-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S4CJOkgZI1bBQnHEALNSvZIEMZxhc4E0eP/rjj8RC5CBA0fxQ+jHO2yeJexaVbKA 2VfW9Q8t+mLkVipRhbk3Kw== 0000049401-97-000002.txt : 19970404 0000049401-97-000002.hdr.sgml : 19970404 ACCESSION NUMBER: 0000049401-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970103 FILED AS OF DATE: 19970403 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYDE ATHLETIC INDUSTRIES INC CENTRAL INDEX KEY: 0000049401 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 041465840 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-05083 FILM NUMBER: 97574307 BUSINESS ADDRESS: STREET 1: 13 CENTENNIAL DR STREET 2: CENTENNIAL INDUSTRIAL PK CITY: PEABODY STATE: MA ZIP: 01961 BUSINESS PHONE: 5085329000 MAIL ADDRESS: STREET 1: 13 CENTENNIAL DRIVE STREET 2: CENTENNIAL INDUSTRIAL PARK CITY: PEABODY STATE: MA ZIP: 01960 FORMER COMPANY: FORMER CONFORMED NAME: HYDE A R & SONS CO DATE OF NAME CHANGE: 19701030 10-K 1 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 3, 1997 Commission file number: 0-05083 HYDE ATHLETIC INDUSTRIES, INC. ------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-1465840 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Centennial Industrial Park, 13 Centennial Drive, Peabody, MA 01960 ------------------------------------------------------------------ (Address of principal executive offices) Registrant's telephone number, including area code: (508) 532-9000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.33-1/3 par value ---------------------------------------- (Title of class) Class B Common Stock, $.33-1/3 par value ---------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant, as of March 21, 1997, was approximately $6,801,742 (based on the last sale price of the Class A Common Stock on such date as reported on the Nasdaq National Market). The number of shares of the registrant's Class A Common Stock, $.33-1/3 par value, and Class B Common Stock, $.33-1/3 par value, outstanding on March 21, 1997 was 2,703,227 and 3,533,659, respectively. Portions of the following documents are incorporated by reference in this Report. Documents Incorporated by Reference ----------------------------------- Document Form 10-K Part -------- -------------- Proxy Statement for Annual Meeting of Stockholders Part III of the Registrant to be held on May 15, 1997, to be filed with the Securities and Exchange Commission. PART I ITEM 1 - BUSINESS Hyde Athletic Industries, Inc. and its subsidiaries (together, "Hyde" or the "Company") design, develop, manufacture and market (i) a broad line of performance oriented athletic shoes and apparel for adults under the Saucony brand name and (ii) outdoor recreational products for children and young adults under licensed names, such as Barbie(R), Playskool(R) and Spalding(R), as well as under Brookfield and other proprietary names of the Company (collectively, "Brookfield products"). The Company's Saucony athletic footwear products include running, walking, cross training and outdoor trail shoes, and the Company's Brookfield outdoor recreational products include roller skates, roller hockey skates and accessories. The following table sets forth the approximate contribution to net sales (in dollars and as a percentage of net sales) attributable to each product line for the periods and geographic areas indicated. "Other" consists of Spot-Bilt coaches and officials shoes, Quintana Roo bicycles and wetsuits, sales of the Company's and other products at retail factory outlets operated by the Company and sales of other branded products at the Company's subsidiary in Australia. Net Sales (dollars in thousands)
Fiscal 1994 Fiscal 1995 Fiscal 1996 ---------- ----------- ---------- Sales Sales Co. Sales Sales Co. Sales Sales Co. $ % % $ % % $ % % - - -- - - - -- Saucony Domestic $ 53,939 71% $ 47,040 67% $ 54,445 69% International 22,420 29% 23,628 33% 24,366 31% ---------- ------- ---------- ------ ---------- ------ Total $ 76,359 100% 71% $ 70,668 100% 69% $ 78,811 100% 71% ---------- ------- ---------- ------ ---------- ------ Brookfield Domestic $ 19,699 80% $ 18,737 78% $ 9,407 48% International 4,824 20% 5,277 22% 10,061 52% ---------- ------- ---------- ------ ---------- ------ Total $ 24,523 100% 23% $ 24,014 100% 23% $ 19,468 100% 18% ---------- ------- ---------- ------ ---------- ------ Other $ 6,696 6% 7,881 8% $ 12,530 11% ---------- ------ ---------- ------ ---------- ------ Grand Total $ 107,578 100% $ 102,563 100% $ 110,809 100% ========== ====== ========== ====== ========== ======
SAUCONY BRAND. The Company sells quality running, walking, cross training, and outdoor trail shoes for adults under the Saucony brand name, which has been marketed in the United States for over 25 years. The Company assembles most of its Saucony footwear sold in the United States at its manufacturing facility in Bangor, Maine, largely with components sourced from independent manufacturers located overseas. The Company believes that assembly at its Bangor facility assists in timely and flexible product delivery in the domestic market. According to ASD/Target Research, Inc., an independent market research organization ("ASD/Target Research"), the Company ranked fifth in sales of running shoes in the United States during 1996. In addition, according to ASD/Target Research, the Company's market share of running shoes sold in the United States was 5.5% in 1996. The Company believes that a high percentage of purchasers of Saucony brand footwear buy such products for athletic uses and that such consumers have greater brand loyalty than athletic shoe purchasers who buy for casual wear purposes. The Company has several product offerings within each of the Saucony brand categories which have different designs and features, resulting in different cushioning, stability, support characteristics and prices. The Company builds its Saucony shoes with a high level of technological performance characteristics to appeal to athletic users. As a result of the Company's application of biomechanical technology in the design process, the Company believes that its Saucony shoes have a distinctive "fit and feel" that is attractive to athletic users. A key element in the design of Saucony shoes is an anatomically correct toe and heel configuration that provides support and comfort throughout the human gait cycle for the particular activity for which the shoe is designed. Several of the Company's top-of-the-line running and other athletic shoes incorporate the Company's G.R.I.D. ("Ground Reaction Inertia Device") System, an innovative midsole system that employs molded strings engineered to create a feeling similar to that of the "sweet spot" of a tennis racquet. In contrast with conventional athletic shoe midsoles, the G.R.I.D. System is designed to react to various stress forces differently and thereby simultaneously to maximize shock absorption and minimize rear foot motion. In 1996, the Company introduced several new running shoe styles which incorporated Saucony's advanced midsole technology, the 3D G.R.I.D., and extended the regular G.R.I.D. System technology into its more moderately priced running shoes. The Company designs and markets separate lines for men and women within most Saucony product categories. The Company currently sells approximately the same percentage of Saucony shoes to men and women. The suggested domestic retail prices for most Saucony footwear products are in the range of $50 to $85 per pair, with the Company's top of the line running shoes having suggested domestic retail prices of up to $125 per pair. The Company designs its Saucony cross training, walking and outdoor trail shoes with many of the same performance features and "fit and feel" characteristics as are found in Saucony running shoes. Currently, the Company's most popular non- running athletic shoe is a women's traditional white leather walking shoe. The Company believes that a line of athletic apparel bearing the Saucony name is supportive of its athletic footwear products and enhances the visibility of the Saucony brand. Accordingly, the Company has licensed the Saucony name for the United States market to the Bangor Trading Company of Chula Vista, California, for use in connection with a line of sporting apparel. The Bangor Trading Company introduced these apparel products into the performance athletic apparel market in 1993. The Company also licenses its Saucony apparel brand to selected markets internationally in addition to designing and marketing its brand throughout most of Europe. BROOKFIELD PRODUCTS. The Company markets a range of recreational and dedicated enthusiast sports products that provide "Outdoor Fun For Kids." The principal products in this category include moderately priced roller skates, roller hockey skates and in-line skates for children and young adults. Other products include protective accessories, such as wrist, elbow and knee pads. These products are sold through mass merchants, toy and sporting goods departments and, in some cases, through free-standing sporting goods outlets. Brookfield products are sold both under names owned by the Company, including the "Brookfield," "Hyde," and "Spot-Bilt" names, and also under brand names licensed from third parties, including Mattel, Inc., Hasbro, Inc., Franklin Sports, Inc., Spalding, Inc., Time Warner Entertainment Company, and the Walt Disney Company. Licensed brands include such recognizable names as Barbie, Playskool, Nerf, Spalding and Topflite, as well as Mickey and Minnie and 101 Dalmatians. The Company's strategy for licensed products is to offer categories and families of products under well known trademarks and children's characters that distinguish its products from those of its competition. The Company believes that the use of these licensed brand names enables it to leverage established consumer awareness created by licensor-implemented national and international advertising and promotional programs. OTHER PRODUCTS SPOT-BILT BRAND. The Company offers Spot-Bilt shoes for coaches and officials through the distribution channels for its Saucony brand shoes. In addition, the Company has licensed the Spot-Bilt name to a third party that distributes youth team field sport shoes under this name. (See Note 3 of Notes to Consolidated Financial Statements). QUINTANA ROO. The Company manufactures and distributes the Quintana Roo line of triathlon bicycles, road bicycles, mountain bicycles and wet suits. FACTORY OUTLET STORES. The Company operates six retail factory outlet stores. To avoid competing against its customers' retail outlets, the Company generally limits the products offered at these stores to products with cosmetic defects, products which have been discontinued and certain slow-moving products. The Company sells Saucony, Brookfield, Spot-Bilt and Quintana Roo products at these outlets, as well as athletic accessory goods of third parties. HIND. In the fourth quarter of 1996, the Company purchased trademarks and related intellectual property from Hind, Inc. ("Hind"), a performance athletic apparel company. The Company currently expects to begin delivery of its Hind apparel products to the retail trade in the third quarter of 1997. AUSTRALIAN PRODUCTS. The Company's Australian subsidiary holds the exclusive license to distribute various non-Hyde products throughout Australia. PRODUCT DEVELOPMENT The Company believes that the technical performance (i.e., comfort, support and stability experienced by the athlete) of its Saucony footwear is important to purchasers of its products. The Company uses consulting services of such professionals as podiatrists, orthopedists, athletes, trainers and coaches as part of its Saucony product development program. In developing Brookfield products, the Company focuses both on comfort and on the color, graphics and design of the product and the product packaging. The Company maintains a staff of 15 persons located in Peabody, Massachusetts to undertake continuing product development and design. Product development work also is performed for the Company by its suppliers at their overseas facilities. During the years ended January 3, 1997, January 5, 1996, and December 30, 1994, the Company expended $1,945,000, $1,851,000, and $1,296,000, respectively, in connection with its product development programs. SALES AND MARKETING SAUCONY BRAND. The Company's Saucony athletic footwear products are sold at more than 5,000 retail outlets in the United States, primarily higher-end, full margin sporting goods chains, independent sporting goods stores, athletic footwear specialty stores and department stores. Retail outlets include Foot Locker/Lady Foot Locker, Athlete's Foot, The Sports Authority, Road Runner's Sport, Sport Mart and Just For Feet. With the exception of certain specified "house accounts" handled directly by the Company, the Company sells its athletic footwear products in the United States through 12 independent manufacturer's representatives, whose organizations employ approximately 42 individual sales representatives. Company sales personnel directly service a limited number of specified house accounts and sell to a number of national accounts on a joint basis with the Company's independent representatives. In 1996, the Company hired a number of additional sales personnel, including several regional sales managers, and established a sales administration team. In addition, in recent years, the Company has introduced a state-of-the-art CD- ROM multimedia sales presentation program and created a Web site on the World Wide Web(R) at www.saucony.com. The Company sells its Saucony products outside the United States in 32 countries through 24 distributors located throughout the world, including joint venture subsidiaries in which the Company holds controlling interests located in the Netherlands (which holds the distribution rights to the Company's Saucony products in the Benelux countries), Australia, Germany and Canada, and through a branch office in the United Kingdom. In 1994, the Company formed a German subsidiary, Saucony Deutschland Vertriebs GmbH, to provide additional sales and marketing support in Europe and to undertake sales and marketing of Saucony products in Germany. The primary overseas markets for the Company's Saucony products are Europe and Australia. To accommodate its customers' requirements and plan for its own product needs, the Company employs a futures orders program for its Saucony products under which the Company takes orders well in advance of the selling season for a particular product and commits to ship the product to the customer in time for the selling season. The Company affords customers price discounts and extended payment terms in respect of such advance orders. The Company generally requires payment at the time that the selling season ends, which increases the Company's working capital requirements. The Company engages in various advertising and promotional programs for its Saucony products. The principal media used by the Company as part of its advertising and promotional programs are magazines, with a particular focus on athletic and fitness magazines. The Company also uses radio and regional television advertising. To heighten its brand presence in retail outlets, the Company emphasizes account-specific, in-store promotions of its Saucony products, such as holding special events, providing consumers with a gift upon the purchase of specified products and employee contests. Also to heighten brand awareness, the Company frequently employs grass roots promotional activities, such as its "Walking Club" and "Extra Mile Club" promotions. In addition, the Company promotes its products on a limited basis through product endorsements by athletes and sponsorship of sporting events. Although most of the Company's advertising and promotional programs for its Saucony brand are directed towards ultimate consumers, the Company promotes these products to the trade through attendance at trade shows and similar events. The Company employs an advertising program under which it reimburses participating retailers for a portion of the costs incurred by such retailers in advertising the Company's Saucony products. BROOKFIELD PRODUCTS. The Company's Brookfield products are sold through mass merchants, toy and sporting goods departments and, in some cases, through free- standing sporting goods outlets. Retailers of Brookfield products include Sam's Wholesale Club, Service Merchandise, Target and Toys "R" Us. The Company sells its Brookfield products to these retailers in the United States primarily through nine multi-line independent manufacturers representative agencies. Company sales personnel directly service a limited number of specified house accounts for Brookfield products and sell jointly with the Company's independent representatives to a limited number of national accounts. The Company has continued its efforts to expand sales of Brookfield products in international markets and at the end of 1996 was selling products in 42 foreign countries. The Company directs most of its advertising and promotional efforts for Brookfield products towards the trade through attendance at trade shows and similar events. The Company also employs an advertising program under which it reimburses participating retailers for a portion of the costs incurred by such retailers in advertising Brookfield products. BACKLOG; SEASONALITY; DISTRIBUTION. The Company's backlog of unfilled orders was approximately $42,056,000 at January 3, 1997 and $34,727,000 at January 5, 1996. The Company expects that all of its backlog at January 3, 1997 will be shipped in fiscal 1997. 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. The Company distributes its products through its warehouses in Peabody and Brookfield, Massachusetts, as well as through independent warehouse facilities located throughout the world. For information about the Company's foreign operations and export sales, see Note 13 of Notes to Consolidated Financial Statements. MANUFACTURING The Company assembles most of its domestically sold Saucony footwear at the Company's manufacturing facility in Bangor, Maine, largely with components sourced from independent manufacturers located overseas. Independent overseas manufacturers produce the balance of the Company's Saucony products and all of the Company's Brookfield and Spot-Bilt products. The overseas manufacturers that supply products and product components to the Company are located in the Far East, primarily in China, but also in Taiwan and Thailand. The Company seeks to develop additional overseas manufacturing sources from time to time, both to increase its sourcing capacity and to obtain alternative sources of supply. All products and components produced by foreign suppliers are manufactured in accordance with product specifications furnished by the Company. The Company carefully monitors foreign manufacturing operations and imported products and components to assure compliance with the Company's design, production and quality requirements. The number of foreign suppliers and the percentage of the Company's total foreign production requirements produced by each such supplier vary from time to time. During fiscal 1996 the Company purchased products from 16 overseas suppliers. One of such suppliers, located in China, accounted for approximately 38% of the Company's total overseas purchases by dollar volume. The Company is subject to the usual risks of a business involving foreign suppliers, such as government regulation of fund transfers, export and import duties and political and labor instability. The Company has not been materially affected by any of these factors to date. Substantially all purchases from foreign suppliers to date have been denominated in United States dollars in order to reduce the Company's risk from currency fluctuations. Although the Company has no long-term manufacturing agreements with its overseas suppliers and competes with other athletic shoe and recreational product companies (including companies that are much larger than the Company) for access to production facilities, management believes that the Company's relationships with its footwear and other suppliers are strong and that it has the ability to develop, over time, alternative sources in various countries for footwear, footwear components and other products obtained from its current suppliers. However, in the event of a supply interruption, the Company's operations could be materially and adversely affected if a substantial delay occurred in locating and obtaining alternative sources of supply. Raw materials required for the manufacture of the Company's products, including leather, rubber, nylon and other fabrics, are generally available in the country in which the products are manufactured. The Company and its suppliers have not experienced any difficulty in satisfying their raw material