic shoe
manufacturer. Prior to 1989, Mr. Schweim worked in sales and marketing positions
with shoe manufacturers including Nike International, Le Coq Sportif and Adidas
AG.
Kenneth W. Graham became Senior Vice President of Research and
Development/Textiles in January 1998 after serving as Senior Vice President of
Research and Development/Manufacturing since 1996. Prior to that Mr. Graham
served as Vice President of Research and Development/Manufacturing. Mr. Graham
joined the Company in 1984 and has served as Manager and Vice President of
Research and Development. Prior to joining the Company, Mr. Graham worked for
seven years with New Balance Athletic Shoe, Inc.
Roger P. Deschenes has served as Vice President, Controller since August 1997,
after having served as Controller and Chief Accounting Officer from October 1995
to August 1997. Mr. Deschenes joined the Company in 1990 as Corporate Accounting
Manager. He was employed at Allen-Bradley Company, a subsidiary of Rockwell
International, Corp., from 1987 to 1990 as Financial and Cost Reporting
Supervisor. Mr. Deschenes is a Certified Management Accountant.
Daniel J. Horgan became Vice President of Operations in September 1995 after
serving as Senior Director of Operations from September 1994 to September 1995.
Mr. Horgan joined the Company in 1982 as Manager of Import and Export
Operations, served as Product Procurement and Distribution Manager from 1985 to
1988, Manager of Production from 1988 to 1992, and Director of International
Trade for the Company from 1992 to 1994.
Andrew M. James joined the Company in February 1984. He has served the Company
as Accounting Manager from 1984 to 1988; Assistant Controller from 1989 to 1993;
Senior Director of Information Systems from 1994 to 1997; and most recently as
Vice President, MIS.
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock and Class B Common Stock trade on the Nasdaq
National Market under the symbols "SCNYA" and "SCNYB," respectively. The
following table sets forth, for the periods indicated, the actual high and low
sales prices per share of the Class A Common Stock and the Class B Common Stock
as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
High Low High Low
Fiscal Year ended January 1, 1999
<S> <C> <C> <C> <C>
First quarter $ 5 $ 3-3/4 $ 5 $ 3-7/8
Second quarter 7-3/4 4-3/8 6-1/8 4-5/16
Third quarter 8 4-3/4 8-1/2 4-1/4
Fourth quarter 7-1/2 3-5/8 6-7/8 4
Fiscal Year ended January 2, 1998
First quarter $ 5-1/4 $ 4-3/8 $ 5-3/8 $ 4-3/8
Second quarter 5-3/8 4-1/2 5-1/4 4-1/2
Third quarter 5 3-7/8 5-1/8 4
Fourth quarter 5-1/8 3-5/8 5-1/8 3-3/8
</TABLE>
There were 310 and 301 stockholders of record of the Class A Common Stock and
Class B Common Stock, respectively, on March 26, 1999.
The Company does not anticipate paying any cash dividends in the foreseeable
future on the shares of Class A Common Stock or Class B Common Stock. The
Company currently intends to retain future earnings to fund the development and
growth of its business. The Company's credit facility agreement restricts the
payment or declaration of any dividend. Each share of Class B Common Stock is
entitled to a regular cash dividend equal to 110% of the regular cash dividend,
if any, payable on a share of Class A Common Stock.
<PAGE>
<TABLE>
ITEM 6 - SELECTED FINANCIAL DATA
Selected Income Statement Data (3)
<CAPTION>
(in thousands; except share amounts)
Year Year Year Year Year
Ended Ended Ended Ended Ended
Jan. 1, Jan. 2, Jan. 3, Jan. 5, Dec. 30,
1999 1998 1997 1996 1994
<S> <C> <C> <C> <C> <C>
Revenues $ 105,810 $ 93,962 $ 91,879 $ 78,840 $ 83,541
Operating income (loss) 5,741 (1,935) 2,345 491 3,881
Income (loss) from continuing operations 3,579 (4,032) 1,349 522 2,086
Discontinued operations: (1)
Income (loss) from discontinued operations -- (394) (243) 863 851
Gain on disposal of Brookfield business -- 96 -- -- --
Net income (loss) 3,579 (4,330) 1,106 1,385 2,937
Earnings per common share - basic (2)
Income (loss) from continuing operations $ 0.57 $ (0.65) $ 0.22 $ 0.08 $ 0.32
Income (loss) from discontinued operations 0.00 (0.05) (0.04) 0.14 0.14
--------- ----------- --------- -------- ---------
Net income (loss) per common share - basic $ 0.57 $ (0.70) $ 0.18 $ 0.22 $ 0.46
========= =========== ======== ======== =========
Earnings per common share - diluted (2)
Income (loss) from continuing operations $ 0.56 $ (0.65) $ 0.22 $ 0.08 $ 0.32
Income (loss) from discontinued operations 0.00 (0.05) (0.04) 0.14 0.14
--------- ----------- --------- -------- ---------
Net income (loss) per common share - diluted $ 0.56 $ (0.70) $ 0.18 $ 0.22 $ 0.46
========= =========== ======== ======== =========
Weighted average common shares and
equivalents outstanding (2) 6,373 6,240 6,268 6,244 6,446
Cash dividends per share of common stock -- -- -- -- --
Selected Balance Sheet Data(3)
Jan. 1, Jan. 2, Jan. 3, Jan. 5, Dec. 30,
1999 1998 1997 1996 1994
Current assets $ 59,142 $ 50,239 $ 58,132 $ 58,984 $ 61,621
Current liabilities 18,840 13,315 13,963 14,728 15,657
Working capital 40,302 36,924 44,169 44,256 45,964
Total assets 69,879 61,316 70,752 69,265 77,082
Long-term debt and capitalized lease
obligations, net of current portion 559 771 4,893 4,205 11,922
Stockholders' equity 48,250 45,072 49,484 48,160 46,754
- ---------------------------
(1) See Note 14 regarding discontinued operations.
(2) See Notes 1 and 12 regarding the adoption of Statement of Financial
Accounting Standards No. 128 (SFAS 128) in fiscal 1997. SFAS 128 requires the
restatement of all previously reported per share amounts.
(3) See Note 24 for details of restatement.
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements.
<TABLE>
<CAPTION>
Highlights
Percent Change Increase (Decrease)
1998 vs. 1997 1997 vs. 1996
<S> <C> <C>
Net sales 12.2% 2.5%
Gross profit 24.4 1.5
Selling, general and administrative 7.8 8.1
</TABLE>
<TABLE>
<CAPTION>
$ Change
(in thousands)
<S> <C> <C>
Operating income $ 7,676 $ (4,280)
Income before income taxes 9,038 (5,782)
Net income 7,909 (5,436)
</TABLE>
<TABLE>
<CAPTION>
Percent of Net Sales
1998 1997 1996
<S> <C> <C> <C>
Gross profit 35.6% 32.2% 32.5%
Selling, general and administrative expenses 30.9 32.2 30.5
Operating income (loss) 5.5 (2.1) 2.6
Income (loss) before income taxes 5.0 (4.3) 2.2
Net income 3.4 (4.6) 1.2
</TABLE>
Consolidated Net Sales
Net sales increased 12% to $105,074,000 in fiscal 1998 from $93,611,000 in
fiscal 1997. Sales increased 15% adjusting for the unfavorable impact of foreign
exchange rate changes in 1998. Sales in 1997 of $93,611,000 were 2% higher than
in 1996. Sales increased 1% adjusting for the favorable impact of foreign
exchange rate changes in 1997.
On a geographic basis, U.S. sales increased $17,762,000 or 27% to $83,364,000 in
fiscal 1998. International sales decreased $6,299,000 or 22% to $21,710,000. At
constant exchange rates, international sales decreased 14% in 1998. U.S. sales
in fiscal 1997 increased 9% to $65,602,000. International sales decreased 10% to
$28,009,000 in fiscal 1997 from $31,105,000 the prior year. At constant exchange
rates, international sales decreased 14% in 1997.
Saucony Brand Segment (dollars in thousands)
1998 1997 1996
---- ---- ----
Net Sales $86,332 (+10%) $78,630 (-0%) $78,811
Worldwide net sales of branded Saucony footwear and apparel increased 10% to
$86,332,000 in 1998 primarily due to 12% unit volume growth in the footwear
category. The average domestic wholesale selling price per pair of technical
footwear increased 4% versus fiscal 1997, but a higher proportion of more
moderately-priced Jazz Originals in the Company's domestic product mix resulted
in an 8% decline in overall selling prices compared to 1997.
Domestic net sales increased 21% to $67,774,000. Domestic sales benefited from
the introduction of Jazz Originals in the second quarter of 1998 which accounted
for 21% of domestic footwear unit volumes for the year.
International net sales decreased 18% to $18,558,000 in fiscal 1998 primarily
due to lower sales in Australia and reduced distributor unit volumes partially
offset by higher direct Company sales in Canada and Western Europe.
Worldwide net sales of the Company's Saucony products were marginally lower in
fiscal 1997 compared to the previous year due to decreased unit volumes and
unfavorable foreign currency exchange rates. Branded Saucony sales in the U.S.
increased 3% in fiscal 1997 to $56,050,000 reflecting higher selling prices,
and, to a lesser extent, increased unit volume. International net sales
decreased 7% to $22,580,000 compared to prior year due primarily to decreased
footwear unit volume and currency impacts, offset in part by increased apparel
sales.
Other Products Segment (dollars in thousands)
1998 1997 1996
---- ---- ----
Net Sales $18,742 (+25%) $14,981 (+20%) $12,530
The Other Products segment consists of the Company's Quintana Roo and Merlin
bicycles, frames, and Real Design bicycle components; Hind athletic apparel;
Spot-Bilt coaches shoes; and six Company-operated factory outlet stores. Each of
these businesses represent less than 10% of Company revenues, (which did not
meet the criteria for separate disclosure in accordance with SFAS 131) and, in
the aggregate, totaled 18% of Company revenues in fiscal 1998.
Other Products segment sales in the U.S. increased 63% in fiscal 1998 to
$15,590,000 reflecting significantly higher revenues in both bicycles and
related products as well as higher sales of the Company's Hind apparel brand.
Year on year growth in bicycles and related products revenues were also
favorably impacted by the acquisition of the Merlin business in February 1998
and the subsequent acquisition of Real Design in August 1998.
Net sales of Other Products increased 20% to $14,981,000 in fiscal 1997 from
$12,530,000 in fiscal 1996. Revenue increases that were recorded at Quintana Roo
and Hind were partially offset by decreased sales of non-Saucony brand products
by the Company's Australian subsidiary.
Costs and Expenses
The Company's gross margin in fiscal 1998 and 1997 was 35.6% and 32.2%,
respectively. The gross margin improvement in 1998 was favorably impacted by
reduced levels of close-out goods and other product markdowns. Gross margins in
1997 were negatively impacted by declines in gross margin realized by the
Company's Australian subsidiary on close-out sales during the fourth quarter of
1997 in addition to the inventory write-down of $1,340,000 taken in the fourth
quarter of fiscal 1997.
For the 1998 fiscal year, the SG&A ratio improved 1.3% to 30.9% of net sales
versus 32.2% in 1997. The improvement in the ratio resulted from cost management
on selling and administrative expenses below the rate of sales growth, and by a
reduced spending rate on advertising and promotions. In fiscal 1997, the SG&A
ratio increased 1.7% over the 30.5% rate for 1996 due principally to increased
information systems costs, higher professional fees and payroll, and increased
administrative costs attributable to the introduction of Hind apparel and
continued investment at Quintana Roo.
No non-recurring charges were recorded in fiscal 1998. In fiscal 1997, the
Company recorded a non-recurring charge of $850,000 ($508,000 after-tax, or
$0.08 per diluted share) to recognize the impairment of an inactive distribution
facility.
Also in fiscal 1997, the Company wrote down the assets of its Australian
subsidiary to their net realizable values. This resulted in the Company
recording total non-recurring pre-tax charges of $2,766,000 (or $0.44 per
share). Inventory, accounts receivable and other assets were written down by
$1,340,000, $858,000 and $568,000, respectively. The inventory write-down was
included in cost of sales. In addition, the Company also recorded a deferred tax
valuation allowance of $999,000 ($0.16 per diluted share) relating to the loss
carryforwards of the Australian subsidiary which are not expected to be
realized.
Net interest expense totaled $707,000 and $817,000 in fiscal years 1998 and
1997, respectively. Interest expense decreased 13% in fiscal 1998 due to lower
average debt levels and, to a lesser extent, lower interest rates compared to
fiscal 1997. In fiscal 1997, higher average borrowings compared to fiscal 1996
resulted in a net interest expense increase of 12%, or $87,000.
Income Before Taxes
Segment 1998 1997 1996
------ ---- ---- ----
Saucony Brand $ 5,497 $ (2,946) $ 947
Other Products (259) (854) 1,035
-------- ------- -------
Consolidated $ 5,238 $ (3,800) $ 1,982
======= ======== =======
The Company evaluates business performance and the performance of key managers
based on profit or loss before income taxes. Consolidated income before taxes
was $9,038,000 higher in fiscal 1998 compared to 1997. This improvement can be
attributed to higher income in the domestic Saucony Brand Segment and
significantly reduced losses compared to fiscal 1997 related to the wind-down of
the Company's Australian subsidiary. The Other Products Segment recorded a loss
before taxes of $259,000 in 1998 versus a loss of $854,000 in 1997. Underpinning
these improved results have been lower Australian and Hind related losses in
fiscal 1998 compared to fiscal 1997.
Income Taxes
The provision for income taxes increased to $1,629,000 in fiscal 1998 from
$355,000 in fiscal 1997, due primarily to an increase in domestic pre-tax income
over fiscal 1997. The effective tax rate increased by 21.8% to 31.1% in fiscal
1998 from 9.3% in fiscal 1997 due primarily to a shift in the composition of
foreign and domestic pre-tax profits and losses.
The provision for income taxes increased to $355,000 in fiscal 1997 from
$325,000 in fiscal 1996 due to the deferred tax valuation allowance recorded in
fiscal 1997 relating to foreign net operating loss carryforwards that were not
expected to be realized. The effective tax rate decreased by 7.1% to 9.3% in
fiscal 1997 from 16.4% the prior year due principally to recording the deferred
tax valuation allowance in fiscal 1997 and shifts in the composition of foreign
and domestic pre-tax income and losses.
Net Income
In 1998 net income was $3,579,000 compared to a net loss of $4,330,000 in fiscal
1997. Diluted earnings per share was $0.56 compared to a loss of $0.70 per
diluted share in fiscal 1997. In fiscal 1996, net income was $1,106,000, or
$0.18 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
As of January 1, 1999, the Company's cash and cash equivalents totaled
$5,495,000, an increase of $1,063,000 from January 2, 1998. The increase was due
primarily to net cash from operating activities of $2,446,000 and increased
borrowings against the Company's domestic credit facility, offset by $1,257,000
of capital expenditures and cash outlays for the acquisition of substantially
all of the net assets of Merlin Metalworks, Inc. and Real Product Design, Inc.
of $863,000, the repurchase of shares of the Company's Common Stock of $611,000
and the repayment of $2,364,000 of long-term debt. The increase in accounts
receivable of $804,000, net of the provision for bad debt and discounts, was due
primarily to increased net sales of the Company's Saucony, Hind and bicycle
products in the fourth quarter of fiscal 1998. The Company's days sales
outstanding for its accounts receivable decreased to 68 days in fiscal 1998 from
73 days in fiscal 1997. Inventories increased $7,002,000 in fiscal 1998 due
primarily to the buildup of Saucony footwear and Hind apparel inventory in the
latter part of the fourth quarter of fiscal 1998 and increased bicycle inventory
associated with the acquisition and expansion of the Merlin product line. The
inventory increase was due in part to the significant increase in the Company's
backlog of unfilled orders, which is up 31% at January 1, 1999, as compared to
the backlog at January 2, 1998. As a consequence of the fiscal 1998 year-end
inventory increase, the Company's inventory turns ratio decreased to 2.5 turns
in fiscal 1998 from 2.6 turns in fiscal 1997.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting the operating cash flows in fiscal
1998, included a decrease of $176,000 in prepaid expenses (due to a decrease in
advance payments for inventory and certain administrative expenses), an increase
of $1,589,000 in accrued letters of credit (due to increased in-transit
inventory), an increase of $714,000 in accounts payable (due to increased
inventory purchases), an increase of $1,921,000 in accrued expenses (due to
increased performance-based compensation accruals and increased income tax
accruals resulting from higher pre-tax earnings in fiscal 1998).
As of January 2, 1998, the Company's cash and cash equivalents totaled
$4,432,000, an increase of $1,629,000 from January 3, 1997. The increase was
primarily the result of the receipt of $6,841,000 from the sale of substantially
all of the net assets of the Company's wholly owned subsidiary, Brookfield
Athletic Co., Inc. The increase was offset in part by an increase in accounts
receivable of $1,824,000, net of the provision for bad debts and discounts, and
an increase in inventories of $1,301,000. The increase in accounts receivable
was due to increased net sales of the Company's Saucony products and Hind
products in the fourth quarter of fiscal 1997. The Company's days sales
outstanding for its accounts receivable remained constant at 73 days in fiscal
1997. Inventories increased in fiscal 1997 due in part to the buildup of Hind
apparel inventory. The Company's inventory turn ratio remained constant at 2.6
turns in fiscal 1997.
During fiscal 1997, the Company used $1,422,000 of net cash in operating
activities, expended $1,331,000 to acquire capital assets and information
technology, decreased short-term borrowings by $1,063,000, expended $2,711,000
to reduce long-term debt, received $511,000 from the sale of capital assets,
principally the sale of the Company's facility in Australia, and expended
$140,000 to acquire the remaining shares held by the minority shareholder in the
Company's Dutch subsidiary. Current maturities of long-term debt increased
$1,190,000 in fiscal 1997 due primarily to the reclassification of a note
payable due on January 30, 1998 from long-term debt.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting the operating cash flows in fiscal
1997 included the non-recurring charge of $2,766,000 to write-down assets of the
Company's Australian subsidiary to estimated realizable value, net cash provided
by discontinued operations of $2,227,000, an increase in prepaid expenses of
$539,000 (due to advance payments for advertising and inventory), a decrease in
accrued expenses of $137,000 (due to a change in sales commissions payment
terms) and an increase in accounts payable and letters of credit payable of
$307,000 (due to the timing of inventory purchases).
The Company maintains a revolving credit line of $20,000,000 for cash borrowings
and letters of credit. As of March 25, 1999, $8,254,000 was available for
borrowing under the credit facility.
Several of the Company's foreign subsidiaries maintain credit facilities in the
aggregate principal amount of approximately $4,204,000. At February 28, 1999, an
aggregate of approximately $1,000,000 was available for borrowing under the
facilities of the foreign subsidiaries. See Note 9 to the Consolidated Financial
Statements.
At January 1, 1999, the Company had various commitments for capital
expenditures. The Company believes that these commitments are insignificant.
The liquidity of the Company is contingent upon a number of factors, principally
the Company's future operating results. Management believes that the Company's
current cash and cash equivalents, credit facilities and internally generated
funds are adequate to meet its working capital requirements and to fund its
capital investment needs and debt service payments.
INFLATION AND CURRENCY RISK
The effect of inflation on the Company's results of operations over the past
three years has been minimal. The impact of currency fluctuation on the purchase
of inventory by the Company from foreign suppliers has been minimal as the
transactions were denominated in U.S. dollars. The Company, however, is subject
to currency fluctuation risk with respect to the operating results of the
Company's foreign subsidiaries and certain foreign currency denominated
payables. The Company has entered into forward foreign exchange contracts to
minimize the transaction currency risk.
YEAR 2000
The Company views its exposure to the Year 2000 problem in three areas: (i)
internal computer systems used to manage the Company's business, (ii)
microprocessors and other electronic devices included as components of equipment
used by the Company ("embedded chips") and (iii) computer systems used by
suppliers and customers of the Company. The Company's plan, under the
coordination of the Vice President - Management Information Systems, is to
resolve its internal Year 2000 problems in these areas following sequential
phases of evaluation, updating and testing. In the evaluation phase, the Company
reviews the applicable system to identify Year 2000 problems and determines any
necessary remediation. The updating and testing phases involve the
implementation and testing, respectively, of Year 2000 remediation measures.
Based on its current evaluation of its exposure to the Year 2000 problem, the
Company has determined that it will have to modify or replace portions of its
software, computer and other equipment systems. The Company incurred costs of
approximately $20,000 in fiscal 1998 and expects to incur additional costs of
between $100,000 to $150,000 in fiscal 1999 related to Year 2000 modifications.
To date, the Company has completed evaluation of substantially all of its
internal computer systems and embedded chips and has completed the majority of
necessary upgrades. It is expected that full evaluation, updating and testing
will be completed during the third quarter of 1999.
The Company has interviewed key suppliers to determine their capability to
continue providing goods and services. Based on responses from over 80% of those
surveyed, the Company believes that these suppliers are either Year 2000
compliant or will be made Year 2000 compliant on a timely basis. Nevertheless,
the Company continues to expand its understanding of the Year 2000 problems to
its significant business partners based on ongoing surveys and interviews and
this process will continue throughout 1999. Contingency plans for supply
disruptions are in the process of being formulated and are expected to be
completed by third quarter 1999.
The Company has also interviewed key customers and all those who utilize
Electronic Data Interface (EDI) as the principal means of placing orders. The
responses received indicate that most customers are in the process of developing
or executing remediation plans to address Year 2000 problems. The Company
believes that customers present a potential Year 2000 business risk because of
the Company's limited ability to influence their actions or internal processes.
The foregoing discussion of the Company's Year 2000 readiness contains
forward-looking statements, and were derived using numerous assumptions. Despite
the Company's belief that its Year 2000 program reduces the risk of an internal
compliance failure and is taking an active approach to assess the readiness of
its business partners, there can be no assurances that all parties will achieve
timely Year 2000 compliance or that such noncompliance will not have a material
adverse impact to the Company.
ACCOUNTING PRONOUNCEMENTS
SFAS 131
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 establishes the reporting standards
for operating segments in annual financial statements and requires selected
information on operating statements in interim financial statements. SFAS 131
revised the disclosure requirements for segment reporting by defining the
characteristics and quantitative thresholds for which segment information is
required to be disclosed. The Company adopted SFAS in 1998 and all prior period
amounts have been restated.
SFAS 133
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (SFAS 133), which is effective for fiscal quarters of fiscal years
commencing after June 15, 1999, with early adoption permitted. SFAS 133 defines
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. Upon adoption of
SFAS 133, all derivatives must be recognized on the balance sheet at their then
fair value and any deferred gains or losses remaining on the balance sheet under
previous hedge-accounting rules must be removed from the balance sheet. In the
period of adoption, the transition adjustments may effect current earnings and
may effect other comprehensive income. SFAS 133 requires companies to recognize
adjustments to the fair value of derivatives that are not hedges currently in
earnings when they occur. For derivatives that qualify as hedges, changes in the
fair value of the derivatives can be recognized currently in earnings, along
with an offsetting adjustment against the basis of the underlying hedged item or
be deferred in other comprehensive income. The Company is assessing the impact
of the provisions of SFAS 133 on its hedging activities, which are currently
limited to forward foreign currency exchange contracts. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
SFAS 133 will have a significant effect on current earnings or on the Company's
financial position, however, at this time, the effect of the adoption of SFAS
133 on the Company's future earnings and financial position cannot be estimated.
SOP 98-5
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 requires that all costs of start-up activities, including
organization costs, be expensed as incurred. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998. The Company will adopt SOP 98-5 in the
first quarter of fiscal 1999, the initial application of which will not have a
material effect on earnings or on the Company's financial position.
CERTAIN OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
Risks and uncertainties could cause the Company's actual results to differ
materially from those reflected by forward looking statements or otherwise
implied by management from time to time.
Competition
Competition is intense in the markets in which the Company sells its products.
The Company competes against a large number of other companies, both domestic
and foreign, with substantially greater resources than the Company. The
principal competitors for the Company's Saucony products are Nike, New Balance
and ASICS. The principal competitors for the Company's bicycle products are
Cannondale and Trek. The principal competitors for Hind are Nike, Pearl Izumi
and TYR.
Foreign Currency Exchange Rates
The Company's financial results have, from time to time, been adversely affected
by the fluctuations in currency exchange rates. There can be no assurance that
the Company's efforts to reduce currency exchange losses will be successful or
that currency exchange rates will not have an adverse impact on the Company's
future operating results and financial condition.
Potential Fluctuations in Quarterly Results
The Company's quarterly operating results may vary significantly depending on a
number of factors, including, but not limited to, the timing and shipment of
individual orders, market acceptance of new products offered by the Company,
changes in the Company's operating expenses, personnel changes, mix of products
sold, changes in product pricing and general economic conditions. It is possible
that in some future quarter the Company's revenue or operating results will be
below expectations of stock investors. If that were to occur, the market price
of the Common Stock could be materially and adversely affected.
Dependence on Consumer Preferences
The Company is susceptible to fluctuations in its business based upon footwear
fashion trends, particularly on its Jazz Original product offerings, and
frequently changing consumer preferences and product demands. The Company
believes that its success depends in substantial part on its ability to
anticipate, gauge and respond to changing consumer demands and fashion trends in
a timely manner. Moreover, the Company could be materially and adversely
affected by conditions in the retail industry in general, including
consolidation and the resulting decline in the number of retailers and other
cyclical economic factors.
Dependence on Major Customers
One key customer accounted for more than 13% of the Company's consolidated
revenue during 1998. Other major accounts also provide significant portions of
the Company's overall revenues which could be adversely impacted by the loss of
any key account.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and foreign
exchange rates. Almost all borrowings of the Company are based on floating rates
which would increase interest expense in an environment of rising interest
rates. The Company has a policy of selectively hedging foreign currency risks,
but there are no assurances that this program will fully insulate against
short-term fluctuations in financial results.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to the Company's Consolidated Financial Statements in Item 14 and
the accompanying Consolidated Financial Statements, notes and schedules which
are filed as part of this Form 10-K following the signature page and are
incorporated herein by this reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Registrant" in PART I hereof, and the remainder is
contained in the Company's Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on May 20, 1999 (the "1999 Proxy Statement") under the
captions "ELECTION OF DIRECTORS" and "SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" and is incorporated herein by this reference. The Company
expects to file the 1999 Proxy Statement within 120 days after the close of the
fiscal year ended January 1, 1999.
Officers are elected on an annual basis and serve at the discretion of the Board
of Directors.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is contained under the captions
"Compensation of Directors," "Compensation of Executive Officers," "Employment
and Consulting Agreements and Other Arrangements" and "Compensation Committee
Interlocks and Insider Participation" in the 1999 Proxy Statement and is
incorporated herein by this reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the 1999 Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by this reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption "Employment
and Consulting Agreements and Other Arrangements" appearing in the 1999 Proxy
Statement and is incorporated herein by this reference.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Consolidated Financial Statements
The following Consolidated Financial Statements of Saucony, Inc. and its
subsidiaries are included in this report:
Reports of Independent Accountants Consolidated balance sheets at January
1, 1999 and January 2, 1998
Consolidated statements of income for the years ended January 1, 1999,
January 2, 1998 and January 3, 1997
Consolidated statements of stockholders' equity for the years ended January
1, 1999, January 2, 1998 and January 3, 1997
Consolidated statements of cash flows for the years ended January 1, 1999,
January 2, 1998 and January 3, 1997
Notes to the Consolidated Financial Statements
2. Index to Consolidated Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
Separate financial statements of the Company have been omitted since it is
primarily an operating Company and its subsidiaries included in the Consolidated
Financial Statements do not have a minority equity interest or indebtedness to
any person other than the Company in an amount which exceeds 5% of the total
assets as shown by the Consolidated Financial Statements as filed herein.
3. Index to Exhibits
The exhibits filed as part of this Form 10-K are listed on the Exhibit
Index immediately preceding such exhibits, which Exhibit Index is incorporated
herein by reference.
(b) 1. Reports on Form 8-K
No Current Reports on Form 8-K were filed in the fourth quarter of fiscal
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SAUCONY, INC. (registrant)
By: /s/ John H. Fisher
John H. Fisher President
and Chief Executive Officer
Date: April 1, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME CAPACITY DATE
/s/ John H. Fisher President April 1, 1999
John H. Fisher Chief Executive Officer
Director
/ s/ Charles A. Gottesman Executive Vice President April 1, 1999
Charles A. Gottesman Chief Operating Officer
Director
/s/ Terence P. Chin Senior Vice President April 1, 1999
Terence P. Chin Chief Financial Officer
/s/ Roger P. Deschenes Vice President, Controller April 1, 1999
Roger P. Deschenes Chief Accounting Officer
/s/ John J. Neuhauser Director April 1, 1999
John J. Neuhauser
/s/ Robert J. LeFort, Jr. Director April 1, 1999
Robert J. LeFort, Jr.
/s/ John M. Connors, Jr. Director April 1, 1999
John M. Connors, Jr.
/s/ Phyllis H. Fisher Director April 1, 1999
Phyllis H. Fisher
<PAGE>
Report of Independent Accountants
To The Board of Directors of
Saucony, Inc.
In our opinion, based on our audits and the report of the other
auditors, the accompanying consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Saucony, Inc. and its subsidiaries at January 1, 1999 and
January 2, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended January 1, 1999, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14(a)(2)
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We did
not audit the financial statements of Saucony SP Pty. Ltd., a fifty percent
owned consolidated joint venture, as of January 2, 1998 and for the two years in
the period ended January 2, 1998, which statements reflect total assets of six
percent of consolidated assets at January 2, 1998, and total revenues of eleven
percent and twelve percent of consolidated revenues for the years ended January
2, 1998 and January 3, 1997, respectively. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Saucony SP
Pty. Ltd.(before adjustments to U.S. GAAP), is based solely on the report of the
other auditors. We also audited the translation of the financial statements of
Saucony SP Pty. Ltd., in Australian dollars to U.S. dollars as well as other
adjustments required to ensure that the financial statements are in accordance
with U.S. GAAP as of January 2, 1998 and for the two years in the period ended
January 2, 1998. We believe that our audits and the report of the other auditors
provide a reasonable basis for the opinion expressed above.
As discussed in footnote 24, the financial statements for 1996 and 1997 have
been restated.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 15, 1999
<PAGE>
Grant Thornton
Independent Audit Report to the Members of Saucony S.P. Pty. Ltd.
Scope
We have audited the financial statements of Saucony S.P. Pty. Ltd., comprising
the Australian statutory accounts (which are not separately presented herein),
for the year ended 2 January 1998. The company's directors are responsible for
the financial statements. We have conducted an independent audit of these
financial statements in order to express an opinion on them to the members of
the company.
Our audit has been conducted in accordance with Australian auditing standards,
which are substantially the same as auditing standards generally accepted in the
United States, to provide reasonable assurance as to whether the financial
statements are free of material misstatement. Our procedures included
examination, on a test basis, of evidence supporting the amounts and other
disclosures in the financial statements, and the evaluation of accounting
policies and significant accounting estimates. These procedures have been
undertaken to form an opinion as to whether, in all material respects, the
financial statements are presented fairly in conformity with generally accepted
accounting principles and so as to present a view which is consistent with our
understanding of the company's financial position, the results of its operations
and its cash flows.
The audit opinion expressed in this report has been formed on the above basis.
Audit Opinion
In our opinion, the financial statements of Saucony S.P. Pty. Ltd. are properly
drawn up so as to present fairly, in all material respects, the company's
financial position as at 2 January 1998 and 3 January 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended 2 January 1998 in accordance with accounting principles generally accepted
in Australia which differ in certain aspects from those followed in the United
States.
Going Concern Basis of Accounting
Without qualification to the opinion expressed above, attention is drawn to Note
1 of the financial statements. Notwithstanding the deficiency of working capital
and net assets, the financial statements have been prepared on a going concern
basis as the directors have received an undertaking of continued financial
support from the directors of Hyde Athletic Industries, Inc. and the directors
believe that such financial support will be continued to be made available.
GRANT THORNTON
Chartered Accountants
/s/ B R Gordon
B R GORDON
Partner
2 April 1998
<PAGE>
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands, except share amounts)
January 1, January 2,
1999 1998
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,495 $ 4,432
Marketable securities 179 148
Accounts receivable, net of allowance for doubtful accounts
and discounts (1998, $1,880; 1997, $2,032) 19,473 18,636
Inventories 31,072 23,471
Deferred income taxes 1,605 2,034
Prepaid expenses and other current assets 1,318 1,518
------------ ------------
Total current assets 59,142 50,239
------------ ------------
Property, plant and equipment, net of accumulated depreciation and amortization 8,123 8,135
------------ ------------
Other assets:
Goodwill, net of accumulated amortization (1998, $132; 1997, $42;) 1,267 1,238
Deferred charges, net of accumulated amortization (1998, $1,544; 1997, $1,843) 430 491
Long-term accounts and notes receivable 82 114
Deferred income taxes 353 353
Other 482 746
------------ ------------
Total other assets 2,614 2,942
------------ ------------
Total assets $ 69,879 $ 61,316
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Letters of credit payable $ 2,790 $ 1,201
Notes payable 7,568 2,885
Current portion of long-term debt and capital lease obligations 324 3,639
Accounts payable 3,454 2,680
Accrued expenses 4,704 2,910
------------ ------------
Total current liabilities 18,840 13,315
------------ ------------
Long-term obligations:
Long-term debt, net of current portion 36 25
Capital lease obligations, net of current portion 523 746
Deferred income taxes 1,851 1,819
Other long-term obligations 157 144
------------ ------------
Total long-term obligations 2,567 2,734
------------ ------------
Commitments and contingencies -- --
Minority interest in consolidated subsidiaries 222 195
------------ ------------
Stockholders' equity:
Preferred stock, $1.00 par; authorized 500,000 shares; none issued -- --
Common stock:
Class A, $.333 par; authorized 20,000,000 shares
(issued 1998, 2,707,027; 1997, 2,706,227) 902 902
Class B, $.333 par; authorized 20,000,000 shares
(issued 1998, 3,826,805; 1997, 3,743,487) 1,276 1,248
Additional paid-in capital 15,921 15,652
Retained earnings 32,360 28,781
Accumulated translation (528) (417)
------------- -------------
49,931 46,166
------------ ------------
Less:
Common stock held in treasury, at cost (1998, 305,400; 1997, 198,400) (1,665) (1,054)
Unearned compensation (16) (40)
------------- ------------
48,250 45,072
------------ ------------
Total liabilities and stockholders' equity $ 69,879 $ 61,316
============ ============
See notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998, AND JANUARY 3, 1997
<CAPTION>
(Note 24)
(in thousands, except share amounts)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 105,074 $ 93,611 $ 91,341
Other revenue 736 351 538
------------ ------------ -----------
Total revenue 105,810 93,962 91,879
------------ ------------ -----------
Costs and expenses:
Cost of sales 67,623 63,511 61,692
Selling expenses 17,507 16,698 16,065
General and administrative expenses 14,939 13,412 11,777
Writedown of Australian assets -- 1,426 --
Writedown of impaired real estate -- 850 --
------------ ------------ -----------
Total costs and expenses 100,069 95,897 89,534
------------ ------------ -----------
Operating income (loss) 5,741 (1,935) 2,345
Non-operating income (expense):
Interest, net (707) (817) (730)
Foreign currency 124 (1,127) 171
Other 80 79 196
------------ ------------ -----------
Income (loss) before income taxes and minority interest 5,238 (3,800) 1,982
Provision for income taxes 1,629 355 325
Minority interest in income (loss) of consolidated subsidiaries 30 (123) 308
------------ ------------- -----------
Income (loss) from continuing operations 3,579 (4,032) 1,349
Discontinued operations (net of tax):
Loss from discontinued operations -- (394) (243)
Gain on disposal of Brookfield business -- 96 --
------------ ------------ -----------
Net income (loss) $ 3,579 $ (4,330) $ 1,106
============ ============= ===========
Per share amounts:
Earnings per common share - basic:
Income (loss) from continuing operations $ 0.57 $ (0.65) $ 0.22
Income (loss) from discontinued operations 0.00 (0.05) (0.04)
----------- ------------ -----------
Net income (loss) per common share - basic $ 0.57 $ (0.70) $ 0.18
=========== ============ ==========
Earnings per common share - diluted:
Income (loss) from continuing operations $ 0.56 $ (0.65) $ 0.22
Income (loss) from discontinued operations 0.00 (0.05) (0.04)
----------- ------------ -----------
Net income (loss) per common share - diluted $ 0.56 $ (0.70) $ 0.18
=========== ============ ==========
See notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
<CAPTION>
(in thousands, except share amounts)
Common Stock Paid-In Retained
Class A Class B Capital Earnings
<S> <C> <C> <C> <C>
Balance, January 5, 1996 (as restated, see Note 24) $ 902 $ 1,237 $ 15,521 $ 32,005
Issuance of common stock, stock option exercise -- 6 63 --
Cancellation of below market options -- -- (3) --
Amortization of unearned compensation -- -- -- --
Net income -- -- -- 1,106
Foreign currency translation adjustments -- -- -- --
-------- ------- --------- ---------
Balance, January 3, 1997 $ 902 $ 1,243 $ 15,581 $ 33,111
Issuance of common stock, stock option exercise -- 5 34 --
Cancellation of below market options -- -- (15) --
Issuance of below market options and
restricted stock -- -- 52 --
Amortization of unearned compensation -- -- -- --
Net loss -- -- -- (4,330)
Foreign currency translation adjustments -- -- -- --
-------- ------- --------- ---------
Balance, January 2, 1998 $ 902 $ 1,248 $ 15,652 $ 28,781
Issuance of common stock, stock option exercise -- 28 269 --
Amortization of unearned compensation -- -- -- --
Repurchasing of common stock, at cost -- -- -- --
Net income -- -- -- 3,579
Foreign currency translation adjustments -- -- -- --
-------- ------- --------- ---------
Balance, January 1, 1999 $ 902 $ 1,276 $ 15,921 $ 32,360
======== ======= ========= =========
</TABLE>
<PAGE>
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
FOR THE YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
(in thousands, except share amounts)
<CAPTION>
Total
Treasury Stock Unearned Accumulated Stockholders'
Shares Amount Compensation Translation Equity
<S> <C> <C> <C> <C> <C>
Balance, January 5, 1996 (as restated, see Note 24) 198,400 $ (1,054) $ (194) $ (257) $ 48,160
Issuance of common stock, stock option exercise -- -- -- -- 69
Cancellation of below market options -- -- 3 -- --
Amortization of unearned compensation -- -- 126 -- 126
Net income -- -- -- -- 1,106
Foreign currency translation adjustments -- -- -- 23 23
--------- --------- ------- -------- ----------
Balance, January 3, 1997 198,400 $ (1,054) $ (65) $ (234) $ 49,484
Issuance of common stock, stock option exercise -- -- -- -- 39
Cancellation of below market options -- -- 15 -- --
Issuance of below market options and
restricted stock -- -- (52) -- --
Amortization of unearned compensation -- -- 62 -- 62
Net loss -- -- -- -- (4,330)
Foreign currency translation adjustments -- -- -- (183) (184)
--------- --------- ------- --------- -----------
Balance, January 2, 1998 198,400 $ (1,054) $ (40) $ (417) $ 45,072
Issuance of common stock, stock option exercise -- -- -- -- 297
Amortization of unearned compensation -- -- 24 -- 24
Repurchase of common stock, at cost 107,000 (611) -- -- (611)
Net income -- -- -- -- 3,579
Foreign currency translation adjustments -- -- -- (111) (111)
--------- --------- ------- --------- -----------
Balance, January 1, 1999 305,400 $ (1,665) $ (16) $ (528) $ 48,250
========= ========== ======== ========= ==========
See notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997
<CAPTION>
(in thousands)
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 3,579 $ (4,330) $ 1,106
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Writedown of Australian assets -- 2,766 --
Discontinued operations -- 298 243
Depreciation and amortization 1,836 1,594 1,452
Provision for bad debt and discounts 4,908 4,887 5,269
Deferred income tax provision (benefit) 461 (1,269) (217)
Writedown of impaired real estate -- 850 --
Minority interest in income (loss) of consolidated subsidiaries 30 (123) 308
Other (17) (29) 148
Changes in operating assets and liabilities, net of effects of acquisitions,
dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Marketable securities (31) 88 71
Accounts and notes receivable (5,718) (6,711) (9,938)
Inventories (7,002) (1,301) (1,158)
Prepaid expenses and other current assets 176 (539) 281
Increase (decrease) in liabilities:
Letters of credit payable 1,589 (612) (613)
Accounts payable 714 919 (525)
Accrued expenses 977 (296) 733
Accrued income taxes 944 159 (5)
---------- ---------- ----------
Total adjustments (1,133) 681 (3,951)
----------- ---------- ----------
Net cash provided (used) by continuing operations 2,446 (3,649) (2,845)
Net cash provided (used) by discontinued operations -- 2,227 (2,379)
---------- ---------- ----------
Net cash provided (used) by operating activities 2,446 (1,422) (5,224)
---------- ----------- ----------
Cash flows from investing activities:
Proceeds from the sale of Brookfield business -- 6,841 --
Purchases of property, plant and equipment (1,257) (1,305) (791)
Proceeds from the sale of equipment 72 511 78
Change in deferred charges, deposits and other 92 (26) (1,066)
Payments for business acquisitions (863) (140) (1,250)
----------- ----------- ----------
Net cash provided (used) by investing activities (1,956) 5,881 (3,029)
----------- ---------- ----------
Cash flows from financing activities:
Net short-term borrowings 3,426 (1,063) 1,313
Repayment of long-term debt and capital lease obligations (2,364) (2,711) (2,364)
Proceeds from long-term borrowings -- -- 420
Common stock repurchased (611) -- --
Issuances of common stock, including options 297 39 69
---------- ---------- ----------
Net cash provided (used) by financing activities 748 (3,735) (562)
Effect of exchange rate changes on cash and cash equivalents (175) 905 (50)
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 1,063 1,629 (8,865)
Cash and cash equivalents at beginning of period 4,432 2,803 11,668
---------- ---------- ----------
Cash and cash equivalents at end of period $ 5,495 $ 4,432 $ 2,803
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds $ 257 $ 663 $ 736
========== ========== ==========
Interest $ 657 $ 887 $ 959
========== ========== ==========
Non-cash Investing and Financing Activities:
Property purchased under capital leases $ 141 $ 86 $ 1,234
========== ========== ==========
See notes to Consolidated Financial Statements
</TABLE>
SAUCONY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended January 1, 1999, January 2, 1998 and January 3, 1997
1. Summary of Significant Accounting Policies:
Business Activity
The Company is an importer and manufacturer of a broad line of
high-performance athletic footwear, athletic apparel and high-quality
bicycles, bicycle frames and components. The Company markets its
products principally to domestic and international retailers and
distributors.