needs to date. TRADE POLICY The Company's practice of sourcing products and components overseas, with subsequent importation into the United States, exposes it to possible product supply disruptions and increased costs in the event of actions by United States or foreign government agencies adverse to continued trade or the enactment of legislation that restricts trade. For example, on February 2, 1997, the United States and China reached an agreement on a four-year textile pact that generally extends current quota arrangements in Chinese textile and apparel exports to the United States, but reduces quotas on three occasions -- most recently in September, 1996 when the United States imposed triple charges for illegally transshipped merchandise (excluding footwear). China's compliance with the current textiles agreement is under review by U.S. trade officials. In addition, Company imports a significant amount of its products and product components from China. The United States provides China with most-favored- nation ("MFN") status, allowing China to receive the same tariff treatment that the United States extends to its "most favored" trading partners. Notwithstanding this current policy, Congress could seek to revoke MFN for China or condition its renewal on factors such as China's human rights record. Recently, there has been heightened scrutiny of extending MFN for China in light of certain allegations that Chinese nationals may have sought to improperly or illegally influence members of the Administration or Congress through political contributions. In addition, there has been increasing concern in Congress with regard to the growing U.S. trade deficit with China. The administration of existing U.S. trade laws can also create adverse consequences for trade with the Company's suppliers. In particular, under Section 301 of the Trade Act of 1974, as well as "Special 301" and "Super 301," the Office of the United States Trade Representative ("USTR") can retaliate against certain unfair foreign trading practices. For example, in early 1995 such retaliation almost occurred against China in a Special 301 investigation of China's intellectual property regime. However, on February 26, 1995, the United States and China reached an agreement in this Special 301 investigation, avoiding the scheduled imposition of increased tariffs by the United States on certain products imported from China, including certain footwear products. This bilateral agreement has extensive compliance features, and China's compliance with this agreement is currently under review by U.S. trade officials. On May 15, 1996, based on monitoring carried out under Section 306(a) of the Trade Act of 1974, as amended, the United States considered that China was not satisfactorily implementing the February 26, 1995 agreement, and proposed to impose prohibitive tariffs on certain products from China, including certain textile and apparel, but excluding footwear. Additionally, to prevent import surges, USTR directed Customs to limit exports of certain textile products by their date of entry. On June 17, 1996, USTR announced that, based on measures that China has taken and will take in the future to implement key elements of the 1995 agreement, the proposed sanctions would not be imposed. The Company is unable to predict whether USTR may decide in the future to impose sanctions or take other actions against China under this agreement. Also, U.S./ China foreign relations, especially with respect to China's efforts to accede to the World Trade Organization, have been contentious in the recent past, and the Company cannot predict whether this tension will interfere with the ability of the Company to import products from China in the future. In addition, USTR has identified certain of the Asian countries in which the Company's suppliers are located as having various foreign trade barriers. As a result of these or other unfair trade practices as identified by USTR, such countries could be subject to possible retaliation by the United States under Super or regular Section 301 authority. The Company is unable to predict whether additional U.S. customs duties, quotas or other restrictions may be imposed in the future upon the importation of its products and/or components as a result of any of the matters discussed above, or because of similar U.S. or foreign government actions. Such action could result in increases in the costs of imported footwear, footwear components or other Company products generally, or limitations on the Company's ability to import footwear, footwear components or such other products into the United States. Such occurrences might adversely affect the sales or profitability of the Company, possibly materially. COMPETITION Competition is intense in the markets in which the Company sells its products. The Company competes with a large number of other companies, both domestic and foreign. Several competitors are large organizations with diversified product lines, well known brands and financial resources substantially greater than those of the Company. The principal competitors for the Company's Saucony products are Nike, New Balance and ASICS. The principal competitors for the Company's Brookfield products are Variflex, Roller Derby, Blade Runner and Fisher-Price. The Company believes that the key competitive factors as to both its Saucony and Brookfield products are styling, durability, product identification through promotion, brand awareness and price. Technical performance is an important competitive factor with respect to the Company's Saucony products, and name identification is an important competitive factor with respect to the Company's licensed Brookfield products. Customer support services and E.D.I. (Electronic Data Interchange) are also 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 federally registered its Saucony, Spot-Bilt, Hyde, G.R.I.D., Quintana Roo, and Hind marks, among others, in the United States. The Company has also registered some of these marks in a number of foreign countries, including countries in Europe, the Far East, and North, Central and South America. Although the Company 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. The Company also obtains licenses on a royalty-bearing basis to various marks from third parties from time to time, generally for two- to three-year periods. The Company currently uses Barbie, Playskool, Franklin, Spalding and other marks in connection with sales of its Brookfield products. Although the Company has usually been able to renew its licenses upon expiration, there can be no assurance that it will be able to do so in the future. The loss by the Company of its license for the Barbie or Spalding marks could have a material adverse effect on the Company's consolidated financial position and results of operations. In addition, one or more of the Company's licensed tradenames or likenesses may decline in popularity. EMPLOYEES At January 3, 1997, the Company employed approximately 421 people worldwide, of whom approximately 140 worked at the Company's manufacturing plant in Bangor, Maine, approximately 25 worked in the Company's Peabody, Massachusetts warehouse, approximately 29 were sales and marketing personnel, approximately 27 were executive and finance personnel, approximately 15 were product development and design personnel and the remainder were involved in various other aspects of the Company's business. Eighty-four of the Company's employees work at foreign locations. The Company believes that its employee relations are excellent. The Company has never experienced a strike or other work stoppage. Approximately 20 employees in the Company's Peabody warehouse were represented by a union at January 3, 1997. None of the Company's other employees is represented by a union or subject to a collective bargaining agreement. ITEM 2 - PROPERTIES The Company's general and executive offices and its main 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 factory in Bangor, Maine, containing approximately 82,000 square feet of space, substantially all of which is used for the manufacture of the Company's Saucony running shoes, mostly with imported components. The Company also owns a retail store in Bangor, containing approximately 3,000 square feet of space, and a warehouse in East Brookfield, Massachusetts, containing approximately 100,000 square feet. The Company's Australian subsidiary owns an office and warehouse facility in St. Peters, Australia, containing approximately 15,000 square feet. ITEM 3 - LEGAL PROCEEDINGS A subsidiary of the Company, Saucony Shoe Manufacturing Co., Inc. ("SSM"), was named as a third-party defendant in the case of United States v. Atlas Minerals and Chemicals, et al., which was filed on August 9, 1991 in the United States District Court for the Eastern District of Pennsylvania asserting liability under the Comprehensive Environmental Response Compensation and Liability Act for the remediation of hazardous substances contamination at a landfill in Pennsylvania. The United States and the original defendants in this case entered into a settlement agreement under which the original defendants will conduct or pay for future remedial actions at the landfill, and reimburse the United States for certain past response costs. The United States and the original defendants estimated these remedial actions and response costs at approximately $23 million. The original defendants had initiated third-party actions against approximately 40 parties, including SSM, seeking reimbursement or contribution as to these costs. SSM conducted manufacturing operations from 1968 to 1983, at which time it was phased out of business. On August 25, 1995, the court issued an opinion and judgment, holding certain parties in the case jointly and severally liable for response costs which had been and will be incurred, and determined the equitable share of each liable party. The court determined that SSM's equitable share of response costs was $89,370, or 0.44% of the total costs. Should the estimated response costs rise, or should one or more liable parties fail to satisfy the judgments against them, SSM's obligation would increase. Payment of SSM's obligation is expected to occur over a number of years. 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 49 President, Chief Executive Officer and Director Charles A. Gottesman 46 Executive Vice President, Chief Operating Officer, Treasurer and Director Wolfgang Schweim 44 President, Saucony Athletic Footwear Division James A. Buchanan 50 President and General Manager of Brookfield Athletic Co., Inc. and Director Roger P. Deschenes 38 Controller and Chief Accounting Officer Kenneth W. Graham 43 Senior Vice President, Research & Development/Manufacturing Daniel J. Horgan 41 Vice President, Operations John H. Fisher became Chief Executive Officer of the Company in 1991. He was elected President and Chief Operating Officer in 1985 after having served as Executive Vice President from 1981 to 1985 and as Vice President, Sales from 1979 and 1981. Mr. Fisher is a member of the World Federation of Sporting Goods Industries, is the former Chairman of the Athletic Footwear Council of the Sporting Goods Manufacturers Association, and is a member of various civic associations. Mr. Fisher became a director in 1980. Charles A. Gottesman has served as Executive Vice President and Chief Operating Officer of the Company since 1992, and served as Executive Vice President, Finance from 1989 to 1992, Senior Vice President from 1987 to 1989, Vice President from 1985 to 1987, and Treasurer since 1983. Mr. Gottesman became a director in 1983 and is the brother-in-law of John H. Fisher. Wolfgang Schweim became President of the Company's Saucony Athletic Footwear Division in June 1994. From 1993 to 1994, Mr. Schweim served as Managing Director for Saucony Europe. From 1989 to 1993, Mr. Schweim was the German Managing Director and Marketing Sales Manager for Europe at Asics, an athletic shoe manufacturer. Prior to 1989, Mr. Schweim worked in sales and marketing positions with Nike International, Le Coq Sportif and Adidas AG. James A. Buchanan joined the Company in 1989 as Vice President, Marketing and was promoted to his present position in 1990. From 1985 to 1989, he was President of Marketing Associates International Ltd., a company engaged in the marketing of entertainment products, including the European introduction of the board game Trivial Pursuit. From 1981 to 1985 he was employed by General Mills, Inc., first as Director of Marketing for New Ventures (non-foods) and then as European Marketing Vice President for the General Mills Fun Group. Mr. Buchanan became a director in 1991. Roger P. Deschenes joined the Company in 1990 as Corporate Accounting Manager and was promoted to Controller and Chief Accounting Officer in October 1995. He was employed at Allen-Bradley, a manufacturing company and subsidiary of Rockwell International, Corp., from 1987 to 1990 as Financial and Cost Reporting Supervisor. From 1986 to 1987, Mr. Deschenes was employed at Rule Industries, Inc., a manufacturing firm, as Accounting Manager. Mr. Deschenes is a Certified Management Accountant. Kenneth W. Graham was promoted to Senior Vice President of Research and Development/Manufacturing in 1996, after serving 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 Shoes Corporation. Daniel J. Horgan became Vice President of Operations in September 1995 after serving as Senior Director of Operations from September 1994 to September 1995. 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. 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 "HYDEA" and "HYDEB," respectively. The following table sets forth, for the periods indicated, the actual high and low sales prices per share of the Class A Common Stock and the Class B Common Stock as reported by the Nasdaq National Market.
Class A Class B Common Stock Common Stock ------------ ------------ High Low High Low ---- --- ---- --- FISCAL YEAR ENDED JANUARY 3, 1997 --------------------------------- First Quarter $ 4-3/8 $ 3-5/8 $ 4-1/4 $ 3-3/16 Second Quarter 6-3/4 3-5/8 5-13/16 3-1/4 Third Quarter 6-1/2 4-1/2 5-15/16 4-3/4 Fourth Quarter 5-1/2 4-3/8 5-1/2 4-1/2 FISCAL YEAR ENDED JANUARY 5, 1996 --------------------------------- First Quarter $ 5-1/2 $ 4-5/8 $ 5-1/2 $ 4-5/8 Second Quarter 5-1/2 4 5-1/8 3-7/8 Third Quarter 5-1/4 4 5 4 Fourth Quarter 5-1/4 3-5/8 4-5/8 3-5/8
There were 401 and 374 stockholders of record of the Class A Common Stock and Class B Common Stock, respectively, on March 21, 1997. The Company does not anticipate paying any cash dividends in the foreseeable future on the shares of Class A Common Stock or Class B Common Stock. The Company currently intends to retain future earnings to fund the development and growth of its business. The Company's note agreement with an insurance company contains certain covenants restricting the cash dividends which may be paid by the Company. As of January 3, 1997, approximately $11,507,000 was available for payment of cash dividends under the terms of these covenants. Additionally, the Company's credit facility agreement with two banks further restricts the payment or declaration of any dividend or other distributions to stockholders, in money or property, except in shares of its own Common Stock. Each share of Class B Common Stock is entitled to a regular cash dividend equal to 110% of the regular cash dividend, if any, payable on a share of Class A Common Stock. ITEM 6 - SELECTED FINANCIAL DATA Selected Income Statement Data
Year Ended Year Ended Year Ended Year Ended Year Ended January 3, January 5, December 30, December 31, January 1, 1997 1996 1994 1993 1993 ---- ---- ---- ---- ---- Net sales $110,809,169 $102,562,755 $107,577,873 $103,735,477 $81,302,002 Income before interest, income taxes, minority interest and cumulative effect of change in accounting principle 3,181,293 3,320,129 6,256,133 9,081,123 7,701,541 Minority interest 307,998 (285,820) 8,516 (46,747) (26,670) Cumulative effect on prior years of change in accounting principle (1) -- -- -- -- (303,538) Net income 1,494,090 1,591,106 2,936,637 4,607,698 3,422,099 Net income per common share(2) 0.24 0.26 0.46 0.76 0.65 Weighted average number of common shares and equivalents outstanding (2) 6,251,889 6,239,557 6,437,281 6,074,238 5,238,410 Cash dividends per share of common stock -- -- -- -- -- Selected Balance Sheet Data January 3, January 5, December 30, December 31, January 1, 1997 1996 1994 1993 1993 ---- ---- ---- ---- ---- Current assets $57,815,101 $59,190,090 $61,621,756 $58,121,147 $49,032,888 Current liabilities 14,208,783 14,728,785 15,657,860 13,372,714 13,417,951 Working capital 43,606,318 44,461,305 45,963,896 44,748,433 35,614,937 Total assets 71,591,726 69,471,289 77,082,332 73,693,786 56,691,068 Long-term debt and capitalized lease obligations, net of current portion 4,892,753 4,205,568 11,922,392 12,941,977 10,015,977 Stockholders' equity 50,078,617 48,365,054 46,754,828 44,709,824 30,868,287 - --------------------------- (1) The Company adopted Statement of Financial Accounting Standards 109 (SFAS No. 109) in fiscal 1992. SFAS No. 109 required initial application of this statement to be reported as a change in accounting principle. Included in 1992 consolidated net income is a charge to earnings of $303,538 or $.06 per share of Common Stock, reflecting the cumulative effect of adopting SFAS No. 109. (2) See Notes 1 and 10 of the Notes to Consolidated Financial Statements regarding restatement to reflect stock dividend.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Selected Quarterly Financial Results The following table sets forth certain unaudited quarterly financial data of the Company for each of the four fiscal quarters in each of fiscal 1996, 1995 and 1994. The Company believes that this information has been prepared on the same basis as the audited Consolidated Financial Statements and that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the selected quarterly information when read in conjunction with the audited Consolidated Financial Statements and the Notes thereto. SELECTED QUARTERLY FINANCIAL RESULTS Quarters Ended (Unaudited)
April 5, July 5, October 4, January 3, 1996 1996 1996 1997 ---- ---- ---- ---- STATEMENT OF INCOME DATA: Saucony Domestic $ 18,569,207 $ 15,687,804 $ 10,796,406 $ 9,391,947 International 7,139,294 5,489,664 6,418,020 5,318,892 ------------- ------------- ------------- ------------- Saucony Total 25,708,501 21,177,468 17,214,426 14,710,839 ------------- ------------- ------------- ------------- Brookfield Domestic 1,881,752 1,383,626 3,116,876 3,024,950 International 1,371,829 3,261,233 3,987,583 1,440,371 ------------- ------------- ------------- ------------- Brookfield Total 3,253,581 4,644,859 7,104,459 4,465,321 ------------- ------------- ------------- ------------- Other 2,929,811 3,218,663 3,394,633 2,986,608 ------------- ------------- ------------- ------------- Net sales 31,891,893 29,040,990 27,713,518 22,162,768 Other income 249,654 367,593 95,914 362,504 ------------- ------------- ------------- ------------- Total revenue 32,141,547 29,408,583 27,809,432 22,525,272 ------------- ------------- ------------- ------------- Costs and expenses Cost of sales 22,587,788 20,848,665 18,903,001 15,109,717 Selling expenses 4,578,823 4,823,427 4,136,758 4,101,999 General and administrative expenses 3,310,240 3,228,976 3,397,683 3,676,464 Interest expense 263,198 239,047 230,660 218,832 ------------- ------------- ------------- ------------- Total costs and expenses 30,740,049 29,140,115 26,668,102 23,107,012 ------------- ------------- ------------- ------------- Income (loss) before income taxes and minority interest 1,401,498 268,468 1,141,330 (581,740) Provision (benefit) for income taxes 526,618 61,309 392,183 (552,642) Minority interest in income (loss) of consolidated subsidiaries 135,411 93,466 146,529 (67,408) ------------- ------------- ------------- -------------- Net income $ 739,469 $ 113,693 $ 602,618 $ 38,310 ============= ============= ============= ============= Per share amounts: Net income $0.12 $0.02 $0.10 $0.01 ==== ===== ==== ===== Weighted average common shares and equivalents outstanding 6,225,960 6,244,225 6,268,925 6,268,732 ============= ============= ============= =============
Statement of Income Data as a Percentage of Net Sales: Quarters Ended (Unaudited)
STATEMENT OF INCOME DATA: April 5, July 5, October 4, January 3, 1996 1996 1996 1997 ---- ---- ---- ---- Net Sales Saucony Domestic 58.2% 54.0% 39.0% 42.4% International 22.4% 18.9% 23.2% 24.0% -------- -------- -------- -------- Saucony Total 80.6% 72.9% 62.2% 66.4% -------- -------- -------- -------- Brookfield Domestic 5.9% 4.8% 11.2% 13.6% International 4.3% 11.2% 14.4% 6.5% -------- -------- -------- -------- Brookfield Total 10.2% 16.0% 25.6% 20.1% -------- -------- -------- -------- Other 9.2% 11.1% 12.2% 13.5% -------- -------- -------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Other income 0.8% 1.2% 0.3% 1.6% -------- -------- -------- -------- Total revenue 100.8% 101.2% 100.3% 101.6% -------- -------- -------- -------- Costs and expenses Cost of sales 70.8% 71.8% 68.2% 68.2% Selling expenses 14.4% 16.6% 14.9% 18.5% General and administrative expenses 10.4% 11.1% 12.3% 16.5% Interest expense 0.8% 0.8% 0.8% 1.0% -------- -------- -------- -------- Total costs and expenses 96.4% 100.3% 96.2% 104.2% -------- -------- -------- -------- Income (loss) before taxes and minority interest 4.4% 0.9% 4.1% (2.6%) Provision (benefit) for income taxes 1.7% 0.2% 1.4% (2.5%) Minority interest in income (loss) of consolidated subsidiaries 0.4% 0.3% 0.5% (0.3%) -------- -------- -------- -------- Net income (loss) 2.3% 0.4% 2.2% 0.2% ======== ======== ======== ========
SELECTED QUARTERLY FINANCIAL RESULTS Quarters Ended (Unaudited)
STATEMENT OF INCOME DATA: March 31, June 30, September 29, January 5, 1995 1995 1995 1996 ---- ---- ---- ---- Saucony Domestic $ 16,146,371 $ 12,777,890 $ 9,958,877 $ 8,156,455 International 7,145,958 5,775,849 5,487,042 5,219,465 ------------- ------------- ------------- ------------- Saucony Total 23,292,329 18,553,739 15,445,919 13,375,920 ------------- ------------- ------------- ------------- Brookfield Domestic 4,090,634 3,933,322 6,215,743 4,497,599 International 632,771 1,181,895 1,929,266 1,533,042 ------------- ------------- ------------- ------------- Brookfield Total 4,723,405 5,115,217 8,145,009 6,030,641 ------------- ------------- ------------- ------------- Other 2,222,167 1,744,781 2,058,338 1,855,290 ------------- ------------- ------------- ------------- Net sales 30,237,901 25,413,737 25,649,266 21,261,851 Other income 126,221 859,868 383,692 146,078 ------------- ------------- ------------- ------------- Total revenue 30,364,122 26,273,605 26,032,958 21,407,929 ------------- ------------- ------------- ------------- Costs and expenses Cost of sales 20,376,734 17,380,076 17,464,091 15,639,920 Selling expenses 4,860,525 4,361,712 4,419,572 3,045,335 General and administrative expenses 3,617,505 3,034,023 3,356,192 3,202,800 Interest expense 435,168 311,463 228,306 324,921 ------------- ------------- ------------- ------------- Total costs and expenses 29,289,932 25,087,274 25,468,161 22,212,976 ------------- ------------- ------------- ------------- Income (loss) before income taxes and minority interest 1,074,190 1,186,331 564,797 (805,047) Provision (benefit) for income taxes 417,103 460,844 220,581 (383,543) Minority interest in income (loss) of consolidated subsidiaries 28,148 (113,550) 24,808 (225,226) ------------- -------------- ------------- -------------- Net income (loss) $ 628,939 $ 839,037 $ 319,408 $ (196,278) ============= ============= ============= ============== Per share amounts: Net income (loss) $0.10 $0.13 $0.05 $(0.03) ==== ==== ===== ======= Weighted average common shares and equivalents outstanding 6,252,746 6,245,913 6,231,606 6,228,588 ============= ============= ============= =============
SELECTED QUARTERLY FINANCIAL RESULTS Statement of Income Data as a Percentage of Net Sales: Quarters Ended (Unaudited)
STATEMENT OF INCOME DATA: March 31, June 30, September 29, January 5, 1995 1995 1995 1996 --- ---- ---- ---- Saucony Domestic 53.4% 50.3% 38.8% 38.4% International 23.6% 22.7% 21.4% 24.5% -------- -------- -------- -------- Saucony Total 77.0% 73.0% 60.2% 62.9% -------- -------- -------- -------- Brookfield Domestic 13.5% 15.5% 24.3% 21.2% International 2.1% 4.6% 7.5% 7.2% -------- -------- -------- -------- Brookfield Total 15.6% 20.1% 31.8% 28.4% -------- -------- -------- -------- Other 7.4% 6.9% 8.0% 8.7% -------- -------- -------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Other income 0.5% 3.4% 1.5% 0.7% -------- -------- -------- -------- Total revenue 100.5% 103.4% 101.5% 100.7% -------- -------- -------- -------- Costs and expenses Cost of sales 67.4% 68.4% 68.1% 73.6% Selling expenses 16.1% 17.2% 17.2% 14.3% General and administrative expenses 12.0% 11.9% 13.1% 15.1% Interest expense 1.4% 1.2% 0.9% 1.5% -------- -------- -------- -------- Total costs and expenses 96.9% 98.7% 99.3% 104.5% -------- -------- -------- -------- Income (loss) before taxes and minority interest 3.6% 4.7% 2.2% (3.8%) Provision (benefit) for income taxes 1.4% 1.8% 0.9% (1.8%) Minority interest in income (loss) of consolidated subsidiaries 0.1% (0.4%) 0.1% (1.1%) -------- -------- -------- -------- Net income (loss) 2.1% 3.3% 1.2% (0.9%) ======== ======== ======== ========
STATEMENT OF INCOME DATA: Quarters Ended
(Unaudited) April 1, July 1, September 30, December 30, 1994 1994 1994 1994 ---- ---- ---- ---- Saucony Domestic $ 14,754,713 $ 14,153,824 $ 13,580,430 $ 11,450,127 International 6,025,409 3,679,950 5,847,618 6,867,348 ------------- --------------- ------------- ------------- Saucony Total 20,780,122 17,833,774 19,428,048 18,317,475 ------------- --------------- ------------- ------------- Brookfield Domestic 3,449,622 4,640,359 3,818,867 7,789,835 International 253,649 683,519 2,329,573 1,557,237 ------------- --------------- ------------- ------------- Brookfield Total 3,703,271 5,323,878 6,148,440 9,347,072 ------------- --------------- ------------- ------------- Other 1,630,817 1,587,163 1,876,050 1,601,763 ------------- --------------- ------------- ------------- Net sales 26,114,210 24,744,815 27,452,538 29,266,310 Other income 129,850 240,981 379,591 558,028 ------------- --------------- ------------- ------------- Total revenue 26,244,060 24,985,796 27,832,129 29,824,338 ------------- --------------- ------------- ------------- Costs and expenses Cost of goods sold 17,779,333 16,879,487 18,156,065 19,678,500 Selling expenses 4,102,384 4,713,858 4,366,960 4,494,929 General and administrative expenses 3,093,239 2,924,344 3,418,839 3,022,252 Interest expense 371,138 358,138 360,106 390,865 ------------- --------------- ------------- ------------- Total costs and expenses 25,346,094 24,875,827 26,301,970 27,586,546 ------------- --------------- ------------- ------------- Income before income taxes and minority interest 897,966 109,969 1,530,159 2,237,792 Provision for income taxes 319,229 13,277 532,244 965,983 Minority interest in income (loss) of consolidated subsidiaries 61,912 (87,002) 42,449 (8,843) ------------- ---------------- ------------- -------------- Net income $ 516,825 $ 183,694 $ 955,466 $ 1,280,652 ============= =============== ============= ============= Per share amounts: Net income $0.08 $0.03 $0.15 $0.20 ===== ===== ===== ==== Weighted average common shares and equivalents outstanding 6,501,071 6,457,466 6,423,956 6,333,950 ============= =============== ============= =============
SELECTED QUARTERLY FINANCIAL RESULTS Statement of Income Data as a Percentage of Net Sales: Quarters Ended
(Unaudited) April 1, July 1, September 30, December 30, 1994 1994 1994 1994 ---- ---- ---- ---- Saucony Domestic 56.5% 57.2% 49.5% 39.1% International 23.1% 14.9% 21.3% 23.5% ------- ------- -------- -------- Saucony Total 79.6% 72.1% 70.8% 62.6% ------- ------- -------- -------- Brookfield Domestic 13.2% 18.8% 13.9% 26.6% International 1.0% 2.7% 8.5% 5.3% ------- ------- -------- -------- Brookfield Total 14.2% 21.5% 22.4% 31.9% ------- ------- -------- -------- Other 6.2% 6.4% 6.8% 5.5% ------- ------- -------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Other income 0.5% 1.0% 1.4% 1.9% ------- ------- -------- -------- Total revenue 100.5% 101.0% 101.4% 101.9% ------- ------- -------- -------- Costs and expenses Cost of goods sold 68.1% 68.2% 66.1% 67.2% Selling expenses 15.7% 19.1% 15.9% 15.5% General and administrative expenses 11.8% 11.8% 12.5% 10.3% Interest expense 1.4% 1.4% 1.3% 1.3% ------- ------- -------- -------- Total costs and expenses 97.1% 100.5% 95.8% 94.2% ------- ------- -------- -------- Income before taxes and minority interest 3.4% 0.4% 5.6% 7.7% Provision for income taxes 1.2% 0.1% 1.9% 3.3% Minority interest in income (loss) of consolidated subsidiaries 0.2% (0.4%) 0.2% 0.0% ------- ------- -------- -------- Net income 2.0% 0.7% 3.5% 4.4% ======= ======= ======== ========
This Annual Report on Form 10-K contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forwarding-looking statements. These factors include, without limitation, those set forth below under the caption "Certain Factors That May Affect Future Results." FISCAL 1996 COMPARED TO FISCAL 1995 The Company's net sales increased 8.0% to $110,809,000 in fiscal 1996 from $102,563,000 in fiscal 1995. Net sales of the Company's Saucony products increased 12% to $78,811,000 in fiscal 1996 from $70,668,000 in fiscal 1995 due primarily to higher selling prices and, to a lesser extent, increased unit shipment volume. The Company believes that the increase resulted from technical and cosmetic improvements to its Saucony products in 1996. Saucony domestic net sales increased 16% to $54,445,000 in fiscal 1996 from $47,040,000 in fiscal 1995, due to higher selling prices of the Company's recently introduced products in comparison with the Company's existing products and increased unit shipment volume. Saucony foreign net sales increased 3% to $24,366,000 in fiscal 1996 from $23,628,000 in fiscal 1995, due primarily to higher selling prices and, to a lesser extent, favorable currency exchange. The Company currently distributes its Saucony products in 32 countries through 24 distributors located throughout the world. Net sales of the Company's Brookfield's products decreased 19% to $19,468,000 in fiscal 1996 from $24,014,000 in fiscal 1995. Domestic sales of Brookfield products decreased 50% to $9,407,000 in fiscal 1996 from $18,737,000 in fiscal 1995, due to lower unit shipment volume for certain licensed products and a shift in the sales mix to lower-priced product. The Company believes this decrease resulted from an oversupply of inventory at the retail level combined with the Company's current, more conservative credit risk environment. Foreign sales of Brookfield products increased 91% to $10,061,000 in fiscal 1996 from $5,277,000 in fiscal 1995, due primarily to increased unit shipment volume and a change in product mix, with increased sales of the Company's recently introduced products that have higher selling prices. The Company currently distributes its Brookfield products in 42 countries. Net sales of other products increased 59% to $12,530,000 in fiscal 1996 from $7,881,000 in fiscal 1995, due primarily to additional sales from the Company's wholly-owned subsidiary, Quintana Roo, Inc. ("Quintana Roo"), which was acquired in August 1995, and increased sales of non-corporate brands by the Company's Australian subsidiary. Other income decreased 29% to $1,076,000 in fiscal 1996 from $1,516,000 in fiscal 1995, due primarily to the gain on the sale of the Company's investment in a limited partnership and the receipt of the final royalty payment under a litigation settlement, both of which were recognized in fiscal 1995. The Company's gross profit increased to $33,360,000 in fiscal 1996 from $31,702,000 in fiscal 1995. The Company's gross margin decreased to 30.1% in fiscal 1996 from 30.9% in fiscal 1995 reflecting decreased margins for both Saucony and Brookfield products. The gross margin decrease for Saucony products resulted from the shipment of a single slow-moving, non-current model, increased sales of lower-margin footwear and, to a lesser extent, increased freight costs. The decline in the gross margin for Brookfield products resulted from a shift in the sales mix to lower-margin domestic Brookfield product and increased international sales, which have lower margins than domestic sales. Selling, general and administrative expenses increased to $31,254,000, or 28% of net sales, in fiscal 1996, from $29,898,000, or 29% of net sales, in fiscal 1995. Advertising and promotion expenses increased $1,033,000 in fiscal 1996 due primarily to increased Saucony domestic television and print media advertising and, to a lesser extent, increased sponsorship of athletes. Selling expenses decreased by $79,000 in fiscal 1996 due to management's initiative to reduce commissions on sales of Saucony products and to increased sales of Brookfield products to house accounts, which are non- commissionable. General and administrative expenses increased $403,000 in fiscal 1996, due to increased costs related to Quintana Roo, which was acquired in August 1995, and increased foreign costs for payroll due to increased staffing at several of the Company's foreign subsidiaries and increased professional fees. Interest expense decreased 27% to $952,000 in fiscal 1996 from $1,300,000 in fiscal 1995, reflecting the paydown of the Company's senior notes and debt reduction realized as a result of the sale by the Company of its limited partnership investment. The effective tax rate decreased 16.2%, to 19.2% in fiscal 1996 from 35.4% in fiscal 1995, due to the recovery by the Company of low-income housing tax credits, which had previously recaptured, the reversal of a deferred foreign tax valuation allowance and a shift in the international mix of pretax earnings among taxing jurisdictions. The low-income housing tax credit recovery is a non-recurring event. FISCAL 1995 COMPARED TO FISCAL 1994 The Company's net sales decreased 5.0% to $102,563,000 in fiscal 1995 from $107,578,000 in fiscal 1994. Net sales of the Company's Saucony products decreased 7% to $70,668,000 in fiscal 1995 from $76,359,000 in fiscal 1994, due to decreased unit shipment volume and a change in the sales mix to lower-priced product, both of which reflect a difficult retail environment, marginal acceptance of certain new product offerings and increasing brand strength of a footwear competitor. Saucony domestic net sales decreased 13% to $47,040,000 in fiscal 1995 from $53,939,000 in fiscal 1994, due primarily to lower unit shipment volume, and to a lesser extent, a change in the sales mix to lower-priced product. Saucony foreign net sales increased 5% to $23,628,000 in fiscal 1995 from $22,420,000 in fiscal 1994 and accounted for 33% of Saucony net sales in fiscal 1995 compared with 29% of Saucony net sales in fiscal 1994. The increase in foreign Saucony net sales reflected market gains due to increased unit shipment volume at the Company's foreign subsidiaries. The Company currently distributes its Saucony products in 32 countries. Net sales of the Company's Brookfield products decreased 2% to $24,014,000 in fiscal 1995 from $24,523,000 in fiscal 1994. Domestic sales of Brookfield products decreased 5% to $18,737,000 in fiscal 1995 from $19,699,000 in fiscal 1994, primarily as a result of a difficult retail environment at the mass merchant channels of distribution and the absence of a promotional roller skate license for the Christmas selling season. Foreign sales of Brookfield products increased 9% to $5,277,000 in fiscal 1995 from $4,824,000 in fiscal 1994, accounting for 22% of net sales of Brookfield products in fiscal 1995, compared to 20% of net sales of Brookfield products in fiscal 1994. The increase in foreign net sales of Brookfield products was attributable to increased international markets, with distribution in 31 countries in fiscal 1995 compared with 18 countries in fiscal 1994. Net sales of other products increased 18% to $7,881,000 in fiscal 1995 from $6,696,000 in fiscal 1994, due primarily to increased sales on non-corporate brands by the Company's Australian subsidiary. Other income increased 16% to $1,516,000 in fiscal 1995 from $1,308,000 in fiscal 1994 as the result of the gain on the sale of the Company's investment in a limited partnership and increased royalty income. Royalty income increased in fiscal 1995 due to a final payment received under a litigation settlement which amounted to $272,000. The Company's gross profit decreased to $31,702,000 in fiscal 1995 from $35,085,000 in fiscal 1994. The Company's gross margin decreased to 30.9% in fiscal 1995 from 32.6% in fiscal 1994 reflecting decreased margins for both Saucony and Brookfield products. The decline in gross margin for Saucony products resulted from a greater proportion of sales of lower-priced, lower- margin footwear to sales of higher-priced, higher-margin footwear in fiscal 1994. The decline in gross margin for Brookfield products resulted from a greater ratio of lower-margin international sales to higher-margin domestic product sales compared with fiscal 1994. Increased international sales in fiscal 1995 by Brookfield as an OEM manufacturer for certain of its licensors also caused gross margins to contract on some specialty Brookfield product items. Selling, general and administrative expense decreased to $29,898,000, or 29.2% of net sales, in fiscal 1995 from $30,137,000, or 28.0% of net sales, in fiscal 1994. The increase in selling, general and administrative expenses as a percentage of net sales in fiscal 1995 as compared to fiscal 1994 was due to the decrease in net sales in fiscal 1995 in comparison to fiscal 1994. The absolute dollar decrease in the amount of selling, general and administrative expenses resulted from a reduction in Saucony product advertising and promotion spending. Advertising and promotion expenses decreased $1,263,000 in fiscal 1995 due primarily to decreased Saucony domestic television and print media advertising. Selling expenses increased by $272,000 in fiscal 1995 due to increased selling payroll and tradeshow expenses. General and administrative expenses increased $752,000 in fiscal 1995, due to increased foreign spending, including costs associated with the lease of a warehouse in Australia, increased costs related to Saucony GmbH, which was formed in December 1994 and increased payroll costs due to increased staffing at several of the Company's foreign subsidiaries. Interest expense decreased 12% to $1,300,000 in fiscal 1995 from $1,480,000 in fiscal 1994, as a result of the paydown of corporate debt during fiscal 1995 and debt reduction realized as a result of the sale by the Company of its limited partnership investment. The provision for income tax declined by $1,116,000 in fiscal 1995 as compared with fiscal 1994 as a result of the decreases in the Company's pretax earnings. The effective tax rate decreased by 2.9%, to 35.4% in fiscal 1995 from 38.3% in fiscal 1994, due primarily to the relative effect of fixed tax credits from the Company's tax related investment on lower income before tax for fiscal 1995, as compared with fiscal 1994, and an adjustment to the Company's tax reserves LIQUIDITY AND CAPITAL RESOURCES As of January 3, 1997, the Company's cash and cash equivalents totaled $2,803,000, a decrease of $8,865,000 from January 5, 1996. The decrease was the result of an increase in accounts receivable of $6,003,000, net of the provision for bad debts and discounts of $5,397,000, an increase of $1,691,000 in inventory during fiscal 1996 and the acquisition of trademarks and tradenames of an athletic apparel manufacturer for $1,250,000, offset in part by the depreciation and amortization provision of $1,565,000. The increase in accounts receivable was due to increased net sales of the Company's Saucony products in the fiscal fourth quarter of 1996 and extended payment terms given to certain of the Company's customers. The Company's days sales outstanding for its accounts receivable increased to 96 days at the end of fiscal 1996 from 74 days at the end of fiscal 1995. Inventories increased in fiscal 1996 due to an increase in production at the Company's Bangor manufacturing facility and a higher level of finished goods inventory at the Company's overseas subsidiaries. The Company's inventory turn ratio increased to 2.8 turns in fiscal 1996 from 2.4 turns in fiscal 1995. During fiscal 1996, the Company used $5,058,000 of net cash to finance operating activities, expended $1,984,000 to acquire capital assets and information technology, expended $1,250,000 to acquire the tradenames and trademarks of an athletic apparel manufacturer, received $78,000 from the sale of capital assets, increased short-term borrowings by $1,313,000, expended $2,404,000 to reduce long-term debt, received $69,000 from the issuance of the Company's common stock and borrowed $420,000 on a long-term basis, secured by the Company's facility in St. Peters, Australia. Principal factors (other than net income, accounts receivable, provision for bad debts and discounts and inventory) affecting the operating cash flows in fiscal 1996 included a decrease in accrued letters of credit and accounts payable of $1,151,000 (due to the timing of inventory shipments), and an increase in accrued expenses of $419,000 (due to increased advertising and promotional spending). The declining value of the U.S. dollar decreased the value of cash and cash equivalents by $51,000. As of January 5, 