Reporting Period
The Company adopted a 52-53 week fiscal year in 1991. The Consolidated
Financial Statements and notes for 1998, 1997 and 1996 represent the
fiscal years ended January 1, 1999, January 2, 1998 and January 3, 1997,
respectively. In management's opinion, the Consolidated Financial
Statements for 1998, 1997 and 1996 are comparable.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Saucony,
Inc. and all of its majority-owned subsidiaries, domestic and foreign.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition
Sales, net of discounts and estimated returns and allowances, and
related costs of sales are recognized upon shipment of products.
Provisions for returns and allowances are determined principally on the
basis of past experience.
Inventories
Inventories are stated at lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Land, buildings and equipment, including significant improvements to
existing facilities, are at the lower of cost or estimated carrying
values. The assets are depreciated over their estimated useful lives or
capital lease terms, if shorter, using the straight-line method. The
estimated useful lives of the assets are: 33 years for buildings and
improvements and 3 to 15 years for machinery and equipment. Major
renewals and betterments are capitalized. Maintenance, repairs and minor
property renewals are expensed as incurred. The cost and related
accumulated depreciation of all property, plant and equipment retired or
otherwise disposed of, are removed from the accounts. Any gain or loss,
resulting from the retirement or disposition of property, plant and
equipment, is included in consolidated net income.
Investments in Marketable Securities
Investment in marketable securities are categorized as trading
securities which are reported at fair value, with changes in fair value
recorded in consolidated net income.
Deferred Charges and Goodwill
Deferred charges consist primarily of trademarks and business
acquisition costs. Business acquisition costs and trademarks are
amortized over five years; goodwill, representing the excess of the
purchase price over the estimated fair value of the net assets of the
acquired business, is being amortized over the period of expected
benefit of fifteen years.
Income Taxes
The provision for income taxes is calculated according to the precepts
of Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes". Under SFAS 109, income taxes are provided
for the amount of taxes payable or refundable in the current year and
for the expected future tax consequences of events that have been
recognized in the financial statements or tax returns. As a result of
recognition and measurement differences between tax laws and financial
accounting standards, temporary differences arise between the amount of
taxable income and pretax financial income for a year and the tax bases
of assets or liabilities and their reported amount in the financial
statements. The deferred tax assets and liabilities reported as of
January 1, 1999 and January 2, 1998 reflect the estimated future tax
effects attributable to temporary differences and carryforwards based on
the provisions of enacted tax law.
Earnings per Share
Earnings per common share is calculated in accordance with the precepts
of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS
128), which was issued in 1997 by the Financial Accounting Standards
Board. SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes the
dilutive effect of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share.
As required under SFAS 128, all previously reported per share amounts
have been restated.
Stock-Based Compensation
The Company grants stock options to officers, key employees, directors,
consultants and advisors with the exercise price determined by the
Compensation Committee of the Board of Directors. The Company accounts
for stock-option grants, except those granted to selected consultants
and advisors of the Company, in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," which
defines stock compensation as the excess of the quoted market price of
the Company's stock at the date of the grant over the exercise price an
employee is required to pay. The Company accounts for stock option
grants to consultants and advisors in accordance with SFAS 123 and has
not incurred any material charges to date. As prescribed under SFAS 123,
"Accounting for Stock-Based Compensation", the Company has disclosed in
Notes 11 and 12 the pro forma effects on net income and earnings per
share of determining stock-based compensation expense based upon the
fair value of the stock options granted subsequent to December 31, 1994.
Statements of Cash Flows
For purposes of these statements, cash equivalents include all
short-term deposits with an original maturity of three months or less.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at exchange rates as of
the balance sheet date. Revenues and expenses are translated at average
rates of exchange in effect during the year. The resulting cumulative
translation adjustments have been recorded as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are
included in consolidated net income.
Forward Foreign Currency Exchange Contracts
From time to time, the Company enters into forward foreign currency
exchange contracts to hedge certain foreign currency denominated
payables. Gains and losses on forward exchange contracts are offset
against foreign currency exchange gains or losses on the underlying
hedged item.
Reclassifications
Certain items in prior years' Consolidated Financial Statements have
been reclassified to conform to the 1998 presentation. The results of
operations for Brookfield Athletic Co., Inc. have been segregated from
continuing operations and are reported separately as discontinued
operations.
Advertising and Promotion
Advertising and promotion costs, including print media production cost,
are expensed as incurred, with the exception of co-operative
advertising, which is accrued and the advertising costs expensed in the
period of revenue recognition. Advertising and promotion expense
amounted to $7,912,000, $8,543,000 and $8,743,000 for 1998, 1997 and
1996, respectively.
Research and Development Expenses
Expenditures for research and development of products are expensed as
incurred. Research and development expenses amounted to approximately
$1,681,000, $1,438,000 and $1,417,000 for 1998, 1997 and 1996,
respectively.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes the
reporting standards for operating segments in annual financial
statements and requires selected information on operating segments in
interim financial statements. SFAS 131 revised the disclosure
requirements for segment reporting by defining the characteristics and
quantitative thresholds for which segment information is required to be
disclosed. SFAS 131 is effective for fiscal years commencing after
December 15, 1997. The Company adopted SFAS 131 in fiscal 1998 and all
prior periods have been restated. See Note 17 of the Notes to
Consolidated Financial Statements.
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," (SFAS 133), which is effective for fiscal quarters
of fiscal years commencing after June 15, 1999, with early adoption
permitted. SFAS 133 defines the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts and
hedging activities. Upon adoption of SFAS 133, all derivatives must be
recognized on the balance sheet at their then fair value and any
deferred gains or losses remaining on the balance sheet under previous
hedge-accounting rules must be removed from the balance sheet. In the
period of adoption, the transition adjustments may effect current
earnings and may effect other comprehensive income. SFAS 133 requires
companies to recognize adjustments to the fair value of derivatives that
are not hedges currently in earning when they occur. For derivatives
that qualify as hedges, changes in the fair value of the derivatives can
be recognized currently in earnings, along with an offsetting adjustment
against the basis of the underlying hedged item, or be deferred in other
comprehensive income. The Company is still assessing the impact of the
provisions of SFAS 133 on its hedging activities, which are currently
limited to forward foreign currency exchange contracts. Because of the
Company's minimal use of derivatives, management does not anticipate
that the adoption of the new Statement will have a significant effect on
earnings. At this time, the effect of the adoption of SFAS 133 on the
Company's future earnings and financial position cannot be estimated.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 requires that all costs of start-up
activities, including organization costs, be expensed as occurred. SOP
98-5 is effective for fiscal years beginning after December 15, 1998.
The Company will adopt SOP 98-5 in the first quarter of fiscal 1999, the
initial application of which will not have a material effect on earnings
or on the Company's financial position.
2. Marketable Securities:
As of January 1, 1999, the Company's holdings in marketable securities
consisted primarily of equity securities which are classified as trading
securities.
The cost of the securities held at January 1, 1999 and January 2, 1998
was $134,000 and $138,000, respectively. As of January 1, 1999 and
January 2, 1998, the market value of such securities was $179,000 and
$148,000, respectively.
Included in the determination of net income for the years ended January
1, 1999, January 2, 1998 and January 3, 1997 were: 1998, net realized
losses of $3,000 and net unrealized gains of $35,000; 1997, net realized
gains of $22,000 and net unrealized gains of $2,000; and 1996, net
realized gains of $10,000.
3. Inventories:
Inventories at January 1, 1999 and January 2, 1998 consisted of the
following (in thousands):
1998 1997
---- ----
Finished goods $ 24,194 $ 17,534
Work-in-process 834 514
Raw materials and supplies 6,044 5,423
------------ -----------
Total $ 31,072 $ 23,471
============ ===========
<PAGE>
4. Property, Plant and Equipment:
Major classes of property, plant and equipment at January 1, 1999 and
January 2, 1998 were as follows (in thousands): 1998 1997
Land $ 484 $ 484
Buildings and improvements 5,997 5,997
Machinery and equipment 9,777 8,328
Capitalized leases 1,586 1,708
Leasehold improvements 275 236
------------ -----------
18,119 16,753
Less accumulated depreciation
and amortization 9,996 8,618
------------ -----------
Total $ 8,123 $ 8,135
============ ===========
Accumulated amortization of the leased property was $790 and $344 at
January 1, 1999 and January 2, 1998, respectively.
5. Accrued Expenses:
Accrued expenses at January 1, 1999 and January 2, 1998 consisted of the
following (in thousands):
1998 1997
---- ----
Payroll and bonuses $ 1,249 $ 570
Income taxes 869 --
Sales commissions 237 251
Selling and advertising 186 265
Other 2,163 1,824
---------- -----------
Total $ 4,704 $ 2,910
========== ===========
<PAGE>
<TABLE>
<CAPTION>
6. Long-Term Debt:
(in thousands)
1998 1997
<S> <C> <C>
Senior notes payable due in semiannual installments of interest (9.70%
per annum) on the unpaid principal amount through maturity and six
annual principal payments of $2,000,000 commencing April 29, 1993 $ -- $ 2,000
Note payable to a bank under a revolving line of credit agreement, due
on January 30, 1998, with interest of 8.15%. -- 1,302
Notes payable to bank due in monthly installments ranging from $580 to
$744 through June 2002, with interest ranging from 4.9% to 10.0%. 47 31
----------- ----------
47 3,333
Less current portion 11 3,308
----------- ----------
Long-term debt, net $ 36 $ 25
=========== ==========
</TABLE>
Long-term debt maturities payable for the four years and thereafter
subsequent to January 1, 1999 are as follows (in thousands):
1999 $ 11
2000 14
2001 14
2002 8
-------
Total $ 47
=======
7. Capital Lease Obligations:
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments as of January 1, 1999 (in thousands):
1999 $ 359
2000 331
2001 195
2002 22
2003 5
----------
Total minimum lease payments 912
Less amounts representing interest 76
----------
Present value of minimum lease payments 836
Less current portion 313
----------
Long-term portion $ 523
==========
8. Employee Retirement Plans:
The Company has maintained a qualified retirement savings plan ("401(k)
Plan") since 1991. As amended, all United States employees of the
Company who meet the minimum age and service requirements are eligible
to participate in the 401(k) Plan. The Company may make discretionary
contributions to the 401(k) Plan equal to a certain percentage of the
participating employees' contributions, subject to the limitations
imposed by the 401(k) Plan and the Internal Revenue Code. Such
contributions amounted to $72,000, $83,000 and $71,000 for 1998, 1997
and 1996, respectively.
In 1995, the Company established an unfunded deferred compensation
program ("DCP") to provide key executives and highly compensated
employees with supplemental retirement benefits. Eligibility is
determined by the Company's Board of Directors. The DCP is not qualified
under Section 401 of the Internal Revenue Code. The Company may make
discretionary contributions to the DCP equal to a certain percentage of
the participants' contributions. Such contributions amounted to $14,000,
$10,000 and $5,000 for 1998, 1997 and 1996, respectively.
9. Commitments and Contingencies:
Lease Commitments
The Company is obligated under various operating leases for equipment
and rental space through 2005. Total equipment and rental expenses for
1998, 1997 and 1996 were $959,000, $910,000 and $831,000, respectively.
Future minimum equipment and rental payments are as follows: 1999,
$577,000; 2000, $448,000; 2001, $299,000; 2002, $50,000; 2003 and
thereafter, $78,000.
Short-Term Borrowing Arrangements
On August 31, 1998, the Company entered into a revolving credit
agreement under the terms of which a bank committed a maximum credit
line of $15,000,000 to the Company for cash borrowings and letters of
credit. The credit facility, which was amended and increased on March
15, 1999 to $20,000,000, terminates on July 31, 2001 and replaces a
prior credit facility that expired on August 31, 1998. Borrowings under
the facility bear interest at either the bank's prime rate of interest,
less 0.5%, or at the LIBO rate, plus 1.5% (the borrowing mark-up at
January 1, 1999 was 2.0%). In addition, the Company pays a quarterly
commitment fee of 0.375% on the average daily unused credit line. The
credit facility contains restrictions and financial covenants including:
restrictions on additional indebtedness, restrictions on the declaration
or payment of dividends, a minimum tangible net worth, as defined,
restrictions on annual capital expenditures, a minimum current ratio, as
defined, a minimum leverage ratio, a minimum interest coverage, as
defined. The credit facility is subject to the bank's periodic review of
the Company's operations.
The Company was in compliance with such covenants at January 1, 1999. At
January 1, 1999, there were borrowings of $5,838,000 outstanding under
the facility and letters of credit outstanding of $6,604,000.
On March 25, 1998, the Company's primary lender and several of the
Company's foreign subsidiaries entered into demand lines of credit
letter agreements to provide working capital resources. Demand lines of
credit were made available as follows: Saucony Sports BV, Dutch Guilders
3,500,000; Saucony UK, Inc., British Pounds 800,000; and, Saucony
Deutschland Vertriebs GmbH, German Marks 900,000. The lines of credit
are not committed facilities and as such the availability of advances
under the lines of credit are at the sole discretion of the bank.
At January 1, 1999, aggregate borrowings under the demand lines of
credit amounted to $1,730,000.
Saucony Canada, Inc. maintains a credit facility with a Canadian lender.
The agreement provides Saucony Canada with a credit line of Canadian
Dollars 1,000,000 for cash borrowings and letters of credit. At January
1, 1999, there were no borrowings outstanding under this credit
facility.
At January 1, 1999, the Company was committed under foreign exchange
contracts to purchase U.S. dollars in the amount of $735,000.
Litigation
The Company is involved in various routine litigation incident to its
business. Many of these proceedings are covered in whole or in part by
insurance. In management's opinion, none of these proceedings will have
a material adverse effect on the Company's financial position,
operations or cash flows (irrespective of any potential insurance
recovery).