1996, the Company's cash and cash equivalents totalled $11,668,000, an increase of $8,319,000 from December 30, 1994. The increase was primarily the result of a decrease in accounts receivable of $6,846,000 and a decrease in inventory of $5,187,000 during fiscal 1995. The decrease in receivables was due to reduced corporate net sales in the fiscal fourth quarter of 1995. The Company's days sales outstanding at the end of fiscal 1995 remained consistent with fiscal 1994's level of 74 days. The Company's inventory turn ratio decreased to 2.4 turns at the end of fiscal 1995 from 2.7 turns at the end of fiscal 1994. Inventories in fiscal 1995 decreased due to lower inventory requirements. In fiscal 1995, the Company generated approximately $11,215,000 from operations, expended $1,120,000 for capital expenditures, information technology and other deferred charges, invested $112,000 to form a new subsidiary, expended $77,000 to repurchase shares of the Company's Common Stock, reduced long-term debt and other long-term commitments by $2,920,000 and received $1,335,000 in cash as the result of the sale by the Company of its investment in a limited partnership. As part of the sale of this investment, the Company realized a reduction of $4,056,000 of debt and accrued interest, of which $3,259,000 was long-term debt. Principal factors (other than net income, accounts receivable, provision for bad debts and discounts and inventory) affecting the Company's operating cash flows in fiscal 1995 included an increase in prepaid expenses and other current assets of $262,000 (due to advance payments for business insurance and production molds), an increase in marketable securities of $308,000, an increase in accrued letters of credit of $1,115,000 (due to increased in-transit inventory), a decrease in accounts payable of $865,000 (due to lower inventory requirements and reduced operating spending in the fourth quarter of 1995), a decrease in accrued expenses of $1,605,000 (reflecting decreased sales commissions, incentive bonuses, royalties payable, and other operating expenses, which are attributable to the fourth quarter sales decrease and lower interest payable as a result of the reduction in long term debt) and a decrease in accrued income taxes of $743,000 due to lower pre-tax income and the timing of tax payments. The declining value of the U.S. dollar decreased the value of cash and cash equivalents by $37,000 in fiscal 1995. The Company has a credit facility with two principal banks pursuant to which a $30,000,000 credit line is available to the Company. This credit facility, which was amended in January 1997, will extend through August 1, 1998 and provide for a short-term demand line of credit, in the principal amount of up to $15,000,000, subject to formula adjustment, and a revolving line of credit in the principal amount of $15,000,000. Borrowings under this facility generally will be made at the primary bank's prime rate of interest. As of January 3, 1997, there was $2,301,803 outstanding under the current facility. The Company had open commitments at such date related to letters of credit in the amount of $5,347,751. As of March 7, 1997, $6,440,221 was available for borrowing under the short-term demand line and $15,000,000 was available for borrowing under the revolving term line. Certain of the Company's foreign subsidiaries have credit facilities, consisting of demand and/or revolving lines of credit, in the aggregate principal amount of approximately $5,888,000. As of March 7, 1997, an aggregate of approximately $2,057,059 was available for borrowing under the facilities of the foreign subsidiaries. See Note 9 of Notes to Consolidated Financial Statements. On April 29, 1988, Hyde issued to a life insurance company $12,000,000 of 9.70% senior notes due April 29, 1998. The notes provide for semi-annual payments of interest, payable in April and October of each year, continuing to April 1998, and annual payments of principal of $2,000,000 each from April 1993 to and including April 1998. The note purchase agreement relating to the notes contains restrictive covenants commonly found in such agreements. See Note 6 of Notes to Consolidated Financial Statements. The Company may prepay the note at the time of any scheduled principal or interest payment, subject to a prepayment premium in certain circumstances. During 1996, the Company acquired an information technology hardware system at a cost of $991,000 pursuant to a long-term capital lease. The lease provides for a bargain purchase option at the conclusion of the lease term. At January 3, 1997, the Company had various commitments for capital expenditures, including information technology systems, improvements to and expansion of distribution facilities, both domestic and foreign. The Company believes that these commitments are not significant. The liquidity of the Company is contingent upon a number of factors, principally the Company's future operating results. Management believes that the Company's current cash and cash equivalents, credit facilities and internally generated funds are adequate to meet its working capital requirements and to fund its capital investment needs and debt service payments. INFLATION AND CURRENCY RISK The 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 certain forward foreign exchange contracts to minimize the transaction currency risk. SFAS 121 Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), issued by the Financial Accounting Standards Board, requires that long-lived assets to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in the circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 establishes standards for recognizing and measuring impairment of long-lived assets, certain identifiable intangibles and goodwill. For 1996, the Company determined that an impairment loss was not required on its long-lived assets. SFAS 123 The Financial Accounting Standards Board issued Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) in October 1995. SFAS 123 establishes the financial accounting and reporting standards for all stock-based compensation. SFAS 123 prescribes a fair value method of accounting for stock options and other similar equity instruments and encourages companies to adopt this accounting treatment for all stock-based compensation plans. However, under SFAS 123, companies are permitted to continue to measure compensation expense using the intrinsic value based method of accounting as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," provided that pro forma disclosures are made of net income and earnings per share had the fair value method been adopted. SFAS 123 is effective for fiscal years commencing after December 15, 1995. As permitted by SFAS 123, the Company is continuing to account for employee stock compensation expense under the precepts of APB Opinion No. 25. See Note 11 for pro forma disclosures of net income and earnings per share, calculated utilizing the fair value method prescribed under SFAS 123. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time. COMPETITION. Competition is intense in the markets in which the Company sells its products. The Company competes with a large number of other companies, both domestic and foreign, several of which have diversified products lines, well- known brands and financial, distribution and marketing resources substantially greater than those of the Company. The principal competitors for the Company's Saucony products are Nike, New Balance and ASICS. The principal competitors for the Company's Brookfield products are Variflex, Roller Derby, Blade Runner and Fisher-Price. DEPENDENCE ON FOREIGN SUPPLIERS. A number of manufacturers located in the Far East, primarily in China, Taiwan and Thailand, supply products and product components to the Company. During fiscal 1996, one of such suppliers, located in China, accounted for approximately 38% of the Company's total purchases by dollar volume. The Company is subject to the usual risks of a business involving foreign suppliers, such as currency fluctuations, government regulation of fund transfers, export and import duties, trade limitations imposed by the United States or foreign governments and political and labor instability. In particular, there are a number of trade-related and other issues creating significant friction between the governments of the United States and China, and the imposition of punitive import duties on certain categories of Chinese products has been threatened in the past and may be implemented in the future. In addition, the Company has no long-term manufacturing agreements with its foreign suppliers and competes with other athletic shoe and recreational product companies, including companies that are much larger than the Company, for access to production facilities. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly operating results may vary significantly depending on a number of factors, including the timing and shipment of individual orders, market acceptance of new athletic footwear or outdoor recreational products for children, changes in the Company's operating expenses, personnel changes, mix of products sold, changes in product pricing and general economic conditions. In addition, a substantial portion of the Company's revenue is realized during the last few weeks of each quarter; therefore, any delays in orders or shipments are more likely to result in revenue not being recognized until the following quarter, which could adversely impact the results of operations for that quarter. The Company's current expense levels are based in part on its expectations of future revenue and, as a result, net income for a given period could be disproportionately affected by any reduction in revenue. It is possible that in some future quarter the Company's revenue or operating results will be below the expectations of stock market securities analysts and investors; if that were to occur, the market price of the Common Stock could be materially adversely affected. MANAGEMENT OF GROWTH. One element of the Company's business strategy is to seek acquisitions of businesses and products that are complementary to those of the Company. There can be no assurance that the Company will be able to effect any acquisitions, operate any such acquired businesses profitably or otherwise implement its growth strategy successfully. In addition, identifying and effecting acquisitions and integrating the acquired businesses with the operations of the Company may place significant demands upon the current management team and operational systems of the Company. In order to effect acquisitions of a certain size, the Company may require additional capital, which the Company may obtain through additional borrowings under its credit facility. DEPENDENCE UPON LICENSING ARRANGEMENTS. The Company sells Brookfield products under trade names licensed from other parties. Most of the Company's licenses are non-exclusive, have a fixed term and limit the types of products that may be sold under the license. DEPENDENCE ON CONSUMER PREFERENCES. The Company is susceptible to fluctuations in its business based upon fashion trends and frequently changing consumer style preferences and product demands, including levels of enthusiasm for athletic activities. The Company believes that its success depends in substantial part on its ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner. Moreover, the Company could be materially adversely affected by conditions in the retail industry in general, including consolidation and the resulting decline in the number of retailers and other cyclical economic factors. ADVERTISING AND MARKETING PROGRAMS. The Company's success in the markets in which it competes depends in part upon the effectiveness of advertising and marketing programs of the Company. In particular, the Company must periodically design and successfully execute new and effective advertising and marketing programs. DEPENDENCE ON MAJOR CUSTOMERS. Although the Company had no customer that accounted for ten percent or more of the Company's consolidated revenue during 1996, the Company's business is susceptible to the loss of certain key customers of the Company's product lines, such as Foot Locker for the Company's Saucony products and Toys-R-Us for the Company's Brookfield products. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Index to the Company's Consolidated Financial Statements in Item 14 and the accompanying consolidated financial statements, notes and schedules which are filed as part of this Form 10-K following the signature page and are incorporated herein by this reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 15, 1997 (the "1997 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 1997 Proxy Statement within 120 days after the close of the fiscal year ended January 3, 1997. 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 Company's 1997 Proxy Statement and is incorporated herein by this reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in the Company's 1997 Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners and Management" and is incorporated herein by this reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained under the caption "Employment and Consulting Agreements and Other Arrangements" appearing in the Company's 1997 Proxy Statement and is incorporated herein by this reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Index to Financial Statements ----------------------------- The following consolidated financial statements of Hyde Athletic Industries, Inc. and its subsidiaries are included in this report: Reports of Independent Accountants Consolidated balance sheets at January 3, 1997 and January 5, 1996 Consolidated statements of income for the years ended January 3, 1997, January 5, 1996 and December 30, 1994 Consolidated statements of stockholders' equity for the years ended January 3, 1997, January 5, 1996 and December 30, 1994 Consolidated statements of cash flows for the years ended January 3, 1997, January 5, 1996 and December 30, 1994 Notes to the consolidated financial statements 2. Index to Consolidated Financial Statement Schedule --------------------------------------------------- Schedule II -- Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. Separate financial statements of the Company have been omitted since it is primarily an operating Company and its subsidiaries included in the consolidated financial statements do not have a minority equity interest or indebtedness to any person other than the Company in an amount which exceeds 5% of the total assets as shown by the consolidated financial statements as filed herein. 3. Index to Exhibits ----------------- The exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such exhibits, which Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K ------------------- No Current Reports on Form 8-K were filed in the fourth quarter of fiscal 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HYDE ATHLETIC INDUSTRIES, INC. ------------------------------ (registrant) By: /s/ John H. Fisher ----------------------------------- John H. Fisher President and Chief Executive Officer Date: April 3, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME CAPACITY DATE ---- -------- ---- /s/ John H. Fisher President April 3, 1997 - ------------------------- John H. Fisher Chief Executive Officer Director /s/ Charles A. Gottesman Executive Vice President April 3, 1997 - ------------------------- Charles A. Gottesman Chief Operating Officer Director (Principal Financial Officer) /s/ Roger P. Deschenes Controller April 3, 1997 - ------------------------- Roger P. Deschenes Chief Accounting Officer /s/ James A. Buchanan President April 3, 1997 - ------------------------- James A. Buchanan Brookfield Athletic Co., Inc. Director /s/ John J. Neuhauser Director April 3, 1997 - ------------------------- John J. Neuhauser /s/ Jonathan O. Lee Director April 3, 1997 - ------------------------- Jonathan O. Lee /s/ Phyllis H. Fisher Director April 3, 1997 - ------------------------- Phyllis H. Fisher REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Hyde Athletic Industries, Inc. We have audited the consolidated financial statements and the financial statement schedule of Hyde Athletic Industries, Inc. and Subsidiaries listed in Item 14(a) of this Annual Report on Form 10-K. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We did not audit the financial statements of Saucony SP Pty. Ltd., a fifty percent owned joint venture, which statements reflect total net assets and revenues consisting of thirteen percent and 12 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and in our opinion, insofar as it relates to the amounts included for Saucony SP Pty. Ltd., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hyde Athletic Industries, Inc. and Subsidiaries as of January 3, 1997 and January 5, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 3, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Boston, Massachusetts March 14, 1997 INDEPENDENT AUDIT REPORT TO THE MEMBERS OF SAUCONY SP PTY., LIMITED Scope We have audited the financial statements of Saucony SP Pty., Ltd., as set out on pages 2 to 18, for the year ended 3 January 1997. 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 generally accepted auditing standards 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 SP Pty Limited are properly drawn up so as to present fairly in accordance with generally accepted accounting principles the Company's state of affairs as at 3 January 1997 and its profit and cash flows for the financial year ended on that date. GRANT THORNTON Chartered Accountants /s/ W. H. Chapman Partner Sydney, NSW Australia April 2, 1997 HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
January 3, January 5, 1997 1996 ---- ---- Current Assets: Cash and cash equivalents $ 2,802,864 $ 11,668,316 Marketable securities (Note 2) 236,128 307,500 Accounts receivable, net of allowance for doubtful accounts and discounts (1996, $1,334,530; 1995, $940,244) (Note 3) 22,840,161 17,361,195 Inventories (Note 4) 28,632,511 26,831,600 Deferred income taxes (Note 12) 1,424,987 1,251,654 Prepaid expenses and other current assets 1,878,450 1,769,825 -------------- -------------- Total current assets 57,815,101 59,190,090 -------------- -------------- Property, plant and equipment, net of accumulated depreciation and amortization (Note 5) 9,217,468 8,122,937 -------------- -------------- Other assets: Deferred charges, net of accumulated amortization (1996, $1,613,931; 1995 $1,185,319) 1,447,804 999,363 Long-term accounts and notes receivable (Note 3) 1,035,987 353,175 Goodwill (Note 13) 1,250,001 -- Investment in limited partnership (Note 6) 753,433 753,433 Other 71,932 52,291 -------------- -------------- Total other assets 4,559,157 2,158,262 -------------- -------------- Total assets $ 71,591,726 $ 69,471,289 ============== ============== See notes to consolidated financial statements
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY January 3, January 5, 1997 1996 ---- ---- Current liabilities: Accrued letters of credit (Note 9) $ 1,848,666 $ 2,619,819 Notes payable (Note 9) 4,237,083 4,336,940 Current portion of long-term debt and capital lease obligations (Notes 6 & 7) 2,484,459 2,199,225 Accounts payable 2,121,528 2,436,148 Accrued expenses (Note 9) 3,517,047 3,136,653 -------------- -------------- Total current liabilities: 14,208,783 14,728,785 -------------- -------------- Long term obligations: Long-term debt, net of current portion (Note 6) 3,885,342 4,000,000 Capital lease obligations, net of current portion (Note 7) 1,007,411 205,568 Deferred income taxes (Note 12) 1,923,708 2,001,655 -------------- -------------- Total long-term obligations 6,816,461 6,207,223 -------------- -------------- Commitments and contingencies (Note 9) Minority interest in consolidated subsidiaries 487,865 170,227 -------------- -------------- Stockholders' Equity (Notes 10 & 11) Preferred stock, $1.00 par; authorized 500,000 shares; none issued and outstanding -- -- Common stock: Class A, $.333 par; authorized 20,000,000 shares (issued 1996, 2,706,227; 1995, 2,704,727) 902,075 901,575 Class B, $.333 par; authorized 20,000,000 shares (issued 1996, 3,729,059; 1995, 3,710,815) 1,243,020 1,236,939 Additional paid-in capital 15,581,353 15,521,470 Retained earnings 33,704,957 32,210,867 Accumulated translation (233,654) (257,694) --------------- -------------- 51,197,751 49,613,157 -------------- -------------- Less: Common stock held in treasury, at cost (1996, 198,400; 1995, 198,400) (1,053,790) (1,053,790) Unearned compensation (65,344) (194,313) --------------- --------------- 50,078,617 48,365,054 -------------- -------------- Total liabilities and stockholders' equity $ 71,591,726 $ 69,471,289 ============== ============== See notes to consolidated financial statements.