10. Common Stock:
As of January 1, 1999, January 2, 1998 and January 3, 1997, the number
of shares of Class A Common Stock and Class B Common Stock outstanding
were as follows:
<TABLE>
<CAPTION>
Class A Class B
Common Common
Stock Stock
<S> <C> <C>
Shares outstanding at January 5, 1996 2,701,727 3,515,415
Shares issued 1,500 18,244
--------- ---------
Shares outstanding at January 3, 1997 2,703,227 3,533,659
Shares issued -- 14,428
--------- ---------
Shares outstanding at January 2, 1998 2,703,227 3,548,087
Shares issued 800 83,318
Shares repurchased (25,000) (82,000)
---------- ---------
Shares outstanding at January 1, 1999 2,679,027 3,549,405
========= =========
</TABLE>
11. Stock Options:
Under the Company's 1993 Equity Incentive Plan (the "Equity Incentive
Plan") the Company may grant incentive stock options and restricted
stock awards to officers, key employees and Directors of the Company.
Outside consultants and advisors to the Company are eligible to receive
non-statutory stock options and awards of restricted stock.
The Equity Incentive Plan is administered by the Compensation Committee
of the Board of Directors which, at its sole discretion, grants options
to purchase shares of Common Stock and make awards of restricted stock.
The purchase price per share of Common Stock shall be determined by the
Board of Directors, provided, however, in the case of Incentive Stock
Options, the purchase price shall not be less than 100% of the fair
market value of such stock at the time of grant of the option. The terms
of option agreements are established by the Board of Directors, except,
in the case of Incentive Stock Options, wherein the term cannot exceed
ten years. The vesting schedule is subject to the discretion of the
Board of Directors.
Restricted stock awards which may be granted under the Equity Incentive
Plan entitle recipients to purchase shares of the Company's Common Stock
subject to restrictions concerning the sale, transfer and other
disposition of the shares issued until such shares are vested. The Board
of Directors shall determine the purchase price, which can be less than
the fair market value of the Common Stock, and the vesting schedule for
such award.
At January 1, 1999, a total of 1,150,000 shares, in the aggregate, of
Class A Common Stock and Class B Common Stock have been reserved by the
Company and may be issued under the plan.
The Director Stock Option Plan provides for the automatic grant to
non-employee directors of non-statutory stock options upon specified
occasions. A total of 100,000 shares of Class B Common Stock have been
reserved for issuance under the plan. The option purchase price per
share shall equal the fair market value of Class B Common Stock on the
date of the grant. The options are exerciseable at any time, in whole or
in part, prior to the fifth anniversary of the date of the grant. No
further options may be granted under the Director Stock Option Plan
which expired in 1998. The remaining 62,000 shares reserved under the
Plan are no longer available for grant.
The following table summarizes the awards available for grant under the
Company's 1993 Equity Incentive Plan and the Director Stock Option Plan
for the three-year reporting period ended January 1, 1999:
Shares
Shares available at January 5, 1996 421,240
Awards granted (8,000)
Options expired 44,486
---------
Shares available at January 3, 1997 457,726
Additional shares reserved 350,000
Awards granted (149,150)
Options expired 25,278
---------
Shares available at January 2, 1998 683,854
Awards granted (18,750)
Options expired 26,666
Director stock option plan expiration (62,000)
----------
Shares available at January 1, 1999 629,770
==========
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) encourages, but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to
measure stock-based compensation expense using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, compensation
cost for stock options and restricted stock awards is measured as the
excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the exercise price an employee must pay to
acquire the stock.
Stock-based compensation arising from the issuance of restricted stock
and below market options, is being amortized to expense over the vesting
period of the stock grant or option term and amounted to $24,000,
$62,000 and $126,000 for 1998, 1997 and 1996, respectively.
<PAGE>
The following table summarizes the Company's stock option activity as of
January 3, 1997, January 2, 1998 and January 1, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Option
Shares Price Price Range
<S> <C> <C> <C> <C>
Outstanding at January 5, 1996 390,304 $ 4.37 $ 2.00 - $ 12.25
Granted 8,000 $ 4.00 $ 4.00 - $ 4.00
Exercised (19,744) $ 3.52 $ 2.25 - $ 3.69
Forfeited (10,386) $ 5.00 $ 2.25 - $ 10.75
Expired (35,000) $ 4.68 $ 4.68 - $ 4.68
--------
Outstanding at January 3, 1997 333,174 $ 4.36 $ 2.00 - $ 12.25
Granted 147,350 $ 4.50 $ 4.44 - $ 5.00
Exercised (12,628) $ 3.11 $ 2.50 - $ 3.69
Forfeited (38,278) $ 5.87 $ 2.50 - $ 8.50
Expired (3,000) $ 3.35 $ 2.88 - $ 3.63
-----------
Outstanding at January 2, 1998 426,618 $ 4.32 $ 2.00 - $ 12.25
Granted 18,750 $ 5.05 $ 4.44 - $ 6.50
Exercised (84,118) $ 3.52 $ 2.25 - $ 5.00
Forfeited (3,266) $ 3.27 $ 2.50 - $ 5.00
Expired (23,400) $ 8.46 $ 3.69 - $ 12.25
-----------
Outstanding at January 1, 1999 334,584 $ 4.28 $ 2.00 - $ 6.50
==========
</TABLE>
Options exercisable for shares of the Company's Class A and Class B Common
Stock as of January 3, 1997, January 2, 1998 and January 1, 1999, are as
follows:
<TABLE>
<CAPTION>
Options Exercisable
Weighted Average
Exercise Price
Class A Class B Class A Class B
Common Common Common Common
Stock Stock Total Stock Stock
<S> <C> <C> <C> <C> <C>
January 3, 1997 11,400 181,953 193,353 $ 5.60 $ 4.81
January 2, 1998 4,900 228,586 233,486 $ 2.27 $ 4.71
January 1, 1999 4,100 224,054 228,154 $ 2.27 $ 4.22
</TABLE>
<PAGE>
The following table summarizes information about stock options
outstanding at January 1, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Shares Average Weighted Shares Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices Jan. 1, 1999 Life Price Jan. 1, 1999 Price
--------------- ------------ ---- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
$ 2.00 - $ 2.625 51,334 0.59 $ 2.46 51,334 $ 2.46
$ 4.00 - $ 4.875 257,350 2.84 $ 4.52 155,620 $ 4.57
$ 5.00 - $ 5.75 24,400 3.88 $ 5.40 20,400 $ 5.48
$ 6.00 - $ 6.50 1,500 2.27 $ 6.17 800 $ 6.00
----------- ----------
334,584 228,154
=========== ==========
</TABLE>
12. Earnings Per Share
The following table sets forth the computation of basic earnings per
common share and diluted earnings per common share (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ -------------------------- --------------------------
Earnings Earnings Earnings Earnings Earnings Earnings
per per per per per per
Common Common Common Common Common Common
Share - Share - Share - Share - Share - Share -
Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)
Income (loss) from
continuing operations $ 3,579 $ 3,579 $ (4,032) $ (4,032) $ 1,349 $ 1,349
Loss from discontinued
operations -- -- (298) (298) (243) (243)
--------- --------- ---------- ---------- ---------- ----------
Net income (loss) available
for common shares and
assumed conversions $ 3,579 $ 3,579 $ (4,330) $ (4,330) $ 1,106 $ 1,106
========= ========= ========== ========== ========= =========
Weighted-average common
shares and equivalents
outstanding:
Weighted-average shares
outstanding 6,242 6,242 6,240 6,240 6,224 6,224
Effect of dilutive securities:
Stock options -- 131 -- -- -- 44
--------- --------- --------- --------- --------- ---------
6,242 6,373 6,240 6,240 6,224 6,268
========= ========= ========= ========= ========= =========
Earnings per share:
Income (loss) from
continuing operations $ 0.57 $ 0.56 $ (0.65) $ (0.65) $ 0.22 $ 0.22
Loss from discontinued
operations 0.00 0.00 (0.05) (0.05) (0.04) (0.04)
-------- -------- ---------- --------- --------- ---------
Net income (loss) $ 0.57 $ 0.56 $ (0.70) $ (0.70) $ 0.18 $ 0.18
======== ======== ========== ========= ======== ========
</TABLE>
The weighted average fair value at date of grant for options granted in
1998, 1997 and 1996 was $2.75, $2.47 and $1.93 per option, respectively.
The weighted-average fair value of these options at the date of grant
was estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions for 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.5%, 6.3% and 6.3%; dividend
yields of 0%, 0% and 0%; volatility factors of the expected market price
of the Company's common stock of 43.0%, 41.0% and 47.0%; and a
weighted-average expected life of the options of 5.0, 5.0 and 5.5 years.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for
stock option awards in 1998, 1997 and 1996, consistent with the
provisions of SFAS 123, the Company's net income (loss) and net income
(loss) per share would have been reduced to the pro forma amounts
indicated below (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
Earnings Earnings Earnings Earnings Earnings Earnings
per per per per per per
Common Common Common Common Common Common
Share - Share - Share - Share - Share - Share -
Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Net income (loss):
As reported $ 3,579 $ 3,579 $ (4,330) $ (4,330) $ 1,106 $ 1,106
Compensation expense for
stock, net of tax (81) (81) (63) (63) (87) (87)
---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income (loss) 3,498 3,498 (4,393) (4,393) 1,019 1,019
========= ========= ========== ========== ========= =========
Pro forma earnings per share
As reported $ 0.57 $ 0.56 $ (0.70) $ (0.70) $ 0.18 $ 0.18
Compensation expense for
stock, net of tax (0.01) (0.01) (0.01) (0.01) (0.02) (0.02)
--------- --------- --------- --------- --------- ----------
Pro forma net income (loss)
per share $ 0.56 $ 0.55 $ (0.71) $ (0.71) $ 0.16 $ 0.16
======== ======== ========= ========= ======== =========
</TABLE>
The pro forma net income for 1998, 1997 and 1996 is not representative
of the pro forma effect on net income in future years because SFAS 123
does not take into consideration pro forma compensation expense related
to option grants made prior to 1995.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes
in the subjective assumptions can materially affect the fair value
estimate, management believes the existing models do not necessarily
provide a reliable single measure of the fair value of its employee
stock options.
13. Income Taxes:
The provision for income taxes was based on pre-tax income (loss) from
continuing operations before minority interest which was subject to
taxation by the following jurisdictions (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Pre-tax income (loss):
<S> <C> <C> <C>
United States $ 3,870 $ 369 $ 1,149
Foreign 1,368 (4,169) 833
---------- ------------ ----------
Total $ 5,238 $ (3,800) $ 1,982
========== ============ ==========
</TABLE>
The provision (credit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Current:
<S> <C> <C> <C>
Federal $ 830 $ 1,058 $ 265
State 234 309 142
Foreign 104 223 135
---------- ----------- ----------
1,168 1,590 542
---------- ----------- ----------
Deferred:
Federal 239 (971) (102)
State 90 (298) (34)
Foreign (36) (1,365) 137
----------- ------------ ----------
293 (2,634) 1
---------- ------------ ----------
Change in valuation allowance 168 1,399 (218)
---------- ----------- -----------
Total $ 1,629 $ 355 $ 325
========== =========== ==========
</TABLE>
The net deferred tax asset or liability reported on the consolidated
balance sheet consist of the following items as of January 1, 1999 and
January 2, 1998 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net current deferred tax assets:
Allowance for doubtful accounts and discounts $ 581 $ 1,111
Inventory allowances and tax costing adjustments 336 236
Deferred compensation 315 279
Other accrued expenses 307 283
Foreign loss carryforwards 66 125
---------- ----------
Total $ 1,605 $ 2,034
---------- ----------
Net long-term deferred tax assets:
Foreign loss carryforwards $ 921 $ 1,752
Valuation allowance (568) (1,399)
----------- -----------
Total $ 353 $ 353
---------- ----------
Net long-term deferred tax liabilities:
Property, plant and equipment $ 697 $ 621
Investment in limited partnership 1,154 1,198
---------- ----------
Total $ 1,851 $ 1,819
---------- ----------
Net deferred tax asset $ 107 $ 568
========== ==========
</TABLE>
The foreign loss carryforwards relate to operating losses of
approximately $2,394,000 which may be carried forward indefinitely. At
January 1, 1999, the Company has determined that it is more likely than
not that $568,000 of the deferred tax assets resulting from foreign
operating losses will not be realized.
A reconciliation from the U.S. statutory federal income tax rate to the
effective income tax rate on pre-tax income from continuing operations
before minority interest follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. federal income tax rate 34.0% (34.0%) 34.0%
State income tax, net of federal benefit 4.8 0.2 3.6
Detriment (benefit) of valuation allowance relating
to foreign losses 3.2 36.8 (11.0)
Non-deductible expenses and tax-exempt income 0.4 0.7 1.5
International tax rate differences (7.6) 7.0 (0.6)
Low-income housing tax credits (0.7) (1.4) (9.0)
Adjustment of prior years' estimated tax liabilities (3.0) 0.0 (2.1)
------- ------ -------
Effective income tax rate 31.1% 9.3% 16.4%
======= ======= =======
</TABLE>
The Company has not recorded deferred income taxes on the undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in
foreign operations. These earnings amounted to approximately $1,573,000
at January 1, 1999.
14. Discontinued Operations:
On July 4, 1997, the Brookfield Athletic Co., Inc. ("Brookfield"), a
wholly owned domestic subsidiary of the Company, sold substantially all
of the net assets used in its business of distributing recreational
products for $6,841,000. The Company recorded a pre-tax gain on the sale
of $417,000, net of transaction costs of $278,000.
The operating results of the Brookfield for the 1997 and 1996 fiscal
years have been segregated from continuing operations and are reported
as discontinued operations in the Company's Consolidated Financial
Statements. A summary of such results follows (in thousands) (also, see
Note 24):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues $ 2,381 $ 19,567
Costs and expenses 3,037 19,969
---------- ----------
Loss before income taxes (656) (402)
Income tax benefit (262) (159)
----------- -----------
Loss from discontinued operations $ (394) $ (243)
=========== ===========
Gain on sale of net assets $ 417 --
Post measurement date operating losses (243) --
----------- ----------
Gain on disposal before income taxes 174 --
Income tax expense 78 --
---------- ----------
Gain on disposal of Brookfield business $ 96 --
========== ==========
Total loss from discontinued operations $ (298) $ (243)
=========== ===========
</TABLE>
15. Asset Writedowns:
During 1997, the Company's Australian subsidiary recorded a $1,426,000
non-recurring charge to write-down accounts receivables (by $858,000)
and other assets (by $568,000) to their net realizable values. In
addition, a write-down of inventory of $1,340,000 was included in cost
of sales in 1997. The Company recorded a deferred tax valuation
allowance of $999,000 relating to net operating loss carryforwards of
the Australian subsidiary which are not expected to be realized.
During the second quarter of fiscal 1997, the Company recorded a
non-recurring charge of $850,000 ($508,000 after tax, $0.08 per diluted
share) to reduce the carrying value of the Company's inactive
distribution facility in East Brookfield, Massachusetts to estimated
fair value. The fair value of the facility was based on a present value
calculation of assumed market rental income using a discount rate of
12.0%.
This facility consisted of approximately 109,000 square feet of
warehouse and distribution space, as well as a retail factory outlet
situated on approximately 5.4 acres of land. The facility encompassed
nine separate buildings adjoined together. The dates of construction for
the buildings range from 1925 to 1972.
The facility had functioned as an overflow warehouse for the Company. On
July 4, 1997, the Company's wholly-owned subsidiary, Brookfield Athletic
Co., Inc., ("Brookfield"), sold substantially all of the assets used in
Brookfield's business. At that time, approximately 15% of the facilities
aggregate square footage was either utilized by the Company or let out.
The Company had no current or anticipated future need for the
under-utilized space, nor were there any definitive or prospective plans
to lease additional space. Attempts to lease the facility were
unsuccessful due to the inefficient configuration of the facility.
Accordingly, the Company determined that the East Brookfield
distribution facility was impaired.
The non-recurring charge affected the United States business segment.
<PAGE>
16. Geographic Segment Data:
The following table summarizes the Company's continuing operations by
geographic area for the years ended January 1, 1999, January 2, 1998 and
January 3, 1997 and identifiable assets as of January 1, 1999, January
2, 1998 and January 3, 1997. Operating income (loss) have been
reclassified on a basis consistent with operating segment information
presented in Note 17.
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
<S> <C> <C> <C>
Revenues:
United States $ 83,617 $ 65,711 $ 60,388
International 22,193 28,251 31,491
------------ ------------- -------------
$ 105,810 $ 93,962 $ 91,879
============ ============= =============
International revenues:
United States - based divisions 4,086 $ 5,602 $ 7,405
Foreign subsidiaries 18,107 22,649 24,086
------------ ------------- -------------
$ 22,193 $ 28,251 $ 31,491
============= ============= =============
Inter-area revenues:
United States $ 629 $ 786 $ 743
International 9,286 7,430 8,148
------------- ------------- -------------
$ 9,915 $ 8,216 $ 8,891
============= ============= =============
Total revenues:
United States $ 84,246 $ 66,497 $ 61,131
International 31,479 35,681 39,639
Less: Inter-area eliminations (9,915) (8,216) (8,891)
-------------- -------------- --------------
$ 105,810 $ 93,962 $ 91,879
============= ============= =============
Operating income (loss):
United States $ 6,902 $ 2,934 $ 1,595
International (1,117) (4,572) 978
Less: Inter-area eliminations (44) (297) (228)
-------------- -------------- --------------
$ 5,741 $ (1,935) $ 2,345
============= ============== =============
Identifiable assets:
United States $ 72,677 $ 59,521 $ 65,854
International 14,171 13,142 17,742
Less: Inter-area eliminations (16,969) (11,347) (12,844)
-------------- -------------- --------------
$ 69,879 $ 61,316 $ 70,752
============= ============= =============
</TABLE>
Revenues are classified based on customer location. Other revenue
consists primarily of royalty income and freight and handling income on
product shipments. Inter-area revenues primarily represent inventory
shipments to the Company's international subsidiaries. These inter-area
sales are generally priced to recover cost plus an appropriate mark-up
for profit and are eliminated in the determination of consolidated net
sales. Operating income consists of revenue, less cost of sales, selling
expenses and general and administrative expenses and for 1997 includes
non-recurring charges of $850,000 and $2,766,000 relating to the
reduction in the carrying value of the Company's East Brookfield,
Massachusetts facility to market and the Australian subsidiaries
write-down of assets to estimated realizable values, respectively.
17. Operating Segment Data:
At year end 1998, the Company adopted Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related
Information" (SFAS 131). Prior period amounts have been restated in
accordance with the requirements of the new standard.
The Company's operating segments are organized based on the nature of
products. A description of operating segments for the Company are as
follows:
Saucony Segment
Performance running, walking, cross training and outdoor trail footwear
and multi-sport and triathlon athletic apparel sold under the Saucony
brand name.
Other Products Segment
Other Product segment aggregates several product lines, none of which
meet the criteria as defined in SFAS 131 as a reportable segment.
Included in other products are: Hind multi-sport athletic apparel;
Quintana Roo triathlon, road and mountain bicycles, bicycle components
parts and wetsuits; Merlin titanium bicycle frames; Spot-Bilt coaches
and official footwear; Real bicycle components, and the Company's retail
factory outlet stores.
The following table summarizes the Company's operating segments for
the years ended January 1, 1999, January 2, 1998 and January 3, 1997
and identifiable assets as of January 1, 1999, January 2, 1998 and
January 3, 1997:
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
<S> <C> <C> <C>
Saucony $ 86,651 $ 78,771 $ 79,253
Other 19,159 15,191 12,626
------------ ------------ ------------
$ 105,810 $ 93,962 $ 91,879
============ ============ ============
Pre-tax income (loss):
Saucony $ 5,497 $ (2,946) $ 947
Other Products (259) (854) 1,035
------------- ------------- ------------
Total segment pre-tax income (loss) 5,238 (3,800) 1,982
Provision for income taxes 1,629 355 325
Minority interest 30 (123) 308
------------ ------------- ------------
Net income (loss) from continuing operations $ 3,579 $ (4,032) $ 1,349
============ ============= ============
Assets:
Saucony $ 53,906 $ 51,974 $ 66,311
Other Products 15,973 9,342 4,441
------------ ------------ ------------
$ 69,879 $ 61,316 $ 70,752
============ ============ ============
Depreciation and amortization:
Saucony $ 1,606 $ 1,493 $ 1,434
Other Products 230 101 17
------------ ------------ ------------
$ 1,836 $ 1,594 $ 1,451
============ ============ ============
Interest, net:
Saucony $ 252 $ 568 $ 585
Other Products 455 249 145
------------ ------------ ------------
$ 707 $ 817 $ 730
============ ============ ============
Components of interest, net
Interest expense $ 733 $ 888 $ 803
Interest income 26 71 73
------------ ------------ ------------
Interest, net $ 707 $ 817 $ 730
============ ============ ============
</TABLE>
18. Major Customer:
During 1998, the Company had one customer that accounted for
approximately 13% of gross sales. For 1997 and 1996, the Company did
not have a customer account for more than 10% of gross sales.
19. Acquisitions:
Hind Apparel
On December 20, 1996, the Company purchased the trade name, trademarks,
patents and service marks of an athletic apparel manufacturer for
$1,250,000 in cash. The acquisition was accounted for as a purchase. The
entire purchase amount has been recorded as goodwill.
Saucony S.P. Pty. Ltd.
On April 2, 1998, Hyde International Services, Limited ("Hyde
International"), a wholly-owned subsidiary of the Company, acquired
all of the outstanding shares of Saucony S.P. Pty. Ltd.'s capital
stock (other than those shares already owned by Hyde International)
for a nominal amount. Saucony S.P. Pty. Ltd. is currently in the
process of liquidation.
Merlin
On February 17, 1998, the Company acquired substantially all of the
assets of Merlin Materials, Inc. ("Merlin"), a manufacturer of high-end
titanium road and mountain bicycle frames, for $644,000 in cash. The
acquisition was accounted for as a purchase. Goodwill of $120,000,
representing the excess of the acquisition cost over the net assets
acquired, is being amortized on a straight-line basis over 15 years.
The Merlin purchase agreement included provisions for additional
purchase price consideration in the form of deferred contingent amounts.
The earnout payouts are subject to annual maximum earnout amounts for
each of the three fiscal years, covered by the Agreement, and a
cumulative aggregate earnout amount not to exceed $1,200,000.
Real Design
On August 11, 1998, Quintana Roo, Inc., a wholly-owned subsidiary of the
Company, acquired substantially all of the assets of Real Product
Design, Inc. ("Real"), a manufacturer of bicycle components for $240,000
in cash. The acquisition was accounted for as a purchase.
The Real purchase agreement included provisions for additional purchase
price consideration in the form of contingent earnout amounts. The
cumulative earnout amount cannot exceed approximately $380,000.
20. Concentration of Credit Risk:
Financial instruments which potentially subject the Company to credit
risk consist primarily of cash, cash equivalents and trade receivables.
The Company maintains cash and cash equivalents with various major
financial institutions. Cash equivalents include investments in
commercial paper of companies with high credit ratings, investments in
money market securities and securities backed by the U.S. Government. At
times such amounts may exceed the F.D.I.C. limits. The Company limits
the amount of credit exposure with any one financial institution and
believes that no significant concentration of credit risk exists with
respect to cash investments.
Trade receivables subject the Company to the potential for credit risk
with customers in the retail and distributor sectors. To reduce credit
risk, the Company performs ongoing evaluations of its customers
financial condition but does not generally require collateral.
Approximately 39% of the Company's gross trade receivables balance was
represented by 11 customers at January 1, 1999, which exposes the
Company to a concentration of credit risk.
21. Fair Value of Financial Instruments:
The carrying value of cash, cash equivalents, receivables, long-term
debt and other notes payable approximates fair value. The Company
believes similar terms for current long-term debt and other notes
payable would be attainable. The fair value of marketable securities is
estimated based upon quoted market prices for these securities. The
Company enters into forward currency exchange contracts to hedge
intercompany liabilities denominated in other than the functional
currency. The fair value of the Company's foreign currency exchange
contracts is estimated based on current foreign exchange rates. At
January 1, 1999, the value of the Company's foreign currency exchange
contracts to purchase U.S. dollars was $735,000. Gains and losses on
forward exchange contracts are deferred and offset against foreign
currency exchange gains and losses on the underlying hedged item. At
January 1, 1999, estimated fair value of the Company's financial
instruments approximated the carrying value.
22. Comprehensive Income:
As defined in Financial Accounting Standard No. 130, "Reporting
Comprehensive Income," (SFAS 130) comprehensive income encompasses net
income and other components of comprehensive income that are excluded
from net income under Generally Accepted Accounting Principles,
comprising items previously reported directly in stockholders' equity.
SFAS 130 limits the excluded components to the following: foreign
currency translation adjustments, minimum pension liability adjustments
and unrealized gains and losses on certain investments in debt and
equity investments classified as available-for-sales securities.
The following table sets forth comprehensive income for the years
ended January 1, 1999, January 2, 1998 and January 3, 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ 3,579 $ (4,330) $ 1,106
---------- ----------- ----------
Other comprehensive income (loss):
Foreign currency translation adjustment $ (111) $ (183) $ 24
Income tax expense (benefit) related to
other comprehensive income (loss) (32) 5 10
Reclassification adjustment, net of tax 27 -- --
---------- ---------- ----------
Other comprehensive income (loss), net
of tax $ (52) $ (188) $ 14
----------- ----------- ----------
Comprehensive income (loss) $ 3,527 $ (4,518) $ 1,120
========== =========== ==========
</TABLE>
<PAGE>
23. Quarterly Information:
<TABLE>
<CAPTION>
(Unaudited)
(in thousands, except per share amounts)
1998 (1) Quarter 1 Quarter 2 Quarter 3 Quarter 4
---- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 29,624 $ 26,562 $ 26,056 $ 22,832
Gross profit 9,973 10,082 9,250 8,146
Net income 989 689 818 1,083
Earnings per share:
Basic 0.16 0.11 0.13 0.17
Diluted 0.16 0.11 0.13 0.17
<CAPTION>
1997 (2) Quarter 1 Quarter 2 Quarter 3 Quarter 4
---- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 25,217 $ 24,398 $ 24,635 $ 19,361
Gross profit 8,585 8,550 8,422 5,883
Income (loss) from continuing operations 570 (120) 375 (4,857)
Loss from discontinued operations (287) 246 (172) (85)
Net income (loss) 283 126 203 (4,942)
Earnings per share:
Basic 0.05 (0.02) 0.03 (0.79)
Diluted 0.05 (0.02) 0.03 (0.79)
--------------
</TABLE>
(1)Quarterly net income for each of the four quarters of fiscal 1998
have been restated. The earnings restatement had no impact on earnings
per share.
(2) See Note 24
During the second quarter of 1997, the Company recorded a non-recurring
impairment charge of $850,000 ($508,000 after tax, $0.08 per share
diluted) to reduce the carrying value of the Company's distribution
facility in East Brookfield, Massachusetts to market.
During the fourth quarter of 1997, the Company's Australian subsidiary
recorded a $1,426,000 non-recurring charge to write-down to accounts
receivables of $858,000 and prepaid expenses and other assets of
$568,000 to their net realizable values. In addition, a write-down of
inventory of $1,340,000 is included in cost of sales in 1997. The
Company recorded a deferred tax valuation allowance of $999,000 relating
to net operating loss carryforwards of the Australian subsidiary which
are not expected to be realized.
Earnings per share amounts for each quarter are required to be computed
independently and, as a result, their sum may not equal the total
earnings per share amounts for fiscal 1998 and fiscal 1997.
24. Accounting Restatements:
On March 1, 1999, the Company announced that it was engaged in
discussions with the Securities and Exchange Commission ("SEC")
regarding the accounting for two specific transactions recorded in 1995
and 1997. As a result of those discussions, the Company has restated its
previously reported financial results for 1995, 1996 and 1997.
November 1995 - Barter Transaction. In November 1995, the Company's
Brookfield subsidiary ("Brookfield") entered into a barter of inventory
with an approximate book value of $1,055,000 in exchange for cash of
$100,000 and media and trade receivables barter credits of $950,000 and
$350,000, respectively. As of January 3, 1997, $1,297,714 of barter
credits were outstanding. In addition, in 1995, the Company recorded
$345,000 of pre-tax gross margin which was reflected in "discontinued
operations" in the 1997 Form 10-K for the fiscal year 1995.
In connection with the restatement discussed with the SEC, the fiscal
1995 gross margin was reduced by $345,000 ($206,000 after-tax or $0.04
per diluted share), leaving a net carrying value of all barter credits
of $955,000 at year end fiscal 1995. In addition, a pre-tax impairment
charge of $650,000 ($388,000 after-tax, or $0.06 per diluted share) was
recorded for fiscal 1996 to reflect the uncertain value of the remaining
barter credits at that time.
Substantially all the assets of Brookfield, including the remaining
barter credits, were sold to a third party in 1997. As such, the
adjustments in 1995 and 1996 were reversed in 1997 and are reflected in
the "Gain on disposal of the Brookfield business" in 1997 and had no
impact on cumulative retained earnings at January 2, 1998. Reflecting
this restatement for fiscal 1997, the previously reported after-tax loss
of $498,000 on the disposal of Brookfield becomes an after-tax gain on
disposal of $96,000.
August 1997 - License Agreement. In August 1997, the Company granted a
three-year license to an independent third party for the use of the
"Spot-Bilt" and the "single spot" logo trademarks. The agreement called
for minimum guaranteed total royalties of $447,000 over the three-year
life of the license. In 1997, the Company, based on the fact that it
believed that it had no further contractual requirements under the
agreement, recorded a receivable based on the minimum guaranteed present
value of future cash flows, utilizing a discount rate of 8.5%, which
equates to $378,000. This amount was recorded as revenue in fiscal 1997
resulting in $225,000 of net income, or $0.04 per diluted share. The SEC
disagreed with the Company's original accounting.
As a result of the restatement, the licensing revenue and associated
profit will be recognized ratably over the three-year life of the
agreement, rather than up front as originally reported. Accordingly,
fiscal 1997 revenue has been reduced by $346,000 ($206,000 after-tax, or
$0.03 per diluted share).
The following table summarizes the net income and diluted earnings per
share impact of the two financial restatements (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income effect
Barter transaction $ 594 $ (388) $ (206)
License agreement ( 206) - -
------------ ---------- ----------
$ 388 $ (388) $ (206)
=========== =========== ===========
Earnings per diluted share
As previously reported
Continuing operations $ (0.62) $ 0.22 $ 0.08
Discontinued operations (0.14) 0.02 0.18
----------- --------- ---------
$ (0.76) $ 0.24 $ 0.26
=========== ========= =========
Restatement impact
Continuing operations $ (0.03) $ 0.00 $ 0.00
Discontinued operations 0.09 (0.06) (0.04)
---------- ---------- ----------
$ 0.06 $ (0.06) $ (0.04)
========== ========== ==========
Adjusted earnings per diluted share
Continuing operations $ (0.65) $ 0.22 $ 0.08
Discontinued operations (0.05) (0.04) 0.14
----------- ---------- ---------
$ (0.70) $ 0.18 $ 0.22
=========== ========= =========
</TABLE>
<PAGE>
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 1, 1999, January 2, 1998 and January 3, 1997
-------------------------------------------------------------------------
(dollars in thousands)
<CAPTION>
Additions
Balance charged to Deductions Balance
beginning costs and from end
of year expenses reserve of year
<S> <C> <C> <C> <C>
Year ended January 1, 1999:
Allowance for doubtful accounts and discounts $ 2,032 $ 4,908 $ 5,060 $ 1,880
Year ended January 2, 1998:
Allowance for doubtful accounts and discounts $ 1,234 $ 5,475 $ 4,677 $ 2,032
Year ended January 3, 1997:
Allowance for doubtful accounts and discounts $ 940 $ 5,269 $ 4,975 $ 1,234
</TABLE>
<PAGE>
Exhibit Index
Exhibit
Number Description
3.1 Restated Articles of Organization as amended.
3.2 By-Laws, as amended, of the Registrant are incorporated
herein by reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form S-2, as amended
(File No. 33-61040) (the "Form S-2") *
10.1 Credit Agreement between the Registrant and State Street
Bank and Trust Company dated August 31, 1998 incorporated herein
by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the 39 weeks ended October 2, 1998 *
10.2 Amendment dated March 15, 1999 to the Credit Agreement
between the Registrant and State Street Bank and Trust
Company, dated August 31, 1998
10.3** 1982 Employee Stock Option Plan, as amended, is
incorporated herein by reference to Exhibit 10.7 to the Form S-2 *
10.4*** Trademark License Agreement, dated as of February 1, 1994,
between the Registrant and Leif J. Ostberg, Inc. is incorporated
herein by reference to Exhibit 10.21 of the 1993 10-K Report *
10.5** 1993 Equity Incentive Plan, as amended, is incorporated herein
by reference to Exhibit 10.8 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended January 2, 1998. *
10.6** 1993 Director Option Plan is incorporated herein by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the thirteen weeks ended April 2, 1993, as amended
(the "1993 Form 10-Q") *
10.7** VP Bonus Plan is incorporated herein by reference to
Exhibit 10.19 to the Form S-2 *
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule for the fiscal year ended
January 1, 1999.
* Incorporated herein by reference.
** Management contract or compensatory plan or arrangement filed
herewith in response to Item 14(a)(3) of the instructions to
Form 10-K.
*** Confidential treatment previously granted as to certain portions
of such document.
The Commonwealth of Massachusetts
John F.X. Davoren
Secretary of the Commonwealth
State House, Boston, Mass.
RESTATED ARTICLES OF ORGANIZATION
General Laws, Chapter 156B, Section 74
This certificate must be submitted to the Secretary of the Commonwealth within
sixty days after the date of the vote of stockholders adopting the restated
articles of organization. The fee for filing this certificate is prescribed by
General Laws, Chapter 156B, Section 114. Make check payable to the Commonwealth
of Massachusetts
----------------------
We, Richard Hyde, President and
Arthur T. Wasserman, Clerk of
Hyde Athletic Industries, Inc.
(Name of Corporation)
located at 432 Columbia Street, Cambridge, Massachusetts
do hereby certify that the following restatement of the articles of
organization of the corporation was duly adopted at a meeting held on
June 16, 1969 by vote of 245 shares of Common Stock out of 245 shares
- ---------------- ----------- ----------------- ---
outstanding,
being at least two-thirds of each class of stock outstanding and entitled to
vote and of each class or series of stock adversely affected thereby:
1. The name by which the corporation shall be known is:
Hyde Athletic Industries, Inc.
2. The purposes for which the corporation is formed are as follows:
See attached sheet 2
<PAGE>
3. The total number of shares and the par value of any of each class of stock
which the corporation is authorized to issue is as follows:
Without Par Value With Par Value
Class of Stock Number of Shares Number of Shares Par Value
Preferred 0 500,000 $1.00
Common 0 2,500,000 $1.00
*4. If more than one class is authorized, a description of each of the
different classes of stock with, if any, the preferences, voting powers,
qualifications, special or relative rights or privileges as to each class
thereof and any series now established.
See attached pages 3A - 3D
*5. The restrictions, if any, imposed by the articles of organization upon
the transfer of shares of stock of any class are as follows:
None
(* If there are no such provisions, state "None")
*6. Other lawful provision, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or
for limiting, defining, or regulating the powers of the corporation, or of
its directors or stockholders, or of any class of stockholders:
The directors may make, amend, or repeal the By-laws in whole or in part,
except with respect to any provision thereof which by law or the By-laws
requires action by the stockholders.
Meetings of the stockholders of the corporation may be held anywhere in
the United States.
To manufacture, buy, sell and otherwise deal in and with all kinds of
footwear (including, without limitation, boots, shoes, overshoes, slippers
and all kinds of athletic footwear), both on its own account and for
others.
To acquire, hold, lease or dispose of any real estate necessary or
incidental to the business of the corporation.
To manufacture, purchase or otherwise acquire, invest in, own, mortgage,
pledge, sell, assign and transfer or otherwise dispose of, trade, deal in
and deal with goods, wares, merchandise and personal property of every
class and description.
To enter into, make and perform contracts of every kind and description
with any person, firm, association, corporation, municipality, county,
state, body politic or government or colony or dependency thereof.
To borrow and lend money and negotiate loans; to draw, accept, endorse,
buy and sell promissory notes, bonds, stocks, debentures, coupons,
mortgages and other securities.
To subscribe for, take, acquire, hold, sell, exchange and deal in shares,
stocks, bonds, mortgages, obligations and other securities of any
government authority or company; to form, promote, subsidize and assist
companies syndicates, or partnerships of all kinds and to finance and
refinance the same.
In general, to do any act necessary or incidental to the conduct of said
business and in the transaction of the foregoing business and
undertakings, or any of them, to carry on any other business, whether
manufacturing or otherwise, and do any other thing permitted by all
present and future laws of the Commonwealth of Massachusetts applicable to
business corporations; and to carry on any business permitted by the laws
of the Commonwealth of Massachusetts to a corporation organized under
Chapter 156B.
(a) the shares of Preferred Stock may be divided into and issued in one or
more series of any number of shares, provided that the aggregate numbers
of shares outstanding of all such series shall not exceed the total number
of shares of Preferred Stock authorized by the Articles of Organization.
Each series of Preferred Stock shall be distinctively designated. Except
as otherwise herein stated, all series of Preferred Stock shall rank
equally and be identical in all respects. Each share of a series shall be
identical in all respects with all other shares of such series.