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended January 3, 1997, January 5, 1996 and December 30, 1994
1996 1995 1994 ---- ---- ---- Net sales $ 110,809,169 $ 102,562,755 $ 107,577,873 Other income (Note 13) 1,075,665 1,515,859 1,308,450 -------------- -------------- -------------- Total revenue 111,884,834 104,078,614 108,886,323 -------------- -------------- -------------- Costs and expenses: Cost of sales 77,449,171 70,860,821 72,493,385 Selling expenses 17,641,007 16,687,144 17,678,131 General and administrative expenses (Note 9) 13,613,363 13,210,520 12,458,674 Interest expense 951,737 1,299,858 1,480,247 -------------- -------------- -------------- Total costs and expenses 109,655,278 102,058,343 104,110,437 -------------- -------------- -------------- Income before income taxes and minority interest 2,229,556 2,020,271 4,775,886 Provision for income taxes (Note 12) 427,468 714,985 1,830,733 Minority interest in income (loss) of consolidated subsidiaries 307,998 (285,820) 8,516 -------------- --------------- -------------- Net income (Note 11) $ 1,494,090 $ 1,591,106 $ 2,936,637 ============== ============== ============== Per share amounts (Note 1): Net income (Note 11) $ 0.24 $ 0.26 $ 0.46 ============== =============== =============== Weighted average common shares and equivalents outstanding 6,251,889 6,239,557 6,437,281 ============== ============== ============== Cash dividends per share of common stock 0 0 0 ============== ============== ============== See notes to consolidated financial statements
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended January 3, 1997, January 5, 1996 and December 30, 1994
Common Stock Paid-in Retained Treasury Stock Class A Class B Capital Earnings Shares Amount ------- ------- ------ -------- ------ ------ Balance, December 31, 1993 $915,937 $1,249,404 $16,287,197 $27,683,124 -- -- Issuance of 7,688 shares of common stock, stock option exercise (Note 10) 333 2,229 23,313 -- -- -- Retirement of 89,566 shares of common stock issued under restricted stock grant (Note 10) (14,928) (14,928) (914,050) -- -- -- Issuance of below market options (Note 10) -- -- 237,925 -- -- -- Cancellation of below market options (Note 11) -- -- (41,580) -- -- -- Amortization of unearned compensation (Note 11) -- -- -- -- -- -- Acquisition of 176,700 shares of common stock, at cost (Note 10) -- -- -- -- 176,700 (922,963) Reclassification of 4,000 shares of common stock owned by a subsidiary (Note 10) -- -- -- -- 4,000 (54,140) Net income -- -- -- 2,936,637 -- -- Foreign currency translation adjustments -- -- -- -- -- -- -------- --------- ---------- ---------- --------- --------- Balance, December 30, 1994 $901,342 $1,236,705 $15,592,805 $30,619,761 180,700 ($ 977,103) Issuance of 1,400 shares of common stock, stock option exercise (Note 14) 233 234 3,184 -- -- -- Cancellation of below market options (Note 11) -- -- (74,519) -- -- -- Amortization of unearned compensation (Note 11) -- -- -- -- -- -- Acquisition of 17,700 shares of common stock, at cost (Note 10) -- -- -- -- 17,700 (76,687) Net income -- -- -- 1,591,106 -- -- Foreign currency translation adjustments -- -- -- -- -- -- -------- --------- ---------- ---------- --------- --------- Balance, January 5, 1996 $901,575 $1,236,939 $15,521,470 $32,210,867 $ 198,400 ($1,053,790) Issuance of 19,744 shares of common stock, stock option exercise (Note 10) 500 6,081 62,912 -- -- -- Cancellation of below market options (Note 11) -- -- (3,029) -- -- -- Amortization of unearned compensation (Note 11) -- -- -- -- -- -- Net income -- -- -- 1,494,090 -- -- Foreign currency translation adjustments -- -- -- -- -- -- -------- ---------- ----------- ----------- --------- ----------- Balance, January 3, 1997 $902,075 $1,243,020 $15,581,353 $33,704,957 198,400 $ (1,053,790) ======== ========== =========== =========== ========= =============
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended January 3, 1997, January 5, 1996 and December 30, 1994
Total Unearned Notes Accumulated Stockholders' Compensation Receivable Translation Equity ------------ ---------- ----------- ------ Balance, December 31, 1993 $ (950,354) $ (400,911) $ (74,573) $44,709,824 Issuance of 7,688 shares of common stock, stock option exercise (Note 10) -- -- -- 25,875 Retirement of 89,566 shares of common stock issued under restricted stock grant (Note 10) 542,995 400,911 -- -- Issuance of below market options (Note 10) (237,925) -- -- -- Cancellation of below market options (Note 11) 41,580 -- -- -- Amortization of unearned compensation (Note 11) 156,493 -- -- 156,493 Acquisition of 176,700 shares of common stock, at cost (Note 10) -- -- -- (922,963) Reclassification of 4,000 shares of common stock owned by a subsidiary (Note 10) -- -- -- (54,140) Net income -- -- -- 2,936,637 Foreign currency translation adjustments -- -- (96,898) (96,898) ---------- ---------- ----------- ------------ Balance, December 30, 1994 (447,211) -- (171,471) 46,754,828 Issuance of 1,400 shares of common stock, stock option exercise (Note 14) -- -- -- 3,651 Cancellation of below market options (Note 11) 74,519 -- -- -- Amortization of unearned compensation (Note 11) 178,379 -- -- 178,379 Acquisition of 17,700 shares of common stock, at cost (Note 10) -- -- -- (76,687) Net income -- -- -- 1,591,106 Foreign currency translation adjustments -- -- (86,223) (86,223) ---------- ---------- ----------- ------------ Balance, January 5, 1996 $ (194,313) -- $ (257,694) $48,365,054 Issuance of 19,744 shares of common stock, stock option exercise (Note 10) -- -- -- 69,493 Cancellation of below market options (Note 11) 3,029 -- -- -- Amortization of unearned compensation (Note 11) 125,940 -- -- 125,940 Net income -- -- -- 1,494,090 Foreign currency translation adjustments -- -- 24,040 24,040 ---------- ---------- ---------- ------------ Balance, January 3, 1997 $ (65,344) -- $ (233,654) $50,078,617 ========== ========== =========== ============ See notes to condensed consolidated financial statements
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended January 3, 1997, January 5, 1996 and December 30, 1994
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 1,494,090 $ 1,591,106 $ 2,936,637 Adjustments to reconcile net income to net cash Provided (used) by operating activities: Depreciation and amortization 1,564,509 1,210,689 1,109,906 Provision for bad debt and discounts 5,396,619 5,072,962 4,754,567 Loss on sale of equipment 22,207 2,498 4,491 Deferred income tax (benefit) expense (251,280) (422,737) 125,992 Minority interest in (income) loss of consolidated subsidiaries 307,998 (285,820) 8,516 Compensation from stock grants and stock options 125,940 178,379 156,493 Gain on sale of investment in limited partnership -- (426,377) -- Changes in operating assets and liabilities, net of effects of acquisitions and foreign currency adjustments: Decrease (increase) in assets: Marketable securities 71,372 (307,500) 4,003,952 Accounts and notes receivable (11,399,928) 1,772,637 (9,765,650) Inventories (1,691,033) 5,187,467 (8,523,396) Prepaid expenses and other current assets 43,259 (261,598) 328,272 Increase (decrease) in liabilities: Accrued letters of credit (775,822) 1,115,229 (1,707,261) Accounts payable (375,138) (865,034) 1,131,609 Accrued expenses 418,713 (1,604,521) 1,209,458 Accrued income taxes (9,108) (742,846) 261,512 -------------- -------------- ------------- Total adjustments (6,551,692) 9,623,428 (6,901,539) -------------- ------------- -------------- Net cash provided (used) by operating activities (5,057,602) 11,214,534 (3,964,902) -------------- ------------- -------------- Cash flows from investing activities: Purchases of property, plant and equipment (918,353) (650,570) (676,371) Proceeds from the sale of equipment 77,834 31,813 496 Increase in deferred charges and other (1,065,701) (469,257) (379,933) Investment distribution from limited partnership -- 28,732 -- Payments for trademarks and trade names (1,250,001) -- -- Payments for business acquisitions, net of cash acquired -- (111,800) -- Proceeds from sale of investment in limited partnership -- 1,335,289 -- ------------- ------------- ------------- Net cash provided (used) by investing activities (3,156,221) 164,207 (1,055,808) -------------- ------------- -------------- HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED 1996 1995 1994 ---- ---- ---- Cash flows from financing activities: Net short-term borrowings 1,313,007 (30,087) 2,547,110 Repayment of long-term debt and capital lease obligations (2,403,389) (2,893,098) (2,487,567) Proceeds from long-term borrowings 419,766 -- -- Common stock repurchased -- (76,687) (922,963) Payment of termination benefit payable -- (26,866) (306,075) Issuances of common stock, including options 69,493 3,651 25,875 ------------- -------------- -------------- Net cash used by financing activities (601,123) (3,023,087) (1,143,620) Effect of exchange rate changes on cash and cash equivalents (50,506) (37,114) (499,060) -------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents (8,865,452) 8,318,540 (6,663,390) Cash and cash equivalents at beginning of period 11,668,316 3,349,776 10,013,166 ------------- -------------- -------------- Cash and cash equivalents at end of period $ 2,802,864 $ 11,668,316 $ 3,349,776 Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes, net of refunds $ 736,265 $ 1,935,902 $ 1,507,484 ============= ============== ============== Interest $ 959,461 $ 1,534,015 $ 1,245,927 ============= ============== ============== Non-cash Investing and Financing Activities: Property purchased under capital leases $ 1,233,656 $ 137,853 $ 175,377 Reconciliation of assets acquired and liabilities assumed, business acquisitions Assets acquired -- 232,232 -- Liabilities assumed -- 120,432 -- ------------- -------------- -------------- Cash paid for business acquisitions $ -- $ 111,800 -- ============= ============== ============== Sale of investment in limited partnership Cash received, net of broker fees -- 1,335,289 -- Reduction in short-term debt, long-term debt and accrued liabilities -- 4,055,691 -- ------------- -------------- -------------- Total proceeds -- 5,390,980 -- Investment in limited partnership, net of distributions -- 4,964,603 -- ------------- -------------- -------------- Gain realized on sale -- $ 426,377 -- ============= ============== ============== See notes to consolidated financial statements.
HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended January 3, 1997, January 5, 1996 and December 30, 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------ BUSINESS ACTIVITY ----------------- The Company is an importer and manufacturer of a broad line of high performance athletic footwear and outdoor recreational products. The Company markets its products principally to domestic and international retailers and distributors. REPORTING PERIOD ---------------- The Company adopted a 52-53 week fiscal year reporting period in 1991. The consolidated financial statements and notes for 1996, 1995 and 1994 represent the fiscal years ended January 3, 1997, January 5, 1996 and December 30, 1994, respectively. In Management's opinion, the consolidated financial statements for 1996, 1995 and 1994 are comparable. PRINCIPLES OF CONSOLIDATION --------------------------- The consolidated financial statements include the accounts of Hyde Athletic Industries, Inc. and its wholly-owned subsidiaries, Spot-Bilt, Inc., Brookfield Athletic Co., Inc., Saucony, Inc., Saucony Deutschland Vertriebs GmbH (Germany), Quintana Roo, Inc. and Hyde International Services Limited (Hong Kong), and its majority-owned foreign subsidiary, Saucony Canada, Inc., all herein referred to as the "Company". Hyde International Services Limited owns a controlling interest in a subsidiary called Saucony SP Pty Limited (Australia). Saucony, Inc. owns a majority interest in a joint venture, Saucony Sports BV (Netherlands). The Company also operates a branch in the United Kingdom called Saucony UK and maintains a marketing representative office in Germany called Saucony Europe. Saucony GmbH and Quintana Roo, Inc. are included in the consolidated financial statements beginning in December 1994 and August 1995, respectively. Saucony Shoe Manufacturing Co., Inc., an inactive wholly-owned domestic subsidiary, was dissolved in 1992. Hyde Security Corp., a wholly-owned domestic subsidiary, was dissolved in 1996. The effects of transactions among related companies are eliminated in the consolidated financial statements. 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 related costs of sales are recognized upon shipment of products. INVENTORIES ----------- Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT ----------------------------- Land, buildings and equipment, including significant improvements to existing facilities, are stated at cost. The assets are depreciated over their estimated useful lives or capital lease terms, if shorter, using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives of the assets are: 33 years for buildings and improvements and 3 to 15 years for office equipment and 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 ----------- The Company's investment in a real estate limited partnership is carried at cost. It is Management's intention to retain this investment for its long- term tax benefit. INVESTMENTS IN MARKETABLE SECURITIES ------------------------------------ Investment in debt securities and marketable securities are categorized as trading, held-to-maturity or available-for-sale. Trading securities are reported at fair value, with changes in fair value recorded in consolidated net income. Investment securities include both available-for-sale and held-to-maturity securities. Available-for-sale securities are reported at fair value, with net unrealized gains and losses included as a separate component of stockholders' equity. Held-to-maturity debt securities are reported at amortized cost. For all investments, unrealized losses, other than temporary losses, are recognized in consolidated net income. DEFERRED CHARGES AND GOODWILL ------------------------------ Deferred charges consist primarily of computer software, bond issuance, trademarks, financing and organization costs. The deferred charges are amortized on the straight-line basis over the estimated useful life of the software and the term of the debt; organization costs and trademarks are amortized over five years; 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 No. 109), "Accounting for Income Taxes". Under SFAS No. 109, income taxes are provided for the amount of taxes payable or refundable in the current year and for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. As a result of recognition and measurement differences between tax laws and financial accounting standards, temporary differences arise between the amount of taxable income and pretax financial income for a year and the tax bases of assets or liabilities and their reported amount in the financial statements. The deferred tax assets and liabilities reported as of January 3, 1997 and January 5, 1996 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 based upon the weighted average common shares and common equivalents (stock options) outstanding during the year. Primary and fully diluted earnings per share are approximately the same. All per share amounts reflect the stock dividend (Note 11) which had the same effect on the shares of common stock outstanding as a two-for-one stock split. STATEMENTS OF CASH FLOWS ------------------------ For purposes of these statements, cash equivalents include all short-term deposits with an original maturity of three months or less purchased in connection with the Company's cash management program. FOREIGN CURRENCY TRANSLATION ---------------------------- The financial statements of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates of exchange in effect during the year. The resulting cumulative translation adjustments have been recorded as a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in consolidated net income. Net gains from foreign currency transaction translation amounted to $171,405, $77,409, and $341,651 for 1996, 1995 and 1994, respectively. 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 contract are deferred and offset against foreign currency exchange gains or losses on the underlying hedged item upon consummation of the transaction. RECLASSIFICATIONS ----------------- Certain items in prior years' consolidated financial statements have been reclassified to conform to the 1996 presentation. ADVERTISING AND PROMOTION ------------------------- Advertising and promotion costs are expensed when incurred or expensed ratably over the year in relation to sales. Production costs of future media advertising are deferred until the advertising occurs. Advertising and promotion expense amounted to $8,929,860, $7,897,128 and $9,160,105 for 1996, 1995 and 1994, respectively. RESEARCH AND DEVELOPMENT EXPENSES --------------------------------- Expenditures for research and development of products are expensed as incurred. Research and development expenses amounted to approximately $1,945,317, $1,850,521 and $1,295,779 for 1996, 1995 and 1994, respectively. RELATED PARTY TRANSACTIONS -------------------------- Saucony Sports BV, a majority-owned foreign joint venture, leases office space and office equipment from an entity controlled by the minority stockholder of Saucony Sports BV. Rent expense amounted to $12,442, $70,980 and $73,300 for 1996, 1995 and 1994, respectively. The Company issued a note payable to the minority stockholder of Saucony Canada, Inc., a majority-owned foreign subsidiary, as part of the consideration paid to acquire an 85% interest in the former Canadian distributor. Interest expense incurred amounted to $7,038 and $10,353 for 1995 and 1994, respectively. See Note 6 of the Notes to Consolidated Financial Statements for further discussion of the note agreement. During 1995, the Company prepaid the note and realized a discount of $13,759 which is included in consolidated net income. The Company has entered into a consulting agreement with a principal stockholder of the Company's Class A Common Stock, beginning January 4, 1993. The agreement, as amended, is effective for a term of five years, provides for an annual fee of $40,000 during each of the first two years of the agreement and $90,000 for each of the remaining three years of the agreement. Included in general and administrative expenses for 1996, 1995 and 1994 are consulting fees of $90,000, $90,000 and $40,000, respectively. The Company presently holds a note receivable of $100,000 from an officer of the Company. The promissory note, originated from a transaction in 1993, is collateralized by a mortgage from the officer on two parcels of real estate. See Note 3 of the Notes to Consolidated Financial Statements for further discussion of the terms and conditions of the promissory note. NEW ACCOUNTING PRONOUNCEMENTS ----------------------------- The Financial Accounting Standards Board issued Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123) in October 1995. SFAS 123 establishes the financial accounting and reporting standards for all stock-based compensation. SFAS 123 prescribes a fair value method of accounting for stock options and other similar equity instruments and encourages companies to adopt this accounting treatment for all stock-based compensation plans. However, under SFAS 123, companies are permitted to continue to measure compensation expense using the intrinsic value based method of accounting as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," provided that pro forma disclosures are made of net income and earnings per share had the fair value method been adopted. SFAS 123 is effective for fiscal years commencing after December 15, 1995. As permitted by SFAS 123, the Company intends to continue to account for employee stock compensation expense under the precepts of APB Opinion No. 25. See Note 11 of the Notes to Consolidated Financial Statements for pro forma disclosures of net income and earnings per share, calculated utilizing the fair value method prescribed under SFAS 123. Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), issued by the Financial Accounting Standards Board, requires that long-lived assets, to be held and used or disposed of by an entity, be reviewed for impairment whenever events or changes in the circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 establishes standards for recognizing and measuring impairment of long- lived assets, certain identifiable intangibles and goodwill. For 1996, the Company determined that an impairment loss was not required on its long- lived assets. 2. MARKETABLE SECURITIES: --------------------- As of January 3, 1997, the Company's holdings in marketable securities consisted of equity securities which were classified as trading securities. The cost of the securities held at January 3, 1997 and January 5, 1996 was $170,866 and $287,500, respectively. As of January 3, 1997 and January 5, 1996, the market value of such securities was $236,128 and $307,500, respectively. Gross unrealized gains of $65,262 and $20,000, based on quoted market prices, are included in consolidated net income for the years ended January 3, 1997 and January 5, 1996. Included in the determination of net income for the years ended January 3, 1997, January 5, 1996 and December 30, 1994 were: 1996, net realized gains of $9,773 and net unrealized gains of $65,262; 1995, net unrealized gains of $20,000; and 1994, net realized losses of $263,267. 