(b) the Board of Directors shall have authority by vote to establish and
designate each series of Preferred Stock and the number of shares which
shall constitute each series (which number may be increased (except where
otherwise provided by the Board of Directors in creating such series) or
decreased (but not below the number of shares thereof then outstanding) by
vote of the Board of Directors), and therein to fix and determine the
variations in the relative rights preferences as between the different
series with respect to:
(1) the annual rate or amount of dividends payable on shares of each
series, whether such dividends shall be cumulative or
non-cumulative, the conditions upon which and/or the dates when such
dividends shall be payable and the date from which dividends on
cumulative series shall accrue and be cumulative on all shares of
each series issued prior to the payment date for the first dividend
of each such series;
(2) whether each series shall be redeemable or callable and, if so,
the terms and conditions of such redemption or call, including the
time or times when and the price or prices at which shares of each
series shall be redeemed, or called, and including the terms and
conditions of any retirement or sinking fund for the purchase or
redemption of shares of each series;
(3) the amount payable on shares of each series in the event of
liquidation, dissolution or winding up of the affairs of the
corporation;
(4) whether each series shall be convertible into or exchangeable
for shares of any other class, or any series of the same or any
other class, and, if so, the terms and conditions thereof including
the date or dates when such shares shall be convertible into or
exchangeable for shares of any other class, or any series of the
same or any other class, the price or prices or the rate or rates at
which shares of each series shall be so convertible or exchangeable,
and any adjustments which shall be made, and the circumstances in
which any such adjustments shall be made, in such conversion or
exchange prices or rates;
(5) whether each series shall have any voting rights in addition to
those prescribed by law, and, if so, the terms and conditions of
exercise of such voting rights;
(6) the conditions and restrictions, if any on the payment of
dividends, or on the making of other distributions on, or the
purchase, redemption or other acquisition by, the corporation or any
subsidiary, of the Common Stock, or of any other class, (or other
series of the same class) ranking junior to the shares of such
series as to dividends or upon liquidation, dissolution or winding
up;
(7) the conditions and restrictions, if any, on the creation of
indebtedness of the corporation or any subsidiary, or on the issue
of any additional stock ranking on a parity with or prior to the
shares of each series as to dividends or upon liquidation,
dissolution or winding up; and
(8) such other powers, preferences and relative participating,
optional or other special rights, and qualifications, limitations or
restrictions as shall not be inconsistent with any such resolution
or resolutions previously adopted as to shares then still authorized
or with the provisions of these Articles of Organization or with the
laws of the Commonwealth of Massachusetts.
(c)(1) So long as any shares of Preferred Stock of any series shall be
outstanding, the corporation will not declare or pay any dividends on the
Common Stock (other than dividends payable solely in shares of Common
Stock) or make any distributions of any kind, either directly or
indirectly, in respect of shares of Common Stock, or make any payment on
account of the purchase, redemption or other acquisition of Common Stock,
unless on the payment, distribution or redemption date, as the case may
be, all dividends on the then outstanding shares of Preferred Stock of all
series for all past dividends periods shall have been paid to the full
extent of the preferences, if any, to which each series of Preferred Stock
is entitled.
(2) In case the corporation shall not pay in full all dividends required
to be paid on all shares of all series of cumulative Preferred Stock at
the time outstanding to the full extent of the preference, if any, to
which each such cumulative series is entitled, all cumulative series which
are of equal rank with respect to such dividend preference shall share
ratably in the payment of dividends, including accumulations thereof, if
any, in proportion to the amounts that would be payable on such series if
all dividends thereon were paid in full. Accumulations of dividends shall
not bear interest.
(3) After the requirements with respect to preferential dividends upon all
classes of capital stock, and each series thereof, shall have been met,
then and not otherwise, the holders of Common Stock shall be entitled to
receive such dividends, out of any remaining net profits or net assets of
the corporation available therefor, when, as and if (subject to the
foregoing provisions of this Article Fourth) such dividends may be
declared from time to time by the Board of Directors. After distribution
in full of the preferential amounts to be distributed to the holders of
all classes of stock, and each series thereof, having more than parity
with Common Stock upon liquidation, dissolution or winding up, then, in
the event of the voluntary or involuntary liquidation, dissolution or
winding up of the corporation, the holders of the Common Stock shall be
entitled to receive all the remaining assets of the corporation available
for distribution to its stockholders ratably in proportion to the number
of shares of Common Stock held by them respectively.
(4) A liquidation, dissolution or winding up of the corporation, as such
terms are used herein, or as may be used in any resolution or resolutions
of the Board of Directors providing for the issue of any series of this
corporation's capital stock, shall not be deemed to be occasioned by or to
include:
(i) any consolidation or merger of the corporation with or into
any other corporation or corporations, or
(ii) any sale, lease, exchange or other transfer of any or all of
the assets of the corporation to another corporation or corporations
pursuant to a plan which shall provide for the receipt by the
corporation or its stockholders, as all or the major portion of the
consideration for such sale, lease, exchange or transfer, of
securities of such other corporation or corporations or if any
company or companies subsidiary to, controlled by, or affiliated
with such other corporation or corporations.
(d) The authorized but unissued shares of Common Stock and the authorized
but unissued shares of Preferred Stock may be issued for such
consideration, not less than the par value thereof, as may be fixed from
time to time by the Board of Directors.
(e)(1) Except as otherwise determined pursuant to authority of the Board
of Directors as hereinbefore provided, or by the Business Corporation Law
of the Commonwealth of Massachusetts, all voting rights shall be vested
exclusively in the holders of the outstanding shares of Common Stock and
each such holder shall be entitled to one vote per share for all purposes
for such share of Common Stock held of record by him.
(2) Except as otherwise determined pursuant to authority of the Board of
Directors as hereinbefore provided, or by the Business Corporation Law of
the Commonwealth of Massachusetts, the holders of Preferred Stock shall
not be entitled to vote for any purpose nor shall they be entitled to
notice of meetings of stockholders.
*We further certify that the foregoing restated articles of organization effect
no amendments to the articles of organization of the corporation as hereinunder
amended as amendments to the following articles.
(*If there are no such amendments, state "None")
NONE
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our
names this 16th day of June in the year 1969.
/s/ Richard Hyde, President
/s/ Arthur T. Wasserman, Clerk
<PAGE>
The Commonwealth of Massachusetts
X RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74)
I hereby approve the within restated articles of organization and, the filing
fee in the amount of $75.00 having been paid, said articles are deemed to have
been filed with me this 18th day of June, 1969
/s/ John Davoren
/s/ Kevin White
Secretary of the Commonwealth
State House, Boston, Mass.
TO BE FILLED IN BY CORPORATION
Photo copy of restated articles of organization to be
sent to:
Nutter, McClennen & Fish
75 Federal Street
Boston, Massachusetts 02110
Attn: C. Alexander
Phone No. 423-7011
Copy mailed 6-20-69
<PAGE>
The Commonwealth of Massachusetts
John F.X. Davoren
Secretary of the Commonwealth
State House, Boston, Mass.
RESTATED ARTICLES OF ORGANIZATION
General Laws, Chapter 156B, Section 72
This certificate must be submitted to the Secretary of the Commonwealth within
sixty days after the date of the vote of stockholders adopting the amendment.
The fee for filing this certificate is prescribed by General Laws, Chapter 156B,
Section 114. Make check payable to the Commonwealth of Massachusetts
----------------------
We, Richard Hyde, President and
Arthur T. Wasserman, Clerk of
Hyde Athletic Industries, Inc.
(Name of Corporation)
located at 432 Columbia Street, Cambridge, Massachusetts
do hereby certify that the following restatement of the articles of organization
of the corporation was duly adopted at a meeting held on July 8, 1969 by vote of
625,000 shares of Common Stock out of 625,000 shares outstanding,
being at least two-thirds of each class of stock outstanding and entitled to
vote thereon and of each class or series of stock whose rights are adversely
affected thereby:
<PAGE>
For increase in capital fill in the following:
The total amount of capital ........ shares preferred with par value
stock already authorized is: ........ shares common with par value
........ shares preferred without par
value
........ shares common without par value
The amount of additional ........ shares preferred with par value
capital stock authorized is: ........ shares common with par value
........ shares preferred without par
value
........ shares common without par value
<PAGE>
VOTED: That the Restated Articles of Organization of this corporation be,
and hereby are, amended to reduce the authorized Common Stock of
this corporation, one dollar par value per share, from 2,500,000
shares to 2,425,000 shares, such reduction to be accomplished by
canceling and retiring 75,000 shares of Common Stock now held in its
treasury.
VOTED: That the President and the Clerk of the corporation are hereby
authorized to execute proper Articles of Amendment setting forth the
alteration and amendment in the Restated Articles of Organization of
the corporation adopted at this meeting and the due adoption thereof
and that such Articles of Amendment be submitted to the Secretary of
the Commonwealth for his approval and filing and the proper fee be
paid to him.
<PAGE>
The foregoing amendment will become effective when these articles of amendment
are filed in accordance with Chapter 156B, Section 6 of the General Laws unless
these articles specify, in accordance with the vote adopting the amendment, a
later effective date not more than thirty days after such filing, in which event
the amendment will become effective on such later date.
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our
names this 8th day of July in the year 1969.
/s/ Richard Hyde, President
/s/ Arthur T. Wasserman, Clerk
<PAGE>
The Commonwealth of Massachusetts
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
I hereby approve the within restated articles of organization and, the filing
fee in the amount of $25.00 having been paid, said articles are deemed to have
been filed with me this 10th day of July, 1969
/s/ John Davoren
/s/ Kevin White
Secretary of the Commonwealth
State House, Boston, Mass.
TO BE FILLED IN BY CORPORATION
Photo copy of restated articles of organization to be
sent to:
Nutter, McClennen & Fish
75 Federal Street
Boston, Massachusetts 02110
Attn: C. Alexander
Phone No. 423-7011
Copy mailed 7-14-69
<PAGE>
The Commonwealth of Massachusetts
Secretary of the Commonwealth
State House, Boston, Mass. 02133
04-1465840
ARTICLES OF AMENDMENT
General Laws, Chapter 156B, Section 72
This certificate must be submitted to the Secretary of the Commonwealth within
sixty days after the date of the vote of stockholders adopting the amendment.
The fee for filing this certificate is prescribed by General Laws, Chapter 156B,
Section 114. Make check payable to the Commonwealth of Massachusetts.
----------------------
We, Leonard R. Fisher, President and
Joel A. Kozol, Clerk of
Hyde Athletic Industries, Inc.
(Name of Corporation)
located at 432 Columbia Street, Cambridge, Massachusetts 02141
do hereby certify that the following amendment to the articles of organization
of the corporation was duly adopted at a meeting held on June 2, 1983, by vote
of
478,310 shares of Common Stock out of 825,210 shares outstanding,
being at least a majority of each class outstanding and entitled to vote
thereon.(1)
VOTED: That a change of each share of the Company's authorized Common Stock,
$1.00 par value, including all shares issued and outstanding, into three shares
having a par value of $.33 1/3 each, and an increase of the Company's authorized
Common Stock from 2,425,000 shares, $1.00 par value, to 7,275,000 shares, $.33
1/3 par value, as heretofore authorized by the Company's Board of Directors, be,
and hereby are, in all respects approved; and the Company's Board of Directors
is hereby authorized and directed to take and/or to authorize all appropriate
action to effectuate such stock split and increase of authorized capital stock.
(1) For amendment adopted pursuant to Chapter 156B, Section 70.
<PAGE>
The foregoing amendment will become effective when these articles of amendment
are filed in accordance with Chapter 156B, Section 6 of the General Laws unless
these articles specify, in accordance with the vote adopting the amendment, a
later effective date not more than thirty days after such filing, in which event
the amendment will become effective on such later date.
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our
names this 2nd day of June in the year 1983.
/s/ Leonard R. Fisher, President
Leonard R. Fisher, President
/s/ Joel A. Kozol, Clerk
Joel A. Kozol, Clerk
The Commonwealth of Massachusetts
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
I hereby approve the within articles of amendment and, the filing fee in the
amount of $2,425.00 having been paid, said articles are deemed to have been
filed with me this 3rd day of June, 1983
/s/ Michael Joseph Connolly
Secretary of the Commonwealth
State House, Boston, Mass.
TO BE FILLED IN BY CORPORATION
Photo copy of restated articles of organization to be
sent to:
Scott N. Semel, Esquire
Friedman and Atherton
28 State Street, 19th Floor
Boston, Massachusetts 02109
Copy mailed 6-14-83
<PAGE>
The Commonwealth of Massachusetts
Michael J. Connolly
Secretary of the Commonwealth
State House, Boston, Mass. 02133
04-1465840
ARTICLES OF AMENDMENT
General Laws, Chapter 156B, Section 72
This certificate must be submitted to the Secretary of the Commonwealth within
sixty days after the date of the vote of stockholders adopting the amendment.
The fee for filing this certificate is prescribed by General Laws, Chapter 156B,
Section 114. Make check payable to the Commonwealth of Massachusetts.
----------------------
We, Charles A. Gottesman, Senior Vice President and
Joel A. Kozol, Clerk of
Hyde Athletic Industries, Inc.
(Name of Corporation)
located at 13 Centennial Drive, Centennial Industrial Park, Peabody, MA 01961
-------------------------------------------------------------------
do hereby certify that the following amendment to the articles of
organization of the corporation was
duly adopted at a meeting held on June 25, 1987, by vote of
2,197,220 shares of Common Stock out of 2,845,098 shares outstanding (1) and
2,194,378 shares of Common Stock out of 2,845,098 shares outstanding (2)
being at least two-thirds of each class outstanding and entitled to vote
thereon and of each class or series of stock whose rights are adversely
affected thereby. (2)
- -------------------
(1) With respect to Vote No. 1
See Continuation Sheets
(1) For amendments adopted pursuant to Chapter 156B, Section 70. (2) For
amendments adopted pursuant to Chapter 156B, Section 71.
<PAGE>
VOTE NO. 1
VOTED: That the Restated Articles of Organization of the Corporation, as amended
to date, be and hereby are, further amended by adding to Article 6 thereof the
following provisions:
Elimination of Certain Director Liability: A director of the Corporation shall
not be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 61 or
62 of the Massachusetts Business Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit. Provided, however,
that the provisions hereof shall not apply to limit or eliminate the liability
of any director for any act or omission which occurred prior to the date on
which these provisions become effective; and no amendment or repeal of said
provisions thereafter shall deprive a director of the benefits thereof with
respect to any acts or omissions occurring between the date on which these
provisions became effective and the date of such amendment or repeal.
<PAGE>
The foregoing amendment will become effective when these articles of amendment
are filed in accordance with Chapter 156B, Section 6 of the General Laws unless
these articles specify, in accordance with the vote adopting the amendment, a
later effective date not more than thirty days after such filing, in which event
the amendment will become effective on such later date.
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our
names this 21st day of April in the year 1988.
/s/ Charles A. Gottesman, Senior Vice President
Charles A. Gottesman, Senior Vice President
/s/ Joel A. Kozol, Clerk
Joel A. Kozol, Clerk
The Commonwealth of Massachusetts
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
I hereby approve the within articles of amendment and, the filing fee in the
amount of $75.00 having been paid, said articles are deemed to have been filed
with me this 27th day of April, 1988
/s/ Michael Joseph Connolly
Secretary of the Commonwealth
State House, Boston, Mass.
TO BE FILLED IN BY CORPORATION
Photo copy of restated articles of organization to be
sent to:
Sidney Werlin, Esquire
Friedman and Atherton
28 State Street, 19th Floor
Boston, Massachusetts 02109
Copy mailed 6-16-93
<PAGE>
The Commonwealth of Massachusetts
OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE
MICHAEL JOSEPH CONNOLLY, Secretary
ONE ASHBURTON PLACE, BOSTON, MASSACHUSETTS 02108
FEDERAL IDENTIFICATION
NO. 04-1465840
ARTICLES OF AMENDMENT
General Laws, Chapter 156B, Section 72
We John H. Fisher, President and
David E. Redlick, Clerk of
Hyde Athletic Industries, Inc.
Exact name of Corporation
located at: 13 Centennial Drive, Peabody, Massachusetts 01961
(Massachusetts Address of Corporation)
do hereby certify that these ARTICLES OF AMENDMENT affecting Articles
NUMBERED: 3, 4 and 6
(Number those articles 1,2,3,4,5 and/or 6 being amended hereby)
of the Articles of Organization were duly adopted at a meeting held on May 25,
1993, by vote of:
2,009,027 shares of Common Stock out of 2,813,395 shares outstanding, (1)
2,296,992 shares of Common Stock out of 2,813,395 shares outstanding, (2)
2,456,932 shares of Common Stock out of 2,813,395 shares outstanding, (3) and
2,216,740 shares of Common Stock out of 2,813,395 shares outstanding, (4)
being at least two-thirds of each type, class or series outstanding and entitled
to vote thereon and of each type, class or series of stock whose rights are
adversely affected thereby:
(1) For the Reclassification Amendment. See Exhibit A attached hereto.
(2) For the Preferred Stock Amendment. See Exhibit B attached hereto.
(3) For the Indemnification Amendment. See Exhibit C attached hereto.
(4) For the Business Enterprise Amendment. See Exhibit D attached hereto.
<PAGE>
To CHANGE the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following
The total presently authorized is:
Without Par Value Stocks With Par Value Stocks
Number Number Par
Type of Shares Type of Shares Value
Common Common 7,275,000 $.33 - 1/3
Preferred Preferred 500,000 $1.00
CHANGE the total authorized to:
Without Par Value Stocks With Par Value Stocks
Number Number Par
Type of Shares Type of Shares Value
Common Common
Class A 20,000,000 $.33 - 1/3
Class B 20,000,000 $.33 - 1/3
Preferred Preferred 500,000 $1.00
<PAGE>
Exhibit A
RECLASSIFICATION AMENDMENT
VOTED:
That Article 3 of the corporation's Restated Articles of Organization, as
amended, be and hereby is amended to increase from 7,275,000 to 40,000,000 the
total number of shares of Common Stock, $.33 1/3 par value per share ("Common
Stock"), which the corporation shall have the authority to issue, of which
20,000,000 shares shall be designated Class A Common Stock, $.33 1/3 par value
per share ("Class A Common Stock"), and 20,000,000 shares shall be designated
Class B Common Stock, $.33 1/3 par value per share ("Class B Common Stock").
VOTED:
That Article 4 of the corporation's Restated Articles of Organization, as
amended, be and hereby is amended by (i) deleting Paragraph (d) thereof and
substituting therefor the following: "The authorized but unissued shares of
Preferred Stock may be issued for such consideration, not less than par value
thereof, as may be fixed from time to time by the Board of Directors": (ii)
deleting Paragraph (e)(1) thereof in its entirety and (iii) adding thereto the
following provisions:
"A. COMMON STOCK
1. Reclassification of Existing Common Stock. Upon these Articles of Amendment
becoming effective pursuant to Chapter 156B of the Massachusetts General Laws
(the "Effective Time"), and without any further action on the part of the
corporation or its stockholders, each share of Common Stock of the corporation,
$.33 1/3 par value per share (the "Existing Common Stock"), then issued
(including shares held in the treasury of the corporation, if any) shall
automatically be reclassified, changed and converted into one fully paid and
nonassessable share of Class A Common Stock and certificates previously
representing shares of Existing Common Stock shall be deemed to represent the
same number of shares of Class A Common Stock.
2. General. The powers, preferences and rights of the holders of Class A Common
Stock and Class B Common Stock (collectively the "Common Stock"), and the
qualifications, limitations or restrictions thereof, shall be in all respects
identical, except as otherwise required by law or expressly provided in these
Restated Articles of Organization, as amended, and subject to the powers,
preferences and rights of the holders of shares of Preferred Stock, as
determined by the Board of Directors pursuant to this Article 4.