3. ACCOUNTS AND NOTES RECEIVABLE: ----------------------------- During 1995, the Company exchanged inventory having a fair value of $1,400,000 for $100,000 in cash, receipt of which occurred in March 1996, and media and trade receivable barter credits amounting to $1,300,000. The media and trade receivable barter credits expire on November 14, 1998. It is the Company's intention to utilize the credits during fiscal 1997 and fiscal 1998. As of January 3, 1997, $1,297,714 was outstanding, of which $400,000 was included in current accounts receivable and $897,714 was included in long-term accounts receivable. On December 28, 1993, the Company executed an agreement whereby it granted an exclusive, worldwide, nonassignable right and license for the use of the "Spot-bilt" and the "single spot" logo trademarks. The agreement, which expires in 1997 and may be renewed for up to three additional one-year terms at the licensee's option, contains restrictions with respect to the licensed product, its manufacture, distribution and sale. The agreement established a minimum cumulative guaranteed royalty of $630,000, subject to annual upward adjustments, due in various quarterly payments, commencing in 1994. In 1993, the Company recorded a receivable based upon the minimum guaranteed royalty for the present value of future cash flows, utilizing an imputed interest rate of 6.0%, which equates to $548,925. At January 3, 1997, $218,415 was outstanding, all of which is due in 1997. The Company has received all scheduled payments on a timely basis. During 1993, the Company loaned $100,000 to an officer of the Company. The promissory note issued to the Company by the officer is collateralized by a mortgage from the officer on two parcels of real estate (land and building). The note calls for semi-annual payments of interest through maturity on the unpaid principal amount, commencing on July 1, 1994 and five annual principal payments of $15,000 commencing July 1, 1998 and one principal payment of $25,000 due on July 1, 2003. The note bears interest at a rate equal to the prevailing prime rate of interest. 4. INVENTORIES: ----------- Inventories at January 3, 1997 and January 5, 1996 consisted of the following: 1996 1995 ---- ---- Finished goods $ 22,309,805 $ 22,954,048 Work-in-process 110,559 20,243 Raw materials and supplies 6,212,147 3,857,309 ------------ ------------ Total $ 28,632,511 $ 26,831,600 ============ ============ 5. PROPERTY, PLANT AND EQUIPMENT: ----------------------------- Major classes of property, plant and equipment, at cost, at January 3, 1997 and January 5, 1996 were as follows: 1996 1995 ---- ---- Land $ 760,812 $ 745,307 Buildings and improvements 7,042,973 7,010,015 Machinery and equipment 6,975,726 6,228,358 Capitalized leases 1,751,214 641,136 Leasehold improvements 206,360 90,770 ------------ ------------ 16,737,085 14,715,586 Less accumulated depreciation and amortization 7,519,617 6,592,649 ------------ ------------ Total $ 9,217,468 $ 8,122,937 ============ ============ Accumulated amortization of the leased property was $344,151 and $235,475 at January 3, 1997 and January 5, 1996, respectively. 6. LONG-TERM DEBT: -------------- 1996 1995 ---- ---- Senior notes payable due in semiannual installments of interest on the unpaid principal amount through maturity and six annual principal payments of $2,000,000 commencing April 29, 1993. The notes bear interest at 9.70% and are subject to certain restrictive covenants pertaining to consolidation or merger with another entity, levels of working capital, net worth, the payment of cash dividends and various other restrictions. $4,000,000 $ 6,000,000 Note payable to a bank under a revolving line of credit agreement, due on January 30, 1998, with interest of 8.15%. 1,581,000 -- Note payable due in ten semi-annual principal payments of $43,477 commencing July 1, 1996 and interest on the unpaid principal amount through maturity. The note bears interest at 9.25% and is secured by a mortgage. 391,297 -- ---------- ----------- 5,972,297 6,000,000 Less current portion 2,086,955 2,000,000 ---------- ----------- $3,885,342 $ 4,000,000 ========== =========== Long-term debt maturities payable for the five years and thereafter subsequent to January 3, 1997 are as follows: 1997 $ 2,086,955 1998 3,667,955 1999 86,955 2000 86,955 2001 43,477 ----------- Total $ 5,972,297 =========== On October 12, 1993, the Company invested as a limited partner in Columbia Housing Partners Corporate Tax Credit II Limited Partnership, a Massachusetts limited partnership, by acquiring five (5) units of limited partner interest for an aggregate capital contribution of $5,000,000. The Company issued a promissory note, collateralized by the Company's partnership interest, in the amount of $6,392,960. The note was recorded at the present value of future cash flows, utilizing an imputed interest rate of 7.9% which equates to $4,950,000. On June 1, 1995, the Company sold its entire limited partnership interest in the Columbia Housing Partners Corporate Tax Credit II Limited Partnership for $5,501,000. Net proceeds totalled $1,335,000, resulting in a pre-tax gain of $426,377, after transaction expenses, or $.02 per share after tax. The after-tax gain is based upon projected tax credits and passive losses provided by the general partner. As a result of the sale, the Company realized reductions in current and long-term debt and accrued interest of $4,056,000. During 1995, the Company prepaid its note payable to the minority stockholder of the Company's majority-owned Canadian subsidiary, resulting in a gain of $13,759, which is included in consolidated net income. Under the terms of the senior notes payable, the Company may not declare any cash dividends or make any cash distributions unless, immediately thereafter, the aggregate amount of cash dividends and cash distributions since December 31, 1987 would not exceed the sum of (i) $2,000,000, (ii) 75% of cumulative consolidated net income as defined (or minus 100% of consolidated net income in the case of a loss) for such period and (iii) the proceeds of sales of Common Stock of the Company. As of January 3, 1997, approximately $11,507,000 was available for payment of cash dividends under the terms of these covenants. 7. CAPITAL LEASE OBLIGATIONS ------------------------- The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of January 3, 1997. 1997................................... $ 473,831 1998................................... 364,521 1999................................... 319,906 2000................................... 274,276 2001................................... 138,572 ----------- Total minimum lease payments $ 1,571,106 Less amounts representing interest 166,191 ----------- Present value of minimum lease payments 1,404,915 Less current portion 397,504 ----------- Long-term portion $ 1,007,411 =========== 8. EMPLOYEE BENEFIT PLANS: ---------------------- In 1991, the Company established a qualified retirement plan for the benefit of all United States employees who have attained the age of 21 and have completed six months of consecutive service. As amended in 1996, the plan permits employees to defer on a pre-tax basis up to 15% of gross wages subject to the federal maximum limit. The Company will match a portion of the employee contributions, subject to profitability goals, at the discretion of the Board of Directors. The Company matched 25% of employee elective deferrals subject to a limitation of 1.25% of total employee compensation. Both employee and employer contributions are funded, on a monthly basis, to a group defined contribution plan administered by an independent investment company. The defined contribution for 1996, 1995 and 1994 were $85,324, $57,570 and $49,611, respectively. Expenses related to the administration of the plan are paid by the Company. During 1995, the Company established a supplementary retirement program to provide retirement benefits to certain management and highly compensated employees, as determined by the Company's Board of Directors. Employees are eligible to defer up to 15% of gross wages on a pre-tax basis. The Company will match a portion of employee contributions, subject to profitability goals, at the discretion of the Board of Directors. The Company match of employee elective deferrals is limited to 1.25% of total employee compensation. Both employee and employer contributions and deemed investment income accrued, net of the amount allowable under the qualified plan are funded, on a monthly basis to a group defined contribution plan administered by an independent investment company. The defined contribution amounted to $5,193 for 1996. Expenses related to the administration of the plan are paid by the Company. 9. COMMITMENTS AND CONTINGENCIES: ----------------------------- LEASE COMMITMENTS ----------------- The Company is obligated under various leases for equipment and retail space through 2002. Total rental expenses for 1996, 1995 and 1994 were $837,170, $673,869 and $479,132, respectively. Future minimum rental payments are as follows: 1997, $457,425; 1998, $398,388; 1999, $295,993; 2000, $57,397 and 2001 and thereafter, $5,007. LICENSES -------- The Company is obligated under various royalty licensing agreements through December 31, 2003. Minimum guaranteed royalties for 1997, 1998, 1999, 2000, 2001 and thereafter are $189,532, $636,250, $645,000, $20,000, $20,000 and $40,000, respectively. COMMITMENTS ----------- On August 31, 1993, the Company entered into a credit facility with two banks pursuant to which up to a $30,000,000 credit line was available to the Company as of January 3, 1997. This arrangement provides for a short- term demand line of credit, in the principal amount of up to $15,000,000, subject to formula, for domestic borrowings, international borrowings, and letters of credit; and a revolving line of credit in the principal amount of up to $15,000,000. Borrowings under the demand line of credit are made at the bank's prime rate of interest while borrowing's under the revolving line of credit are made at the bank's prime rate of interest, or at the Company's option, the Eurodollar rate (Fixed Rate Option). At January 3, 1997, there was $2,301,803 outstanding under this facility. This credit facility, which was amended in January 1997, terminates August 1, 1998. This credit facility is subject to the bank's periodic reviews of the Company's operations. The facility contains requirements for maintaining defined levels of working capital, net worth, capital expenditures, net income and various financial ratios. Additionally, the facility limits the Company's ability to pay or declare a dividend or make other distributions to stockholders. Saucony Canada Inc. maintains a credit facility with a Canadian lender. The agreement provides Saucony Canada with a line of credit for $1,000,000 Canadian dollars, subject to formula (approximately $730,000 in U.S. dollars at January 3, 1997). The agreement provides for a demand line in the principal amount of $300,000 (Canadian dollars), for letters of credit, and a revolving line of credit, in the principal amount of $700,000 (Canadian dollars). Borrowings under this facility are made at the lender's prime lending rate plus .25%. At January 3, 1997, there was $317,376 in U.S. dollars outstanding under this credit facility. The facility contains requirements for maintaining defined levels of net worth, working capital and various financial ratios. Saucony SP Pty Limited maintains a credit facility with an Australian lender. In October 1996, the agreement was amended, whereby the available line was increased. The principal terms and conditions of the agreement remained unchanged. The credit facility provides Saucony SP with a $6,550,000 Australian dollar (approximately $5,178,000 in U.S. dollars at January 3, 1997) line of credit. The agreement provides for a short-term demand line of credit, in the principal amount of up to $4,000,000 (Australian dollars), for letters of credit and foreign exchange facilities; a revolving line of credit, in the principal amount of $2,000,000 (Australian dollars); and a $550,000 (Australian dollars) five- year term loan secured by a mortgage against the Company's facility in St. Peters, Australia. Borrowings under this facility are made at market rates of interest as defined in the agreement or at the lender's quoted rate. At January 3, 1997, there was $2,248,973 in U.S. dollars outstanding under this credit facility. The facility is subject to the lender's periodic reviews of the Company's operations. Saucony Sports BV maintains a credit facility with a Dutch lender. The agreement provides Saucony Sports BV with a 1,500,000 Dutch Guilder (approximately $858,000 U.S. dollars at January 3, 1997) line of credit. Borrowings under this facility are made at the bank's discount borrowing rate plus 1.75%. At January 3, 1997, $556,792 in U.S. dollars was outstanding under this credit facility. A division of Saucony, Inc. located in the United Kingdom maintains a demand line of credit facility with a British lender. The credit facility provides the Company with a 500,000 Pound Sterling (approximately $843,000 in U.S. dollars at January 3, 1997) line of credit. Borrowings under this facility are made at the bank's prime rate of interest, plus 1.5%. At January 3, 1997, $784,437 in U.S. dollars was outstanding under this facility. Saucony Deutschland Vertriebs, GmbH ("Saucony GmbH") maintains a credit facility with a German lender. The credit facility provides Saucony GmbH with a 500,000 Deutschmark (approximately $319,000 in U.S. dollars at January 3, 1997) line of credit. Borrowings under this facility are made at an interest rate of 8%. At January 3, 1997, there were no borrowings outstanding under this credit facility. At January 3, 1997, the Company was committed under open letters of credit to several lenders in the aggregate amount of $6,271,786 and under foreign exchange contracts in the amount of $275,000. The Company is guarantor on credit facility agreements for three foreign subsidiaries. At January 3, 1997, the guarantees totalled $7,927,975, of which $2,843,265 was collateralized by the issuance of standby letters of credit. The Company has entered into an employment contract with one key employee that provides for minimum annual compensation of $216,000 in 1997. The contract provides for annual salary, cost-of-living adjustments, additional compensation in the form of bonuses based on performance, life insurance coverage and options to purchase shares of the Company's common stock. In 1996, the Company included in its general and administrative expenses, bonus expense to two key employees of $148,000, of which $28,000 is payable and is included in accrued expenses at January 3, 1997. Bonus expense to key executives amounted to $275,574 and $456,903 for 1995 and 1994, respectively. The Company has entered into an employment contract with its managing partner of Saucony SP Pty Limited. The agreement provides minimum annual compensation of $250,000 in Australian dollars for three years commencing November 13, 1996. The contract provides for minimum annual salary, cost- of-living adjustments and life insurance coverage and additional compensation in the form of bonuses based on performance. Included in accrued expenses at January 3, 1997 and January 5, 1996 were sales commissions payable of $949,857 and $813,940, respectively. 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 other proceedings will have a material adverse effect on the Company's financial position and operations and cash flows (irrespective of any potential insurance recovery). 10. STOCKHOLDERS' EQUITY: -------------------- At the Annual Meeting of the Stockholders of the Company, held on May 25, 1993, the stockholders approved an amendment to the Company's Articles of Organization which increased the number of authorized shares of common stock of the Company from 7,275,000 to 40,000,000, consisting of 20,000,000 shares of Class A Common Stock, $.33 1/3 par value per share, and 20,000,000 shares of Class B Common Stock, $.33 1/3 par value per share; reclassified the then existing Common Stock ("Prior Common Stock") as Class A Common Stock; authorized a new class of non-voting stock designated as Class B Common Stock; and established the rights, powers and limitations of the Class A Common Stock and the Class B Common Stock. The Class A Common Stock has essentially the same rights, powers and limitations as the Prior Common Stock. The Class B Common Stock is non- voting, except with respect to amendments to the Company's Articles of Organization that alter or change the powers, preferences or special rights of the Class B Common Stock so as to affect them adversely and as otherwise required by law. The Class B Common Stock has certain features, including a "Class B Protection" feature and a premium on regular cash dividends, if any, which are intended to minimize the economic reasons for the Class A Common Stock to trade at a premium compared to the Class B Common Stock. The other terms of the Class A Common Stock and Class B Common Stock, including rights with respect to special cash dividends, stock dividends, stock splits, consideration payable in a merger or consolidation and distributions upon liquidation, generally are the same. The Board of Directors of the Company declared a stock dividend of one share of Class B Common Stock for each share of Class A Common Stock outstanding on May 16, 1993. The stock dividend had the same effect on the total number of shares of Class A Common Stock outstanding as a two- for-one split. The ex-dividend date for the stock dividend was May 26, 1993, on which date the Class A Common Stock and the Class B Common Stock began to trade separately. The stock dividend resulted in the issuance of 2,813,695 shares of Class B Common Stock and the transfer of $937,898 from Additional Paid-in Capital to Class B Common Stock. At the May 25, 1993 Annual Meeting, the stockholders also approved the 1993 Equity Incentive Plan ("the Equity Incentive Plan") and 1993 Director Stock Option Plan, adopted by the Company's Board of Directors on April 7, 1993. On April 20, 1993, the Compensation Committee approved the issuance under the Equity Incentive Plan of restricted stock awards, covering 111,968 shares of Prior Common Stock to nine executive officers of the Company. The shares subject to each award were issued on April 27, 1993. Each award vests in equal annual installments over a five-year period, beginning in April 1994. The purchase price for each award was $12 1/8 per share, which represents 50% of the fair market value of the Prior Common Stock on the date the stock was issued. The purchase price was paid in the form of a non-recourse, non-interest bearing note, which is payable in five equal installments, beginning in July 1994 and is collateralized by a pledge of the shares subject to the award. The excess of the quoted market price, as of the date of the grant, over the purchase price for each award was recorded as unearned compensation and is shown as a separate component of stockholders' equity. On November 4, 1993, the Company amended the restricted stock award agreements and repurchased and retired 67,185 shares of each of the Class A and Class B Common Stock issued to the nine executive officers of the Company on April 27, 1993. The purchase price of $6 1/16 per share (reflects stock dividend) was paid by the Company by cancellation of a portion of the promissory notes issued in conjunction with the original stock awards. During 1994, 3,758 shares each of Class A Common Stock and Class B Common Stock, issued to an executive officer of the Company, were repurchased and retired as a result of the termination of employment by the executive. On June 27, 1994, the Company further amended the restricted stock awards and repurchased and retired 41,025 shares of each of the Class A and Class B Common Stock, thus repurchasing and retiring all remaining restricted shares. Issuances by the Company of shares of Class A Common Stock and Class B Common Stock, for the years ended January 3, 1997, January 5, 1996 and December 30, 1994 were: 1996, 1,500 shares of Class A Common Stock and 18,244 shares of Class B Common Stock; 1995, 700 shares each of Class A Common Stock and Class B Common Stock; and, 1994, 1,000 shares of Class A Common Stock and 6,688 shares of Class B Common Stock. Also approved at the 1993 Annual Meeting of the Company's Stockholders was an amendment to the Company's Articles of Organization. The amendment eliminated the requirement that Preferred Stock must necessarily have priority over common stock with respect to dividends. The Board of Directors has the authority by resolution to establish the rights and designate series of Preferred Stock. The Company has authorized 500,000 shares of Preferred Stock for issuance. No shares or series of Preferred Stock were issued and outstanding or designated as of January 3, 1997 and January 5, 1996. In July 1994, the Board of Directors of the Company authorized the repurchase of up to an aggregate of 500,000 shares of the Company's Class A Common Stock and Class B Common Stock. The authority to purchase the shares of Common Stock expired on the earlier of the first anniversary date of this action of Directors, or a determination by the Board of Directors to discontinue such repurchases. During 1994, the Company repurchased 1,000 shares of Class A Common Stock at a cost of $5,000 and 175,700 shares of Class B Common Stock at a cost of $917,963. During 1995, the Company repurchased 17,700 shares of Class B Common Stock at a cost of $76,687. At January 3, 1997, Saucony SP Pty Ltd, a foreign subsidiary controlled by the Company, held 2,000 shares of each of the Company's Class A Common Stock and Class B Common Stock. 11. STOCK OPTIONS: ------------- At the May 25, 1993 Annual Meeting, the stockholders approved the Company's 1993 Equity Incentive Plan (the "Equity Incentive Plan") and the 1993 Director Stock Option Plan (the "Director Option Plan"), adopted by the Company's Board of Directors on April 7, 1993. The 1993 Equity Incentive Plan provides for the grant to officers and key employees of the Company, incentive stock options, non-statutory stock options and awards of restricted stock. Outside consultants and advisors to the Company are eligible to receive only non-statutory options and restricted stock awards under the Equity Incentive Plan. The Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors which, at its sole discretion, grant options to purchase shares of Common Stock and make awards of restricted stock. The plan provides that the purchase price per share of Common Stock shall be determined by the Board of Directors, provided, however, in the case of Incentive Stock Options, the purchase price shall not be less than 100% of the fair market value of such stock at the time of grant of the option. The terms of option agreements are established by the Board of Directors, except, in the case of Incentive Stock Options, wherein the term cannot exceed ten years. Generally, an option cannot be exercised within one year of date of grant. The vesting schedule is subject to the discretion of the Board of Directors. Restricted stock awards which may be granted under the Equity Incentive Plan entitle recipients to purchase shares of the Company's Common Stock subject to restrictions concerning the sale, transfer and other disposition of the shares issued until such shares are vested. The Board of Directors shall determine the purchase price, which can be less than the fair market value of the Common Stock, and the vesting schedule for such award. The Equity Incentive Plan provides for grants of restricted stock awards without the payment of any cash purchase price. At the 1994 Annual Meeting of Stockholders held on May 26, 1994, the stockholders approved an amendment to the Equity Incentive Plan. The amendment increased the number of shares issuable under the Equity Incentive Plan from 400,000 to 800,000 shares and limited to 75,000 the number of shares for which options or awards may be granted in any calendar year to any one person. As amended, a total of 800,000 shares, in the aggregate, of Class A Common Stock and Class B Common Stock have been reserved by the Company and may be issued under the plan. The Director Stock Option Plan provides for the automatic grant to non- employee directors of non-statutory stock options upon specified occasions. A total of 100,000 shares of Class B Common Stock have been reserved for issuance under the plan. The option purchase price per share shall equal the fair market value of Class B Common Stock on the date of the grant. The options are exerciseable at any time, in whole or in part, prior to the fifth anniversary of the date of the grant. The following table summarizes the awards available for grant under the Company's 1993 Equity Incentive Plan and 1993 Director Option Plan for the three-year reporting period ended January 3, 1997: Shares ------ Shares available at December 31, 1993 233,762 Additional shares reserved 400,000 Awards granted (148,800) Options expired 17,276 ------ Shares available at December 30, 1994 502,238 Awards granted (112,000) Options expired 30,502 ------ Shares available at January 5, 1996 420,740 Awards granted (8,000) Options expired 33,610 ------ Shares available at January 3, 1997 446,350 ======= Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" SFAS No. 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 and Interpretations, "Accounting for Stock Issued to Employees." Accordingly, compensation expense 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 option, is being amortized to expense over the vesting period of the stock grant or option term and amounted to $125,940, $178,379 and $156,493 for 1996, 1995 and 1994, respectively. The following table summarizes the Company's stock option activity as of December 30, 1994, January 5, 1996 and January 3, 1997:
Weighted Average Exercise Option Shares Price Price Range ------ ----- ---------- Outstanding at December 31, 1993 195,570 $ 4.81 $ 2.00 - $ 12.25 Granted 148,800 $ 3.63 $ 2.50 - $ 6.00 Exercised (7,688) $ 3.39 $ 2.00 - $ 3.69 Forfeited (20,476) $ 4.52 $ 3.25 - $ 10.75 -------- Outstanding at December 30, 1994 316,206 $ 4.28 $ 2.00 - $ 12.25 ------- Granted 112,000 $ 4.61 $ 4.00 - $ 4.88 Exercised (1,400) $ 2.61 $ 2.25 - $ 2.75 Forfeited (36,502) $ 4.42 $ 2.50 - $ 10.75 -------- 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 =======
Options exercisable for shares of the Company's Class A and Class B Common Stock as of December 30, 1994, January 5, 1996 and January 3, 1997, were as follows: Options Exercisable ------------------------------------ Class A Class B Common Common Stock Stock Total ----- ---- ---- December 30, 1994 10,700 71,943 82,643 January 5, 1996 11,400 155,470 166,870 January 3, 1997 11,400 181,953 193,353 The following table summarizes information about stock options outstanding at January 3, 1997:
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. 3, 1997 Life Price Jan. 3, 1997 Price -------------- ------------ ---- ----- ------------ ---- $ 2.00 - $ 3.69 169,524 2.14 $ 3.13 101,886 $ 3.54 $ 4.00 - $ 6.00 135,400 3.75 $ 4.69 66,717 $ 4.81 $ 8.50 - $ 8.50 15,000 0.95 $ 8.50 12,000 $ 8.50 $ 10.75 - $ 12.50 13,250 1.55 $ 12.11 12,750 $ 12.16 ---------- --------- 333,174 193,353 ========== =========
The weighted average fair value at date of grant for options granted in 1996 and 1995 was $6.07 and $6.44 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 1996 and 1995, respectively: risk-free interest rates of 6.3% and 6.5%; dividend yields of 0% and 0%; volatility factors of the expected market price of the Company's common stock of 48.0% and 47.0%; and a weighted-average expected life of the options of three years. Had the Company determined the stock-based compensation expense for the Company's stock option plans based upon the fair value at the grant date for stock option awards in 1996 and 1995, consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: 1996 1995 ---- ---- Net income: As reported $1,494,090 $1,591,106 Compensation expense for stock options (86,650) (65,390) ----------- ---------- Pro forma net income $1,407,440 $1,525,716 ========== ========== Net income per share: As reported $0.24 $0.26 Compensation expense for stock options (0.01) (0.01) ------------ ----------- Pro forma net income per share $0.23 $0.25 =========== ========== The pro forma net income for 1996 and 1995 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. 12. INCOME TAXES: ------------ The provision for income taxes was calculated according to the precepts of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The objective of SFAS No. 109 is to recognize the amount of taxes payable or refundable in the current year and to recognize the expected future tax consequences of events that have been included in the financial statements or tax returns. SFAS No. 109 requires the identification of all cumulative temporary differences arising between the tax bases of assets and liabilities and their reported amounts in the financial statements. The tax effects of these temporary differences are measured using enacted tax rates and are reported on the consolidated balance sheet as deferred tax assets and liabilities. Deferred tax assets are then reduced if it is more likely than not that some portion of the expected future tax benefits will not be realized. The following is a summary of the components of the provision for income taxes, current and long- term deferred tax assets and liabilities and a reconciliation of the U.S. statutory federal income tax rate to the effective income tax rate reflected in the consolidated income statement. The provision for income taxes was based on pretax income (loss) before minority interest which was subject to taxation by the following jurisdictions. Domestic pretax income includes the pretax income of U.S. based entities as well as the international branches of these entities: 1996 1995 1994 ---- ---- ---- Domestic $1,396,597 $2,805,549 $4,622,282 Foreign 832,959 (785,278) 153,604 ---------- ----------- ---------- Total $2,229,556 $2,020,271 $4,775,886 ========== ========== ========== The provision (credit) for income taxes consists of the following: 1996 1995 1994 ---- ---- ---- Current: Federal $ 369,614 $ 665,961 $1,217,123 State 173,909 232,664 329,813 Foreign 135,225 239,097 157,805 ---------- ---------- ---------- 678,748 1,137,722 1,704,741 ---------- ---------- ---------- Deferred: Federal (128,083) (30,025) 15,065 State (42,197) 24,828 50,197 Foreign 137,000 (482,540) (61,270) ---------- ----------- ----------- (33,280) (487,737) 3,992 ----------- ----------- ---------- Change in valuation allowance (218,000) 65,000 122,000 ----------- ---------- ---------- Total $ 427,468 $ 714,985 $1,830,733 ========== ========== ========== The current deferred tax asset and long-term deferred tax liability reported on the consolidated balance sheet consist of the following items as of January 3, 1997 and January 5, 1996. Net current deferred tax assets: 1996 1995 ---- ---- Allowance for doubtful accounts and discounts$ 400,471 $ 276,877 Inventory allowances and tax costing adjustments 246,272 265,403 Deferred compensation 229,294 178,578 Accrued expenses, not currently deductible 124,769 140,361 Untaxed installment receivables (174,443) (127,189) Loss carryforwards 598,624 735,624 Valuation allowance 0 (218,000) ---------- ----------- Total $ 1,424,987 $ 1,251,654 ========== ========== Net long-term deferred tax liabilities: Property, plant and equipment $ 769,004 $ 806,283 Investments in limited partnerships 1,154,704 1,107,416 Untaxed installment receivables 0 87,956 ---------- ---------- Total $ 1,923,708 $ 2,001,655 ========== ========== Net deferred tax liability $ 498,721 $ 750,001 ========== ========== The loss carryforward amount shown above relates to foreign operating losses of approximately $1,460,000 which may be carried forward indefinitely. At January 3, 1997, the Company has determined, as provided for SFAS No. 109, that it is more likely than not that the deferred tax assets resulting from the foreign operating losses, will be realized. The differences between the U.S. statutory federal income tax rate and the effective income tax rate on pretax income before minority interest are summarized as follows: 1996 1995 1994 ---- ---- ---- U.S. federal income tax rate 34.00% 34.00% 34.00% State income tax, net of federal benefit 3.90 8.41 5.21 (Benefit) detriment of valuation allowance relating to foreign losses (9.78) 3.15 2.87 Nondeductible expenses and tax exempt income 1.41 1.63 0.84 International tax rate differences (0.49) 1.23 0.62 Low-income housing tax credits (7.98) (8.08) (5.21) Adjustment of prior years' estimated tax liabilities (1.89) (4.95) 0.00 ------ ------ ---- Effective income tax rate 19.17% 35.39% 38.33% ====== ====== ====== The Company has not recorded deferred income taxes applicable to the undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations. These earnings amounted to approximately $2,904,000 at January 3, 1997. 13. FOREIGN OPERATIONS, GEOGRAPHIC AREAS, AND OTHER INCOME: ------------------------------------------------------- During 1996, 1995 and 1994, foreign operations of the Company included the international activities of Hyde International Services, Ltd. and Saucony Deutschland Vertriebs GmbH, wholly owned foreign subsidiaries; Saucony Canada, Ltd. and Saucony Sports BV, majority-owned foreign joint ventures; Saucony SP Pty Ltd., a foreign joint venture controlled by the Company; and Saucony UK, a branch operation of Saucony, Inc. The condensed balance sheet of the Company's foreign operations as of January 3, 1997 and January 5, 1996, are as follows: 1996 1995 ---- ---- ASSETS: Current assets: Cash $ 1,829,703 $ 1,314,537 Accounts receivable 4,768,217 3,993,168 Inventories 8,909,494 7,341,438 Other current assets 970,420 917,380 Noncurrent assets 1,092,122 1,187,762 ------------ ------------ $ 17,569,956 $ 14,754,285 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Notes payable $ 1,935,280 $ 4,336,940 Current portion of long-term debt and capital lease obligations 94,105 72,879 Accounts payable and accrued expenses 1,613,742 1,404,481 Due to related parties 7,161,171 6,799,124 Long-term debt 1,885,343 -- Capitalized lease obligations 31,327 -- Minority interest 487,865 170,227 Stockholders' equity 4,361,123 1,970,634 ------------ ------------ $ 17,569,956 $ 14,754,285 ============ ============ The results of foreign operations included in the consolidated statements of income are as follows: 1996 1995 1994 --- ---- --- Net sales to unaffiliated parties $ 23,723,397 $21,214,487 $ 18,822,752 Net sales to affiliated parties (eliminated in consolidation) 740,670 737,378 43,967 ----------- ---------- ----------- Net sales $ 24,464,067 $21,951,865 $ 18,866,719 =========== ========== ============ Income (loss) before income taxes and minority interest $ 677,162 $ 632,367 ($ 1,152,297) =========== ========== =========== Net income (loss) $ 466,475 $ 810,810 ($ 1,379,349) =========== ========== ========== The foreign operations changes in stockholders' equity from 1996 to 1995, 1995 to 1994, and 1994 to 1993 were due to the recognition of common stock and paid-in capital amounts offset by income or losses and accumulated translation adjustments. Foreign sales attributed to international divisions of the United States parent company were $17,442,357, $11,550,486 and $11,486,051, for 1996, 1995 and 1994, respectively. Foreign sales attributed to foreign subsidiaries were $23,723,397, $21,214,488 and $18,822,752 for 1996, 1995, and 1994, respectively. The following table summarizes the Company's operations by geographic area: 1996 1995 1994 ---- ---- ---- NET SALES TO UNAFFILIATED PARTIES: United States $ 69,643,415 $ 69,797,781 $ 77,269,070 International 41,165,754 32,764,974 30,308,803 ------------ ------------ ------------ $110,809,169 $102,562,755 $107,577,873 ============ ============ ============ NET SALES BETWEEN GEOGRAPHIC AREAS: United States $ 44,043 $ 137,849 $ 43,967 International 8,147,516 8,241,637 9,076,190 ------------ ------------ ------------ $ 8,191,559 $ 8,379,486 $ 9,120,157 ============ ============ ============ TOTAL NET SALES: United States $ 69,687,458 $ 69,935,630 $ 77,313,037 International 49,313,270 41,006,611 39,384,993 Less: Inter-area eliminations (8,191,559) (8,379,486) (9,120,157) ------------- ------------- ------------ $110,809,169 $102,562,755 $107,577,873 ============ ============ ============ OPERATING PROFIT: United States $ 1,892,596 $ 3,962,144 $ 5,934,688 International 1,516,366 (592,195) 417,143 Less: Inter-area eliminations (227,669) (49,820) (95,698) ------------- ------------- ------------ $ 3,181,293 $ 3,320,129 $ 6,256,133 ============ ============ ============ IDENTIFIABLE ASSETS: United States $ 66,693,871 $ 64,395,000 $ 74,387,496 International 17,741,509 14,754,285 14,777,799 Less: Inter-area eliminations (12,843,654) (9,677,996) (12,082,963) ------------- ------------- ------------ $ 71,591,726 $ 69,471,289 $ 77,082,332 ============ ============ ============ Net sales to unaffiliated customers is based on the location of the customers. International inter-area sales represent shipment of inventory to international subsidiaries and purchases of inventory from international subsidiaries. These inter-area sales are generally priced to recover cost plus an appropriate mark-up for profit and are eliminated in the determination of consolidated net sales. Operating profit consists of revenue less related cost of sales, selling expenses and general and administrative expenses, and does not include interest expense, income taxes or minority shareholders' interest. Other income consists primarily of royalty income, income from short-term investments, income recognized due to the sale or licensing of trademarks, foreign currency transaction exchange gains and losses, and gains or losses from the sale or disposition of assets. 14. MAJOR CUSTOMER: --------------- For 1996, 1995 and 1994, the Company did not have a major customer account for more than 10% of gross sales. 15. ACQUISITIONS: ------------ On December 11, 1991, the Company entered into a joint venture with a Dutch company to market and distribute Saucony footwear. On December 31, 1991, the Company purchased 51% of the issued and outstanding stock of Saucony Sports BV for $413,598. On June 9, 1993, the Company increased its majority ownership from 51% to 76% by acquiring an additional 25% of the issued and outstanding common stock from the minority shareholder, for $210,192, which equaled the book value of the stock. At January 3, 1997, January 5, 1996 and December 30, 1994, Saucony Sports BV had assets of $1,570,594, $1,595,470 and $1,853,804, liabilities of $1,235,630, $1,454,778 and $1,551,890 and revenues of $3,083,856, $3,215,936 and $2,988,367, respectively. On March 1, 1993, the Company acquired 85% of the issued and outstanding stock of a Canadian distributor, Saucony Canada, Inc. The purchase price of $350,797 was financed with available cash of $160,954 and the issuance of a note payable of $189,843. At January 3, 1997, January 5, 1996 and December 30, 1994, Saucony Canada, Inc. had assets of $2,101,969, $1,867,383 and $2,293,569, liabilities of $850,732, $740,380 and $1,453,913, and revenues of $4,002,061, $3,776,545 and $3,755,057, respectively. Effective July 1, 1993, the Company acquired 50% of the issued and outstanding common stock of an Australian distributor, Saucony SP Pty. Ltd., for $214,159 in cash. The agreement was completed on November 13, 1993. During 1995, the Company increased its investment in Saucony SP Pty. Ltd. by acquiring 28 shares of Cumulative Redeemable Preferred Stock ($1 par) for $2,081,800 in exchange for an equivalent reduction in debt owed to the Company by Saucony SP. The shares, which are redeemable on or after January 1, 1998, provide for cumulative preferential dividends and confer priority to the preferred shareholders, with respect to dividends and return of share capital and share premium. As the fair value of assets acquired equaled the carrying value of the debt reduction, there was no impact on consolidated net income. At January 3, 1997, January 5, 1996 and December 30, 1994, Saucony SP had assets of $9,420,129, $7,401,248 and $7,252,590, liabilities of $6,895,092, $5,527,511 and $6,848,537 and revenues of $14,023,651, $11,661,122 and $10,840,627, respectively. On August 31, 1995, Quintana Roo, Inc., a newly formed subsidiary of the Company, acquired the assets of a bicycle and wetsuit manufacturer for $112,000 in cash. On December 20, 1996, the Company acquired the tradename, trademarks, patents and service marks of an athletic apparel manufacturer for $1,250,001 in cash. The entire purchase amount has been recorded as goodwill. These acquisitions are accounted for as purchases. 16. CONCENTRATION OF CREDIT RISK: ---------------------------- Financial instruments which potentially subject the Company to credit risk consist primarily of cash, cash equivalents and trade receivables. The Company maintains cash and cash equivalents with various major financial institutions. Cash equivalents include investments in commercial paper of companies with high credit ratings, investments in money market securities and securities backed by the U.S. Government. 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 46% of the Company's gross trade receivables balance was represented by 16 customers at January 3, 1997, which exposes the Company to a concentration of credit risk. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The carrying value of cash, cash equivalents, receivables, long-term debt and other notes payable approximates fair value. The Company believes similar terms for current long-term debt and other notes payable would be attainable. The fair value of marketable securities 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 3, 1997, the value of the Company's foreign currency exchange contracts was $275,000. Gains and losses on forward exchange contracts are deferred and offset against foreign currency exchange gains and losses on the underlying hedged item upon consummation of the transaction. At January 3, 1997, estimated fair value of the Company's financial instruments approximated the carrying value. HYDE ATHLETIC INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended January 3, 1997, January 5, 1996 and December 30, 1994 --------------------------------------------------------------------------
Additions Balance, charged to Deductions Balance, beginning costs and from end of year expenses reserve of year ------- -------- ------ ------ Year ended January 3, 1997: Allowance for doubtful accounts and discounts $ 940,244 $ 5,408,609 $ 5,014,323 $ 1,334,530 Year ended January 5, 1996: Allowance for doubtful accounts and discounts $ 1,147,409 $ 5,072,962 $ 5,280,127 $ 940,244 Year ended December 30, 1994: Allowance for doubtful accounts and discounts $ 1,191,819 $ 4,754,567 $ 4,798,977 $ 1,147,409