3. Dividends. Dividends or distributions may be declared and paid to the holders
of the Class A Common Stock and the Class B Common Stock in cash, securities, or
other property of the corporation out of any funds legally available therefor.
If and when dividends or distributions on the Class A Common Stock and the Class
B Common Stock are declared payable from time to time by the Board of Directors,
whether payable in cash, in property or in securities of the corporation, the
holders of the Class A Common Stock and the holders of the Class B Common Stock
shall be entitled to share equally, on a per share basis, in such dividends,
provided, however, that in the case of regular cash dividends, no such dividends
shall be declared or paid on one class of Common Stock unless a cash dividend is
simultaneously declared and paid on the other class of Common Stock, and any
such dividend will be paid on the Class B Common Stock in an amount per share of
Class B Common Stock equal to 110% of the amount of such dividend paid on each
share of Class A Common Stock (rounded down, if necessary, to the nearest
one-hundredth of a cent); and provided, further, that, dividends or other
distribution payable on the Common Stock in capital stock shall be made to all
holders of Common Stock and may be made (i) in Class B Common Stock to the
record holders of Class A Common Stock and to the record holders of Class B
Common Stock, (ii) in Class A Common Stock to the record holders of Class A
Common Stock and in Class B Common Stock to the record holders of Class B Common
Stock or (iii) in any other authorized class or series of capital stock to the
holders of both classes of Common Stock.
4. Distribution on Dissolution, etc. Upon any liquidation, dissolution or
winding up of the corporation, whether voluntary or involuntary, the remaining
net assets of the corporation shall, after payment in full of the liquidation
preference, if any, of any outstanding Preferred Stock, be distributed pro rata,
on a per share basis, to the holders of the Class A Common Stock and the Class B
Common Stock.
5. Voting Rights.
(a) At each annual or special meeting of the stockholders, each holder of Class
A Common Stock shall be entitled to one (1) vote in person or by proxy for each
share of Class A Common Stock standing in his name on the stock transfer records
of the corporation in connection with the election of directors and all other
actions submitted to a vote of stockholders. Holders of Class B Common Stock
shall not vote on any matters: except that (i) the affirmative vote of the
holders of a majority of the outstanding shares of Class B Common Stock shall be
required for the authorization of any amendment of these Restated Articles of
Organization, as amended, that would alter or change the powers, preferences or
special rights of the Class B Common Stock so as to affect them adversely and
(ii) the holders of Class B Common Stock shall have such other voting rights as
may be required under Chapter 156B of the Massachusetts General Laws.
Notwithstanding the foregoing, an amendment of these Restated Articles of
Organization, as amended, which (A) increases the number of authorized shares of
Class B Common Stock or (B) authorizes a class or series of capital stock with
preference or priority over the Class B Common Stock with respect to the right
to receive dividends or amounts distributable upon liquidation, dissolution of
winding up of the corporation shall not be considered an amendment on which the
holders of Class B Common Stock are entitled to vote pursuant to either clause
(i) or clause (ii) of the foregoing sentence.
(b) The number of authorized shares of Class B Common Stock may be increased or
decreased (but not below the number of shares then outstanding) by the
affirmative vote of the holders of a majority of the outstanding shares of Class
A Common Stock.
6. Conversion.
(a) All outstanding Class B Common Stock may be converted into Class A Common
Stock on a share-for-share basis by the Board of Directors if, as a result of
the existence of the Class B Common Stock, either the Class A Common Stock or
Class B Common Stock is or both are excluded from trading on the New York Stock
Exchange, the American Stock Exchange and all other principal national
securities exchanges then in use and also excluded from Quotation on the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System and other comparable national quotation systems then in
use. In making such determination, the Board of Directors may conclusively rely
on any information or documentation available to it, including filings made with
the Securities and Exchange Commission, any stock exchange, the National
Association of Securities Dealers, Inc. or any other governmental or regulatory
agency or any written instrument purporting to be authentic.
(b) All outstanding shares of Class B Common Stock shall automatically be
converted into shares of Class A Common Stock on a share-for-share basis if at
any time the number of outstanding shares of Class A Common Stock , as reflected
on the stock transfer records of the corporation, falls below ten percent (10%)
of the aggregate number of outstanding shares of Class A Common Stock and of
Class B Common Stock. For purposes of the immediately preceding sentence, any
Common Stock repurchased and held as treasury shares or canceled by the
corporation shall no longer be deemed "outstanding" from and after the date of
repurchase.
(c) In the event of any conversion of the Class B Common Stock pursuant to
subparagraph A(6)(a) or A(6)(b), certificates which formerly represented
outstanding shares of Class B Common Stock will thereafter be deemed to
represent a like number of shares of Class A Common Stock and all authorized
Common Stock shall consist of only Class A Common Stock.
7. Class B Common Stock Protection Provision.
(a) If, after the Effective Time, any person, entity or group (other than the
corporation) acting in concert acquires beneficial ownership of shares
representing 10% or more of the then outstanding Class A Common Stock
(excluding, for purposes of determining the shares owned by such person, entity
or group but not for purposes of determining the shares outstanding, the shares
beneficially owned by such person or group before the Effective Time and any
shares acquired upon the issuance or sale by the corporation, by operation of
law (including a merger or consolidation effected for the purpose of
recapitalizing such person or reincorporating such person in another
jurisdiction, but excluding a merger or consolidation effected for the purpose
of acquitting another person), by will or the laws of descent and distribution,
by gift or by foreclosure of a bona fide loan), and such person or group (a
"Significant Stockholder") does not then beneficially own an equal or greater
percentage of all then outstanding shares of the Class B Common Stock that such
Significant Stockholder acquired after the first issuance of Class B Common
Stock (the "Distribution Date"), such Significant Stockholder must, within a
ninety (90) day period beginning the day after becoming a Significant
Stockholder, make a public cash tender offer in compliance with all applicable
laws and regulations to acquire additional Class B Common Stock as provided in
this subparagraph A(7) of Article 4 (a "Class B Protection Transaction").
(b) In each Class B Protection Transaction, the Significant Stockholder must
make a public tender offer to acquire that number of additional shares of Class
B Common Stock determined by (i) multiplying the percentage of outstanding
shares of Class A Common Stock beneficially owned by such Significant
Stockholder and acquired after the Effective Time by such Significant
Stockholder by the total number of shares of Class B Common Stock outstanding on
the date such person or group became a Significant Stockholder, and (ii)
subtracting therefrom the excess (if any) of the number of shares of Class B
Common Stock beneficially owned on such date (including shares acquired on such
date at or prior to the time such person or group became a Significant
Stockholder) over the number of shares of Class B Common Stock beneficially
owned on the Distribution Date (as such number may be appropriately adjusted for
any stock splits, stock dividends or similar recapitalization). The Significant
Stockholder must acquire all of such shares validly tendered; provided, however,
that if the number of shares of Class B Common Stock tendered to the Significant
Stockholder exceeds the number of shares required to be acquired pursuant to the
formula set forth in this subparagraph A(7)(b), the number of shares of Class B
Common Stock acquired from each tendering holder shall be such portion of the
number of shares tendered by such stockholder as is equal to the number of
shares required to be acquired as a percentage of the total number of shares
tendered by all tendering holders.
(c) The offer price for any Class B Common Stock required to be purchased by the
Significant Stockholder pursuant to this subparagraph A(7) shall be the greatest
of (i) the highest price per share paid by the Significant Stockholder for any
share of Class A Common Stock in the six month period ending on the date such
person or group became a Significant Stockholder, (ii) the highest reported sale
price of a share of Class A Common Stock or Class B Common Stock on the NASDAQ
National Market System (or such other exchange or quotation system as is then
the principal trading market for such shares) on the date such person or group
became a Significant Stockholder and (iii) the highest reported sale price of a
share of Class A Common Stock or Class B Common Stock on the NASDAQ National
Market System (or such other exchange or quotation system as is then the
principal trading market for such shares) on the date preceding the date the
Significant Stockholder makes the tender offer required by this subparagraph
A(7). For purposes of subparagraph A(7)(d) below, the applicable date for each
calculation required by clauses (i) and (ii) of the preceding sentence shall be
the date on which the Significant Stockholder becomes required to engage in the
subsequent Class B Protection Transaction for which such calculation is
required. In the event that the Significant Stockholder as acquired Class A
Common Stock in the six month period ending on the date such person or group
becomes a Significant Stockholder for consideration other than cash, the value
of such consideration per share of Class A Common Stock shall be as determined
in good faith by the Board of Directors.
(d) A Class B Protection Transaction shall also be required to be effected by
any Significant Stockholder each time that the Significant Stockholder acquires
beneficial ownership of the next higher integral multiple of 5% (e.g., 15%, 20%,
25%, etc.) of the outstanding Class A Common Stock after the Effective Time
(other than upon the issuance or sale by the corporation, by operation of law
(including a merger or consolidation effected for the purpose of recapitalizing
such person or reincorporating such person in another jurisdiction, but
excluding a merger or consolidation effected for the purpose of acquiring
another person), by will of the laws of descent and distribution, by gift, or by
foreclosure of a bona fide loan) if such Significant Stockholder does not then
own an equal or greater percentage of the Class B Common Stock that such
Significant Stockholder acquired after the Distribution Date. Such Significant
Stockholder shall be required to make a public cash tender offer to acquire that
number of shares of Class B Common Stock prescribed by the formula set forth in
subparagraph A(7)(b) above and must acquire all shares validly tendered or a pro
rate portion thereof, as specified in subparagraph A(7)(b), at the price
determined pursuant to subparagraph A(7)(c) above.
(e) If any Significant Stockholder fails to make an offer required by this
subparagraph A(7), or to purchase shares validly tendered and not withdrawn
(after proration, if any), such Significant Stockholder shall not be entitled to
vote any Class A Common Stock beneficially owned by such Significant Stockholder
unless and until such requirements are complied with or unless and until all
Class A Common Stock causing such offer requirement to be effective are no
longer beneficially owned by such Significant Stockholder.
(f) The Class B Protection Transaction requirement shall not apply to any
increase in percentage beneficial ownership of Class A Common Stock resulting
solely from a change in the total amount of Class A Common Stock outstanding,
provided that any acquisition after such change which resulted in any person,
entity or group beneficially owning ten percent (10%) or more of the Class A
Common Stock (excluding, for purposes of determining the shares owned by such
person, entity or group but not for purposes of determining the shares
outstanding, Class A Common Stock held by such Significant Stockholder
immediately after the Effective Time) shall be subject to any Class B Protection
Transaction requirement that would be imposed with respect to a Significant
Stockholder pursuant to this subparagraph A(7).
(g) All calculations with respect to percentage beneficial ownership of issued
and outstanding shares of either class of Common Stock will be based upon the
numbers of issued and outstanding shares reported by the corporation on the last
to be filed of (i) the corporation's most recent Annual Report on Form 10-K,
(ii) its most recent Quarterly Report on Form 10-Q, (iii) its most recent
Current Report on Form 8-K, and (iv) its most recent Form 10-C.
(h) For purposes of this subparagraph A(7), the term "person" means a natural
person, corporation, partnership, trust, association, government, or political
subdivision, agency or instrumentality of a government, or other entity.
"Beneficial ownership" shall be determined pursuant to Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any
successor regulation. The formation or existence of a "group" shall be
determined pursuant to Rule 13d-5(b) under the 1934 Act or any successor
regulation.
8. Merger or Consolidation. In the event of a merger or consolidation of the
corporation with or into another entity (whether or not the corporation is the
surviving entity), the holders of Class B Common Stock shall be entitled to
receive the same per share consideration as the per share consideration, if any,
received by the holders of Class A Common Stock in such merger or consolidation.
9. Splits, Subdivisions, etc. If the corporation shall in any manner split,
subdivide or combine the outstanding Class A Common Stock or Class B Common
Stock, the outstanding shares of the other such class of Common Stock shall be
proportionally split, subdivided or combined in the same manner and on the same
basis as the outstanding shares of the other class of Common Stock have been
split, subdivided or combined.
10. No Preemptive Rights. No holder of Class A Common Stock or Class B Common
Stock shall, by reason of such holding, have any preemptive right to subscribe
to any additional issue of stock of any class or series of the corporation or to
any security of the corporation convertible into such stock.
11. Consideration for Sale of Shares. The Board of Directors shall have the
power to issue and sell all or any part of any class of stock herein or
hereafter authorized to such persons, firms, associations or corporations, and
for such consideration, as the Board of Directors shall from time to time, in
its discretion, determine, whether or not greater consideration could be
received upon the issue or sale of the same number of shares of another class,
and as otherwise permitted by law.
12. Consideration for Purchase of Shares. The Board of Directors shall have the
power to purchase any class of stock herein or hereafter authorized from such
persons, firms, associations or corporations, and for such consideration, as the
Board of Directors shall from time to time, in its discretion, determine,
whether or not less consideration could be paid upon the purchase of the same
number of shares of another class, and as otherwise permitted by law."
<PAGE>
Exhibit B
PREFERRED STOCK AMENDMENT
VOTED:
That Article 4 of the corporation's Restated Articles of Organization, as
amended, be and hereby is deleted, except for any other provision added by an
amendment approved by the corporation's stockholders at the corporation's Annual
Meeting of Stockholders held on May 25, 1993 or any adjournment thereof, and the
following is substituted therefor:
"B. PREFERRED STOCK
1. The shares of Preferred Stock may be divided into and issued in one or more
series of any number of shares, provided that the aggregate numbers of shares
outstanding of all such series shall not exceed the total number of shares of
Preferred Stock authorized by the Restated Articles of Organization. Each series
of Preferred Stock shall be distinctively designated. Except as otherwise herein
stated, all series of Preferred Stock shall rank equally and be identical in all
respects. Each share of a series shall be identical in all respects with all
other shares of such series.
2. The Board of Directors shall have authority by resolution to establish and
designate each series of Preferred Stock and the number of shares which shall
constitute each series (which number may be increased (except where otherwise
provided by the Board of Directors in creating such series) or decreased (but
not below the number of shares thereof then outstanding) by vote of the Board of
Directors), and therein to fix and determine the variations in the relative
rights preferences as between the different series with respect to:
(a) the annual rate or amount of dividends payable on shares of each
series, whether such dividends shall be cumulative or non-cumulative, the
conditions upon which and/or the dates when such dividends shall be payable and
the date from which dividends on cumulative series shall accrue and be
cumulative on all shares of each series issued prior to the payment date for the
first dividend of each such series;
(b) whether each series shall be redeemable or callable and, if so, the
terms and conditions of such redemption or call, including the time or times
when and the price or prices at which shares of each series shall be redeemed,
or called, and including the terms and conditions of any retirement or sinking
fund for the purchase or redemption of shares of each series;
(c) the amount payable on shares of each series in the event of
liquidation, dissolution or winding up of the affairs of the corporation;
(d) whether each series shall be convertible into or exchangeable for
shares of any other class, or any series of the same or any other class, and, if
so, the terms and conditions thereof including the date or dates when such
shares shall be convertible into or exchangeable for shares of any other class,
or any series of the same or any other class, the price or prices or the rate or
rates at which shares of each series shall be so convertible or exchangeable,
and any adjustments which shall be made, and the circumstances in which any such
adjustments shall be made, in such conversion or exchange prices or rates;
(e) whether each series shall have any voting rights in addition to those
prescribed by law, and, if so, the terms and conditions of exercise of such
voting rights;
(f) the conditions and restrictions, if any, on the payment of dividends,
or on the making of other distributions on, or the purchase, redemption or other
acquisition by, the corporation or any subsidiary, of the Common Stock, or of
any other class (or other series of the same class) ranking junior to the shares
of such series as to dividends or upon liquidation, dissolution or winding up;
(g) the conditions and restrictions, if any, on the creation of
indebtedness of the corporation or any subsidiary, or on the issue of any
additional stock ranking on a parity with or prior to the shares of each series
as to dividends or upon liquidation, dissolution or winding up; and
(h) such other powers, preferences and relative participating, optional or
other special rights, and qualifications, limitations or restrictions as shall
not be inconsistent with any such resolution or resolutions previously adopted
as to shares then still authorized or with the provisions of these Restated
Articles of Organization or with the laws of the Commonwealth of Massachusetts.
3. In case the corporation shall not pay in full all dividends required to be
paid on all shares of all series of cumulative Preferred Stock at the time
outstanding to the full extent of the preference, if any, to which each such
cumulative series is entitled, all cumulative series which are of equal rank
with respect to such dividend preference shall share ratably in the payment of
dividends, including accumulations thereof, if any, in proportion to the amounts
that would be payable on such series if all dividends thereon were paid in full.
Accumulations of dividends shall not bear interest.
4. The authorized but unissued shares of Preferred Stock may be issued for such
consideration, not less than the par value thereof, as may be fixed from time to
time by the Board of Directors.
5. Except as otherwise determined pursuant to authority of the Board of
Directors as hereinbefore provided, or by Chapter 156B of the Massachusetts
General Laws, the holders of Preferred Stock shall not be entitled to vote for
any purpose nor shall they be entitled to notice of meetings of stockholders."
<PAGE>
Exhibit C
INDEMNIFICATION AMENDMENT
VOTED:
That the corporation's Restated Articles of Organization, as amended, be and
hereby are amended by adding to Article 6 thereof the following provision:
INDEMNIFICATION
1. Actions, Suits and Proceedings. The corporation shall indemnify each person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was, or has
agreed to become, a director or officer of the corporation, or is or was
serving, or has agreed to serve, at the request of the corporation, as a
director or officer of, or in a similar capacity with, another organization or
in any capacity with respect to any employee benefit plan of the corporation
(all such persons being referred to hereafter as an "Indemnitee"), or by reason
of any action alleged to have been taken or omitted in such capacity, against
all expenses (including attorneys' fees), judgments and fines incurred by him or
on his behalf in connection with such action, suit or proceeding and any appeal
therefrom, unless the Indemnitee shall be finally adjudicated in such action,
suit or proceeding not to have acted in good faith in the reasonable belief that
his action was in the best interests of the corporation or, to the extent such
matter relates to service with respect to an employee benefit plan, in the best
interests of the participants or beneficiaries of such employee benefit plan.
Notwithstanding anything to the contrary in this Article, except as set forth in
Section 5 below, the corporation shall not indemnify as Indemnitee seeking
indemnification in connection with a proceeding (or part thereof) initiated by
the Indemnitee unless the initiation thereof was approved by the Board of
Directors of the corporation.
2. Settlements. The right to indemnification conferred in this Article shall
include the right to be paid by the corporation for amounts paid in settlement
of any such action, suit or proceeding and any appeal therefrom, and all
expenses (including attorneys' fees) incurred in connection with such
settlement, pursuant to a consent decree or otherwise, unless and to the extent
it is determined pursuant to Section 5 below that the Indemnitee did not act in
good faith in the reasonable belief that his action was in the best interests of
the corporation or, to the extent such matter relates to service with respect to
an employee benefit plan, in the best interests of the participants or
beneficiaries of such employee benefit plan.
3. Notification and Defense of Claim. As a condition precedent to his right to
be indemnified, the Indemnitee must notify the corporation in writing as soon as
practicable of any action, suit, proceeding or investigation involving him for
which indemnity will or could be sought. With respect to any action, suit,
proceeding or investigation of which the corporation is so notified, the
corporation will be entitled to participate therein at its own expense and/or to
assume the defense thereof at its own expense, with legal counsel reasonably
acceptable to the Indemnitee. After notice from the corporation to the
Indemnitee of its election so to assume such defense, the corporation shall not
be liable to the Indemnitee for any legal or other expenses subsequently
incurred by the Indemnitee in connection with such claim, other than as provided
below in this Section 3. The Indemnitee shall have the right to employ his own
counsel in connection with such claim, but the fees and expenses of such counsel
incurred after notice from the corporation of its assumption of the defense
thereof shall be at the expense of the Indemnitee unless (i) the employment of
counsel by the Indemnitee has been authorized by the corporation, (ii) counsel
to the Indemnitee shall have reasonably concluded that there may be a conflict
of interest or position on any significant issue between the corporation and the
Indemnitee in the conduct of the defense of such action or (iii) the corporation
shall not in fact have employed counsel to assume the defense of such action in
each of which cases the fees and expenses of counsel for the Indemnitee shall be
at the expense of the corporation, except as otherwise expressly provided by
this Article. The corporation shall not be entitled, without the consent of the
Indemnitee, to assume the defense of any claim brought by or in the right of the
corporation or as to which counsel for the Indemnitee shall have reasonably made
the conclusion provided for in clause (ii) above.
4. Advance of Expenses. Subject to the provisions of Section 5 below, in the
event that the corporation does not assume the defense pursuant to Section 3 of
this Article of any action, suit, proceeding or investigation of which the
corporation receives notice under this Article, any expenses (including
attorneys' fees) incurred by an Indemnitee in defending a civil or criminal
action, suit, proceeding or investigation or any appeal therefrom shall be paid
by the corporation in advance of the final disposition of such matter, provided,
however, that the payment of such expenses incurred by an Indemnitee in advance
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the corporation as authorized in this Article.
Such undertaking may be accepted without reference to the financial ability of
the Indemnitee to make such repayment.
5. Procedure for Indemnification. In order to obtain indemnification or
advancement of expenses pursuant to Section 1, 2 or 4 of this Article, the
Indemnitee shall submit to the corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the corporation of the written request
of the Indemnitee, unless the corporation determines, by clear and convincing
evidence, within such 60-day period that the Indemnitee did not meet the
applicable standard of conduct set forth in Section 1 or 2, as the case may be.
Such determination shall be made in each instance by (a) a majority vote of a
quorum of the directors of the corporation, (b) a majority vote of a quorum of
the outstanding shares of stock of all classes entitled to vote for directors,
voting as a single class, which quorum shall consist of stockholders who are not
at the time parties to the action, suit or proceeding in question, (c)
independent legal counsel (who may be regular legal counsel to the corporation),
or (d) a court of competent jurisdiction.
6. Remedies. The right to indemnification or advances as granted by this Article
shall be enforceable by the Indemnitee in any court of competent jurisdiction if
the corporation denies such request, in whole or in part, or if no disposition
thereof is made within the 60-day period referred to above in Section 5. Unless
otherwise provided by law, the burden of proving that the Indemnitee is not
entitled to indemnification or advancement of expenses under this Article shall
be on the corporation. Neither the failure of the corporation to have made a
determination prior to the commencement of such action that indemnification is
proper in the circumstances because the Indemnitee has met the applicable
standard of conduct, nor an actual determination by the corporation pursuant to
Section 5 that the Indemnitee has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the Indemnitee has
not met the applicable standard of conduct. The Indemnitee's expenses (including
attorneys' fees) incurred in connection with successfully establishing his right
to indemnification, in whole or in part, in any such proceeding shall also be
indemnified by the corporation.
7. Subsequent Amendment. No amendment, termination or repeal of this Article or
of the relevant provisions of Chapter 156B of the Massachusetts General Laws or
any other applicable laws shall affect or diminish in any way the rights of any
Indemnitee to indemnification under the provisions hereof with respect to any
action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.
8. Other Rights. The indemnification and advancement of expenses provided by
this Article shall not be deemed exclusive of any other rights to which an
Indemnitee seeking indemnification or advancement of expenses may be entitled
under any law (common or statutory), agreement or vote of stockholders or
directors or otherwise, both as to action in his official capacity and as to
action in any other capacity while holding office for the corporation, and shall
continue as to an Indemnitee who has ceased to be a director or officer, and
shall inure to the benefit of the estate, heirs, executors and administrators of
the Indemnitee. Nothing contained in this Article shall be deemed to prohibit,
and the corporation is specifically authorized to enter into, agreements with
officers and directors providing indemnification rights and procedures different
from those set forth in this Article. In addition, the corporation may, to the
extent authorized from time to time by its Board of Directors, grant
indemnification rights to other employees or agents of the corporation or other
persons serving the corporation and such rights may be equivalent to, or greater
or less than, those set forth in this Article.
9. Partial Indemnification. If an Indemnitee is entitled under any provision of
this Article to indemnification by the corporation for some or a portion of the
expenses (including attorneys' fees), judgments, fines or amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
10. Insurance. The corporation may purchase and maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another organization or employee benefit plan against any
expense, liability or loss incurred by him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the power to
indemnify such person against such expense, liability or loss under Chapter 156B
of the Massachusetts General Laws.
11. Merger or Consolidation. If the corporation is merged into or consolidated
with another corporation and the corporation is not the surviving corporation,
the surviving corporation shall assume the obligations of the corporation under
this Article with respect to any action, suit, proceeding or investigation
arising out of or relating to any actions, transactions or facts occurring prior
to the date of such merger or consolidation.
12. Savings Clause. If this Article or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the corporation shall
nevertheless indemnify each Indemnitee as to any expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement in connection with any
action, suit, proceeding or investigation, whether civil, criminal or
administrative, including an action by or in the right of the corporation, to
the fullest extent permitted by any applicable portion of this Article that
shall not have been invalidated and to the fullest extent permitted by
applicable law.
13. Subsequent Legislation. If the Massachusetts General Laws are amended after
adoption of this Article to expand further the indemnification permitted to
Indemnitees, then the corporation shall indemnify such persons to the fullest
extent permitted by the Massachusetts General Laws, as so amended.
<PAGE>
Exhibit D
BUSINESS ENTERPRISE AMENDMENT
VOTED:
That the corporation's Restated Articles of Organization, as amended, be and
hereby are amended by adding to Article 6 thereof the following provision:
AUTHORITY TO BE A PARTNER IN ANY BUSINESS ENTERPRISE
The corporation shall have the power to be a partner in any business
enterprise which this corporation would have the power to conduct by
itself.
<PAGE>
The foregoing amendment will become effective when these articles of amendment
are filed in accordance with Chapter 156B, Section 6 of The General Laws unless
these articles specify, in accordance with the vote adopting the amendment, a
later effective date not more than thirty days after such filing, in which event
the amendment will become effective on such later date.
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereunto signed
our names this 25th day of May, in the year 1993.
/s/ John H. Fisher, President and
/s/ David E. Redlick, Clerk
<PAGE>
The Commonwealth of Massachusetts
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
I hereby approve the within articles of amendment and, the filing fee in the
amount of $32,925 having been paid, said articles are deemed to have been filed
with me this 25th day of May, 1993.
/s/ Michael Joseph Connolly
Secretary of State
TO BE FILLED IN BY CORPORATION
Photo copy of restated articles of organization to be sent to:
David E. Redlick
Hale and Dorr
60 State Street
Boston, MA 02109
Telephone: 617-526-6434
FIRST AMENDMENT TO
THE REVOLVING CREDIT AGREEMENT
FIRST AMENDMENT dated the 12th day of March, 1999 to the REVOLVING CREDIT
AGREEMENT (the "Credit Agreement") dated August 31, 1998 by and between SAUCONY,
INC., a Massachusetts corporation with its principal place of business at 13
Centennial Drive, Peabody, Massachusetts (the "Borrower") and STATE STREET BANK
AND TRUST COMPANY, a Massachusetts trust company with its head office at 225
Franklin Street, Boston, Massachusetts (the "Bank").
Except as otherwise indicated, all capitalized terms used herein shall
have the meanings given to them in the Credit Agreement.
1. Increase of Commitment. From and including the Effective Date (as
defined below) Section 2.1 of the Credit Agreement shall be revised to read as
follows:
2.1. Revolving Credit. The Bank agrees on the terms and conditions herein
set forth, to make loans, whether LIBO Rate Loans or Prime Rate Loans
(including LMCS Loans) (together, the "Loans") to the Borrower and to
issue Letters of Credit (subject, however, to the additional terms and
conditions of the Letter of Credit Agreement) from time to time during the
period from the date of this Agreement up to but not including the
Termination Date in an aggregate principal amount of up to twenty million
United States Dollars (US$20,000,000) at any one time outstanding, as such
amount may be reduced pursuant to Section 2.2 (the "Commitment"). Each
Loan (other than a LMCS Loan) which shall not utilize the Commitment in
full shall be in an amount not less than $50,000. Within the limits of the
Commitment, the Borrower may borrow, prepay pursuant to Section 2.7, repay
pursuant to Section 2.8, and reborrow under this Section 2.1.
2. The Effective Date shall be the date when all of the following
conditions precedent shall have been satisfied in form and substance
satisfactory to the Bank:
(a) The Borrower shall have executed and delivered to the Bank this First
Amendment and the Amended and Restated Note, attached hereto as Exhibit A.
(b) The Borrower shall have delivered to the Bank a certificate from its
President, Chief Operating Officer or Clerk certifying to the Board of Directors
votes authorizing the execution, delivery and performance of this First
Amendment, the Amended and Restated Note, and the other matters contemplated
hereby, setting forth the names of the officers of the Borrower authorized to
sign the same, and stating that the Bank may conclusively rely on the statements
made therein until the Bank shall receive a further certificate of such officer
canceling or amending the prior certificate.
(c) The Bank shall have received a duly executed original of the
favorable legal opinion of counsel for the Borrower as to the due authorization,
execution and enforceability of the
Credit Agreement, as amended by this First Amendment, and the Amended and
Restated Note and such other matters as the Bank and its counsel may reasonably
require.
(d) The representations and warranties of the Borrower contained in
Section 4 of the Credit Agreement shall be true on and as of the Effective Date
as if they had been made on such date (except to the extent that such
representations and warranties expressly relate to an earlier date or are
affected by the consummation of transactions permitted under the Credit
Agreement).
(e) No Default shall have occurred and be continuing.
3. The Borrower represents and warrants to the Bank that (i) the
representations and
warranties of the Borrower contained in Section 4 of the Credit Agreement are
true on the date hereof as though made on such date (except to the extent that
such representations and warranties expressly relate to an earlier date or are
affected by the consummation of transactions permitted under the Credit
Agreement), and (ii) no Default has occurred or is continuing or will occur
after giving effect to this First Amendment and the transactions contemplated
hereunder.
4. As of the Effective Date, all references to the Credit Agreement shall
be to the Credit Agreement as amended hereby and all references to the Note
shall be to the Amended and Restated Note.
5. The Borrower agrees to pay all costs and expenses, including reasonable
attorneys' fees, incurred by the Bank in connection with the preparation,
negotiation and execution of this First Amendment and of the documents and
instruments referred to herein.
6. Except as otherwise provided herein all other terms of the Credit
Agreement shall remain in full force and effect.
7. THE BORROWER AND THE BANK HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH,
THIS FIRST AMENDMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE
BORROWER OR THE BANK. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED
FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION
OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE BORROWER AND THE BANK ENTERING INTO THIS FIRST
AMENDMENT AND EACH SUCH OTHER LOAN DOCUMENT.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be
duly executed by their respective duly authorized officers as of the date first
above written.
SAUCONY, INC.
Borrower
By: /s/ Charles A. Gottesman
Name: Charles A. Gottesman
Title: Executive Vice President
STATE STREET BANK AND TRUST COMPANY
Bank
By: /s/ Kelley L. Rumps
Name: Kelley L. Rumps
Title: Assistant Vice President
<PAGE>
EXHIBIT AAMENDED AND RESTATED PROMISSORY NOTE
US$20,000,000
Boston, Massachusetts
March 12, 1999
FOR VALUE RECEIVED, the undersigned, Saucony, Inc., a Massachusetts
corporation (the "Borrower"), hereby promises to pay to the order of State
Street Bank and Trust Company, at its offices at 225 Franklin Street, Boston,
Massachusetts (the "Bank") the principal sum of Twenty Million United States
Dollars ($20,000,000) or, if less, the aggregate unpaid principal amount of all
Loans made by the Bank to the Borrower pursuant to the Credit Agreement referred
to below, together with interest on the outstanding principal amounts of the
Loans, at the rates, on such dates and as otherwise provided for in the Credit
Agreement.
This Note is the Note referred to in the Revolving Credit Agreement (as
modified, supplemented or amended from time to time, the "Credit Agreement"),
dated as of August 3 1, 1998, by and between the Borrower and the Bank and is
subject to the provisions and entitled to the benefits thereof. Terms used
herein which are defined in the Credit Agreement shall have their defined
meanings when used herein. As provided in the Credit Agreement, this Note is
subject to voluntary prepayment, in whole or in part.
In case an Event of Default shall occur and be continuing, the principal of
and accrued interest on this Note shall be, or may be declared to be, due and
payable in the manner and with the effect provided in the Credit Agreement.
The Borrower hereby waives, to the fullest extent permitted by applicable
law, presentment, demand, protest and all notices of any kind in connection with
this Note.
This Note amends and restates the terms of that Promissory Note dated
August 31, 1998 (the "1998 Note") made by the Borrower to the order of the Bank,
which 1998 Note is superseded in its entirety hereby. By accepting this Note or
canceling the 1998 Note, the Bank does not waive any obligation of the Borrower
to the Bank under the 1998 Note, nor shall the delivery or acceptance of this
Note be deemed to satisfy any such obligation, the intent of the parties being
to hereby amend and restate the agreed terms applicable to such obligations.
This Note is executed as an instrument under seal, and shall be governed
by the laws of the Commonwealth of Massachusetts.
<PAGE>
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY
RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON,
OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS NOTE.
SAUCONY, INC.
By: /s/ Charles A. Gottesman
Name: Charles A. Gottesman
Title: Executive Vice President
<PAGE>
AMENDED AND RESTATED PROMISSORY NOTE
US$20,000,000
Boston, Massachusetts March 12, 1999FOR VALUE RECEIVED, the undersigned,
Saucony, Inc., a Massachusetts corporation (the "Borrower"), hereby promises to
pay to the order of State Street Bank and Trust Company, at its offices at 225
Franklin Street, Boston, Massachusetts (the "Bank") the principal sum of Twenty
Million United States Dollars ($20,000,000) or, if less, the aggregate unpaid
principal amount of all Loans made by the Bank to the Borrower pursuant to the
Credit Agreement referred to below, together with interest on the outstanding
principal amounts of the Loans, at the rates, on such dates and as otherwise
provided for in the Credit Agreement.
This Note is the Note referred to in the Revolving Credit Agreement (as
modified, supplemented or amended from time to time, the "Credit Agreement"),
dated as of August 3 1, 1998, by and between the Borrower and the Bank and is
subject to the provisions and entitled to the benefits thereof. Terms used
herein which are defined in the Credit Agreement shall have their defined
meanings when used herein. As provided in the Credit Agreement, this Note is
subject to voluntary prepayment, in whole or in part.
In case an Event of Default shall occur and be continuing, the principal of
and accrued interest on this Note shall be, or may be declared to be, due and
payable in the manner and with the effect provided in the Credit Agreement.
The Borrower hereby waives, to the fullest extent permitted by applicable
law, presentment, demand, protest and all notices of any kind in connection with
this Note.
This Note amends and restates the terms of that Promissory Note dated
August 31, 1998 (the "1998 Note") made by the Borrower to the order of the Bank,
which 1998 Note is superseded in its entirety hereby. By accepting this Note or
canceling the 1998 Note, the Bank does not waive any obligation of the Borrower
to the Bank under the 1998 Note, nor shall the delivery or acceptance of this
Note be deemed to satisfy any such obligation, the intent of the parties being
to hereby amend and restate the agreed terms applicable to such obligations.
This Note is executed as an instrument under seal, and shall be governed
by the laws of the Commonwealth of Massachusetts.
<PAGE>
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY
RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON,
OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS NOTE.
SAUCONY, INC.
By: /s/ Charles A. Gottesman
Name: Charles A. Gottesman
Title: Executive Vice President
EXHIBIT 21
SUBSIDIARIES OF SAUCONY, INC.
Jurisdiction of Percentage
Name Incorporation Ownership
Hyde International Services, Ltd. Hong Kong 100%
Hyde Transition Corp. Massachusetts 100%
Hyde, Inc. (1) Maine 100%
Saucony Canada, Inc. (2) Ontario 85%
Saucony UK, Inc. (3) Massachusetts 100%
Saucony Sports, B.V.(2) Netherlands 100%
Saucony SP Pty. Ltd. (2) Australia 100%
Saucony Deutschland Vertriebs GmbH (2) Germany 100%
Quintana Roo, Inc. (4) Delaware 100%
- ----------------------
(1) Formerly known as Spot-Bilt, Inc.
(2) Does business as "Saucony."
(3) Formerly known as Saucony, Inc. Does business as "Saucony."
(4) Does business as "Quintana Roo."
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement of
Saucony, Inc. on Forms S-8 (file numbers 33-50922, 33-61532, 33-66482, 33-80726,
333-33485) of our report dated March 15, 1999, on our audits of the consolidated
financial statements and financial statement schedule of Saucony, Inc. and
Subsidiaries as of January 1, 1999 and January 2, 1998 and for the years ended
January 1, 1999, January 2, 1998, and January 3, 1997 which report is included
in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> Optional or Required When Applicable
This schedule contains summary financial Optional or Required When Applicable
information extracted from Saucony, Inc.'s
Form 10-K for the period ended January 1, 1999 and is qualified in its
entirety by reference to such 10-K.
</LEGEND>
<CIK> 0000049401
<NAME> Saucony, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Jan-01-1999
<PERIOD-START> Jan-03-1998
<PERIOD-END> Jan-01-1999
<CASH> 5495
<SECURITIES> 179
<RECEIVABLES> 19473
<ALLOWANCES> 1880
<INVENTORY> 31072
<CURRENT-ASSETS> 59142
<PP&E> 18119
<DEPRECIATION> 9996
<TOTAL-ASSETS> 69879
<CURRENT-LIABILITIES> 18840
<BONDS> 559
0
0
<COMMON> 2178
<OTHER-SE> 46072
<TOTAL-LIABILITY-AND-EQUITY> 69879
<SALES> 105074
<TOTAL-REVENUES> 105810
<CGS> 67623
<TOTAL-COSTS> 67623
<OTHER-EXPENSES> 32446
<LOSS-PROVISION> 775
<INTEREST-EXPENSE> 707
<INCOME-PRETAX> 5238
<INCOME-TAX> 1629
<INCOME-CONTINUING> 3579
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3579
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.56
</TABLE>