EXHIBIT INDEX ------------- Exhibit Number Description - ------ ----------- 3.1 Restated Articles of Organization, as amended, of the Registrant are incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (File No. 33-66482) * 3.2 By-Laws, as amended, of the Registrant are incorporated herein by reference to Exhibit 3.3 to the Registrant's Registration Statement on Form S-2, as amended (File No. 33-61040) (the "Form S-2") * 10.1 Note Purchase Agreement between the Registrant and the Principal Mutual Life Insurance Company is incorporated herein by reference to Exhibit (4b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (the "1988 10-K Report") * 10.2 Credit Agreement among the Registrant, State Street Bank and Trust Company and CoreStates Bank, N.A., dated August 31, 1993 is incorporated herein by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 10-K Report") * 10.3 Guarantee of the Registrant to the Bank of Nova Scotia is incorporated herein by reference to Exhibit 10.3 to the 1993 10-K Report * 10.4 Letter of Guarantee of the Registrant to State Street Finance Limited is incorporated herein by reference to Exhibit 10.4 to the 1993 10-K Report * 10.5** 1982 Employee Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10.7 to the Form S-2 * 10.6** Amendment to the Credit Agreement among the Registrant, State Street Bank and Trust Company and CoreStates Bank, N.A., dated August 31, 1993, is incorporated herein by reference to Exhibit 10.06 to the Registrant's Quarterly Report on Form 10-Q for the 39 weeks ended September 30, 1994 * 10.7** Consulting Agreement, as amended, between the Registrant and Phyllis H. Fisher is incorporated herein by reference to Exhibit 10.10 to the 1994 10-K Report * 10.8# License Agreement between Brookfield Athletic Co., Inc. and Playskool, Inc., as amended, is incorporated herein by reference to Exhibit 10.14 to the Form S-2 * 10.9# Letter Agreement, dated June 3, 1993, between Brookfield Athletic Co., Inc. and Playskool, Inc. is incorporated herein by reference to Exhibit 10.14 to the 1993 10-K Report * 10.10# Letter Agreement, dated January 26, 1995, between Brookfield Athletic Co., Inc. and Hasbro, Inc. is incorporated herein by reference to Exhibit 10.15 of the 1994 10-K Report * 10.11# Patent Cross-License Agreement for In-Line Skates, dated June 1993, and as amended September 1993, among the Registrant, Brookfield Athletic Co., Inc., Rollerblade, Inc. and David Wolf is incorporated herein by reference to Exhibit 10.17 to the 1993 10-K Report * 10.12 License Agreement between the Registrant and Cal's Best, Inc. (d/b/a Bangor Trading Company) is incorporated herein by reference to Exhibit 10.27 to the Form S-2 * 10.13# 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 * 10.14** 1993 Equity Incentive Plan, as amended, is incorporated herein by reference to Exhibit 10.21 of the 1994 10-K Report * 10.15** 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") * 10.16** VP Bonus Plan is incorporated herein by reference to Exhibit 10.19 to the Form S-2 * 10.17** Compensation Agreement between the Registrant and James H. Noyes, Jr. is incorporated herein by reference to Exhibit 10.3 to the 1993 Form 10-Q * 10.18# License and Royalty Agreement between Brookfield Athletic Co., Inc. and Franklin Sports, Inc. is incorporated herein by reference to Exhibit 10.25 to the 1994 10-K Report * 10.19# License Agreement, dated May 2, 1994, between Brookfield Athletic Co., Inc. and The Walt Disney Company, Inc. is incorporated herein by reference to Exhibit 10.26 to the 1994 10-K Report * 10.20# License Agreement dated August 1, 1995 between Spalding Sports Worldwide and Brookfield Athletic Co., Inc. is incorporated herein by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 5, 1996 (the "1995 10-K Report") * 10.21# License Agreement dated April 1, 1995 between Mattel, Inc. and Brookfield Athletic Co., Inc. is incorporated herein by reference to Exhibit 10.26 to the 1995 10-K Report * 10.22# License Agreement dated April 1, 1995 between Hasbro, Inc. and Brookfield Athletic Co., Inc. is incorporated herein by reference to Exhibit 10.27 to the 1995 10-K Report * 10.23** Employment Agreement, dated as of June 1, 1995, between the Registrant and Wolfgang Schweim is incorporated herein by reference to Exhibit 10.01 to the Registrant's Quarterly Report on Form 10-Q for the twenty-six weeks ended June 30, 1995 * 10.24** Letter Agreement dated March 30, 1995, between the Registrant and Principal Mutual Life Insurance Company is incorporated herein by reference to Exhibit 10.01 of the Registrant's Quarterly Report on Form 10-Q for the thirteen weeks ended March 31, 1995 * 10.25# License Agreement, dated April 1, 1996, between Disney Enterprises, Inc. and Brookfield Athletic Co., Inc. is incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the twenty- six weeks ended July 5, 1996 (the "1996 10-Q Report") * 10.26# License Agreement, effective as of January 1, 1997, between Mattel, Inc. and Brookfield Athletic Co., Inc. is incorporated herein by reference to Exhibit 10.2 to the 1996 10-Q Report * 10.27# Second and Third Amendments to the Credit Agreement among the Registrant, State Street Bank and Trust Company and CoreStates Bank, N.A. 21 Subsidiaries of the Registrant 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Grant Thornton 27 Financial Data Schedule * Incorporated herein by reference. ** Management contract or compensatory plan or arrangement filed herewith in response to Item 14(a)(3) of the instructions to Form 10-K. # Confidential treatment previously granted as to certain portions of such document. EX-10 2 EXHIBIT 10.27 SECOND AMENDMENT TO CREDIT AGREEMENT Hyde Athletic Industries, Inc. 13 Centennial Drive Peabody, Massachusetts 01960-7901 November 29, 1996 State Street Bank and Trust Company, for itself and as Agent 225 Franklin Street Boston, Massachusetts 02110 CoreStates Bank, N.A. P.O. Box 7618 Philadelphia, Pennsylvania 19101-7618 Ladies and Gentlemen: Reference is made to the Credit Agreement among the undersigned and your banks dated August 31, 1993, as amended (the "Agreement"). Capitalized terms used herein without definition shall have the meanings such terms have in the Agreement. The undersigned hereby requests your consent to amend the Agreement as follows: 1. That Section 2.1(a) of the Agreement be amended to read in its entirety as follows: "2.1 REVOLVING LINE OF CREDIT. (a) Each Bank hereby severally agrees, on the terms and conditions hereinafter set forth, to make advances ("Advances") to the Borrower and its Borrowing Subsidiaries from time to time during the period from the date hereof to and including August 1, 1998 (the "Termination Date"), in an aggregate principal amount outstanding at any time not to exceed the lesser of the two amounts computed as provided next to its name below (each Bank's "Commitment"): Maximum % of Bank principal amount Borrowing Base State Street $ 7,500,000 50% CBNA $ 7,500,000 50% Total $ 15,000,000 100% Each borrowing under this Section 2.1 shall consist of Advances made on the same date by the Banks ratably according to their respective Commitments. Subject at all times to the Borrowing Base and within the limits of each Bank's Commitment, the Borrower and the Borrowing Subsidiaries may borrow, repay Advances and reborrow under this Section 2.1. The proceeds of the Advances shall be used for working capital except as permitted by Section 5.1(iv) and 5.5." 2. That Exhibit A hereto be substituted for Exhibit A to the Agreement. All terms and provisions of the Agreement not amended hereby shall remain in full force and effect. The undersigned has delivered to the Agent contemporaneously herewith promissory notes in the form attached hereto as Exhibit A in the principal amount of $7,500,000 in substitution for the "Revolving Credit Notes" referred to in Section 2.1 of the Agreement. Upon receipt of the aforementioned notes, please return the promissory notes of the undersigned dated August 31, 1994 payable to the order of State Street and CBNA each in the principal amount of $5,000,000 to the undersigned. The notes delivered to the Agent herewith shall thereafter be deemed to be the "Revolving Credit Notes" referred to in the Agreement. The undersigned represents and warrants to you that, as of the date of the execution and delivery of this Amendment, each of the representations and warranties set forth in the Agreement is true and correct except to the extent that such representations and warranties relate solely to an earlier date and that no Default or Event of Default as defined in Section 7 of the Agreement has occurred and is continuing. The undersigned hereby agrees to pay all costs and expenses, including reasonable attorneys' fees, incurred by you in connection with the preparation, negotiation and execution of this Amendment and of the documents and instruments referred to herein. This Amendment shall take effect as a second amendment to the Agreement as of the date hereof upon delivery to the undersigned of duplicate originals hereof, duly executed by authorized officers of your banks. This Amendment shall be deemed to be a sealed instrument and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. Please indicate below your concurrence in the foregoing. HYDE ATHLETIC INDUSTRIES, INC. By: /s/ Charles A. Gottesman Agreed: STATE STREET BANK AND TRUST COMPANY for itself and as Agent By: /s/ Richard Flood CORESTATES BANK, N.A. By: /s/ Lyle P. Cunningham EXHIBIT A $7,500,000 November 1996 On August 1, 1998, FOR VALUE RECEIVED, the undersigned, Hyde Athletic Industries, Inc., a Massachusetts corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of (the "Bank") the principal sum of Seven Million Five Hundred Thousand Dollars ($7,500,000) or, if less, the aggregate unpaid principal amount of all Advances made by the Bank to the Borrower pursuant to the Credit Agreement referred to below, together with interest on any and all principal amounts remaining unpaid hereunder from time to time outstanding from the date hereof until payment in full of this Note, payable monthly in arrears beginning December 1, 1996, and continuing on the first day of each succeeding month at a fluctuating interest rate per annum equal to the Prime Rate in effect from time to time unless the Borrower shall have made an effective election to have one or more Advances bear interest at a Fixed Rate Option, as defined in the Credit Agreement, in which case such Advance shall bear interest at the Fixed Rate Option chosen by the Borrower. Each change in the fluctuating interest rate payable hereunder. "Prime Rate" shall mean the rate of interest announced by State Street Bank and Trust Company at its Boston office from time to time as its "Prime Rate." Interest shall be calculated on the basis of actual days elapsed and a year of 360 days. If any amount due under this note is not paid in full on the due date, whether as stated or by acceleration, interest on unpaid balances shall thereafter be payable on demand at a fluctuating rate equal to 4% per annum above the Prime Rate in effect from time to time, or if greater, 4% per annum above the Fixed Rate Option then in effect. Both principal and interest are payable in lawful money of the United States of America to the Agent at the office of the Bank located at 225 Franklin Street, Boston, Massachusetts, in immediately available funds. All Advances made by the Bank to the Borrower and all payments made on account of principal hereof shall be recorded by the Bank and Bank's records shall constitute evidence of the disbursement and repayment of such Advances which shall be presumed correct in the absence of manifest error. Any deposits or other sums at any time credited by, or due from the holder hereof to the Borrower may at any time be applied or set off against amounts due under this Note and any and all sole, joint or several, secured or unsecured, due or to become due, now existing or hereafter arising) of the Borrower to the holder at any time after a Default (as defined in the Credit Agreement) regardless of the adequacy of collateral. This note is one of the Revolving Credit Notes referred to in the Credit Agreement dated August 31, 1993, as amended, among the Bank, the Borrower, State Street Bank and Trust Company, as agent, and (the "Credit Agreement"), any Advance outstanding hereunder may be prepaid without penalty at any time that the Floating Rate Option (as defined in the Credit Agreement) is in effect. Any Advance outstanding hereunder that bears interest at the Fixed Rate Option may not be prepaid except upon payment to the holder of certain amounts provided for in the Credit Agreement. Pursuant to the Credit Agreement, the maturity of the principal hereof may be accelerated upon the occurrence of a Default, as defined in the Credit Agreement. This note is executed as an instrument under seal, and shall be governed by the laws of Massachusetts. HYDE ATHLETIC INDUSTRIES, INC. By: /s/ Charles Gottesman THIRD AMENDMENT TO CREDIT AGREEMENT Hyde Athletic Industries, Inc. 13 Centennial Drive Peabody, Massachusetts 01960-7901 January 31, 1997 State Street Bank and Trust Company, for itself and as Agent 225 Franklin Street Boston, Massachusetts 02110 CoreStates Bank, N.A. P.O. Box 7618 Philadelphia, Pennsylvania 19101-7618 Ladies and Gentlemen: Reference is made to the Credit Agreement among the undersigned and your banks dated August 31, 1993, as amended (the "Agreement"). Capitalized terms used herein without definition shall have the meanings such terms have in the Agreement. 1. That Section 1.10 of the Agreement be amended to read in its entirety as follows: "1.10 FIXED RATE OPTION. Shall mean the Borrower's option pursuant to Section 2.1(d) and (e) to designate the Eurodollar Rate or a Foreign Rate (in each case reserve adjusted) as the rate of interest applicable to certain Advances outstanding under the Revolving Credit Notes subject to the conditions stated therein." 2. That Section 1.13 of the Agreement be amended to read in its entirety as follows: "1.13 INTEREST PERIOD. Shall mean as to any Advance that bears interest at the Fixed Rate Option, or as to any Foreign Currency Advance, the period commencing on the date such Advance is disbursed by the Banks (or the date an Advance of U.S. dollars is converted to a Fixed Rate Option from the Floating Rate Option) and ending 30, 60 or 90 days later, as elected by the Borrower." 3. That the reference in Section 1 of the Agreement to "Eurodollar Reserve Requirement" be amended to read "Applicable Reserve Requirement," and that the following be added after the same: "Foreign Currency Advance" 2.1" 4. That the form of Exhibit A attached hereto be substituted for Exhibit A to the Agreement. 5. That Sections 2.1(d) and (e) of the Agreement be amended to read in their entirety as follows: " (d) So long as neither a Default nor an Event of Default shall have occurred and be continuing, the Borrower may elect to fix the interest rate payable on any portion of the Advances that is equal to or greater than $500,000 at the Eurodollar Rate or a Foreign Rate (reserve adjusted) upon three Business Days' written notice to the Agent. The Borrower's right to elect such rates is referred to herein as the 'Fixed Rate Option.' In no event shall an Interest Period be established for a period ending subsequent to the Termination Date. In the event that notice of the Borrower's election of a Fixed Rate Option is received after 10:00 a.m. on any day, such notice shall be deemed to have been received on the next Business Day. At the expiration of any Interest Period, the rate of interest on the Advance bearing interest at the Fixed Rate Option shall revert to Floating Rate Option unless the Borrower shall have made an effective election to renew the Fixed Rate Option. As used herein in the term 'Foreign Rate' shall mean a rate quoted by the Agent to the Borrower or a Borrowing Subsidiary as the rate at which the Banks are willing to lend to the Borrower or a Borrowing Subsidiary: (i) the dollar equivalent of a foreign currency designated by the Borrower or such Borrowing Subsidiary and approved by the Majority of the Banks in their discretion for an Interest Period of 90 days, or (ii) a Foreign Currency Advance." " (e) The term 'reserve adjusted' as used in this Agreement means, with respect to each Interest Period during which any portion of the Advances bears interest at the Eurodollar Rate or a Foreign Rate, the rate determined in accordance with the following formula: ( LIBOR ) (------------------------------ ) plus 2 equals Reserve adjusted rate (1 - Applicable Reserve Requirement) 'Applicable Reserve Requirement' as used above means a percentage equal to the daily average during the applicable Interest Period of the percentages in effect on each day of such Interest Period, as prescribed by the Federal Reserve Board, for determining the aggregate maximum reserve requirements (including all basic, supplemental, marginal and other reserves) applicable to 'Eurocurrency liabilities' pursuant to Regulation D or any other regulation of the Federal Reserve Board then applicable to the Advances which prescribes reserve requirements applicable to 'Eurocurrency liabilities,' as defined in Regulation D. Without intending to limit the generality of the foregoing, the Applicable Reserve Requirement shall reflect any other reserves required to be maintained by either Bank against: (i) any category of liabilities that includes deposits by reference to which LIBOR is to be determined, or (ii) any category of extensions of credit or other assets that includes any Advance bearing interest at the Eurodollar Rate or a Foreign Rate. For purposes of this Agreement, each Advance bearing interest at the Eurodollar Rate or a Foreign Rate shall be deemed to be a 'Eurocurrency liability,' as defined in Regulation D, and shall be deemed to be subject to such reserve requirements without the benefit of, or credit for, proration, exceptions or offsets which may be available to either Bank from time to time under Regulation D." 6. That the following Sections 2.1(f) through (h) be added to the Agreement following Section 2.1(e): " (f) So long as neither a Default nor an Event of Default shall have occurred and be continuing , the Borrower may request the Banks to make an Advance in any lawful currency which, in the opinion of the Majority of the Banks, is at such time freely traded in the offshore interbank foreign exchange markets and is freely transferable and freely convertible into U.S. dollars (a 'Foreign Currency Advance'). Any such request shall be made no later than 10:00 o'clock a.m. (Boston time) at least ten Business Days in advance of the date such Foreign Currency Advance is proposed to made. The Agent shall promptly notify the Banks of such request, and shall promptly notify the Borrower of the acceptance or rejection of such request." " (g) Each Foreign Currency Advance shall bear interest at the Foreign Rate applicable to such Advance as quoted to the Borrower by the Agent. Upon the occurrence of a Default or an Event of Default, all Foreign Currency Advances shall, at the request of the Majority of the Banks, be redenominated and converted into U.S. dollars and shall bear interest at 4% per annum above the Floating Rate Option, and if not so converted shall bear interest at a rate equal to 4% per annum above the rate otherwise payable thereon." " (h) The Agent shall determine the U.S. dollar equivalent of all Foreign Currency Advances as of the last Business Day of each month, and shall make appropriate adjustments to the unused portion of each Bank's Commitment to reflect fluctuations in rates of exchange between U.S. dollars and all currencies in which Foreign Currency Advances have been made. In the event that the aggregate of all Advances and the U.S. dollar equivalent of all Foreign Advances exceeds the Banks' combined Commitments, the Agent shall give notice to the Borrower to pay to the Agent a sum equal to such excess in U.S. dollars to reduce the aggregate amount of Advances and Foreign Currency Advances to an amount that is less than the combined Commitments of the Bank." All terms and provisions of the Agreement not amended hereby shall remain in full force and effect. The undersigned has delivered to each of the Banks contemporaneously herewith a promissory note in the form attached hereto as Exhibit A in the principal amount of $7,500,000. Upon receipt of the notes delivered to you herewith, please return to the Borrower the promissory notes dated November 29, 1996 in the principal amount of $7,500,000 each previously delivered to the Banks. The notes delivered to the Banks herewith shall thereafter be deemed to be the "Revolving Credit Notes" referred to in the Agreement. Each Bank is authorized to charge the account of the Borrower for all accrued but unpaid interest on their respective notes dated November 29, 1996, through the date hereof. The undersigned represents and warrants to you that, as of the date of the execution and delivery of this Amendment, each of the representations and warranties set forth in the Agreement is true and correct except to the extent that such representations and warranties relate solely to an earlier date and that no Default or Event of Default as defined in Section 7 of the Agreement has occurred and is continuing. The undersigned hereby agrees to pay all costs and expenses, including reasonable attorneys' fees, incurred by you in connection with the preparation, negotiation and execution of this Amendment and of the documents and instruments referred to herein. This Amendment shall take effect as a third amendment to the Agreement as of the date hereof upon delivery to the undersigned of duplicate originals hereof, duly executed by authorized officers of your banks. This Amendment shall be deemed to be a sealed instrument and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. Please indicate below your concurrence in the foregoing. HYDE ATHLETIC INDUSTRIES, INC. By: /s/ Charles A. Gottesman Agreed: STATE STREET BANK AND TRUST COMPANY for itself and as Agent By: /s/ Richard Flood CORESTATES BANK, N.A. By: /s/ Lyle Cunningham EXHIBIT A $7,500,000 January, 1997 On August 1, 1998, FOR VALUE RECEIVED, the undersigned, Hyde Athletic Industries, Inc., a Massachusetts corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of (the "Bank") the principal sum of Seven Million Five Hundred Thousand Dollars ($7,500,000) or, if less, the aggregate unpaid principal amount of all Advances made by the Bank to the Borrower pursuant to the Credit Agreement referred to below, together with interest on any and all principal amounts remaining unpaid hereunder from time to time outstanding from the date hereof until payment in full of this Note, at the rates, on the dates and as otherwise provided for in the Credit Agreement. Upon the occurrence of any Default as defined in the Credit Agreement, the Bank may increase the rate of interest payable on any Advance to a rate that is 4% per annum above the Prime Rate or 4% per annum above such other rate as is then payable on such Advance. Each change in the Prime Rate shall be reflected by a corresponding change in the fluctuating interest rate payable hereunder. "Prime Rate" shall mean the rate of interest announced by State Street Bank and Trust Company at its Boston office from time to time as its "Prime Rate." Interest shall be calculated on the basis of actual days elapsed and a year of 360 days unless a different method of computation of interest is provided for in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to the Agent at the office of the Agent located at 225 Franklin Street, Boston, Massachusetts, in immediately available funds. All Advances made by the Bank to the Borrower and all payments made on account of principal hereof shall be recorded by the Bank and Bank's records shall constitute evidence of the disbursement and repayment of such Advances which shall be presumed correct in the absence of manifest error. Any deposits or other sums at any time credited by, or due from the holder hereof to the Borrower may at any time be applied or set off against amounts due under this Note and any and all other liabilities (direct or indirect, absolute or contingent, sole, joint or several, secured or unsecured, due or to become due, now existing or hereafter arising) of the Borrower to the holder at any time after a Default (as defined in the Credit Agreement) regardless of the adequacy of collateral. This note is one of the Revolving Credit Notes referred to in the Credit Agreement dated August 31, 1993, as amended, among the Bank, the Borrower, State Street Bank and Trust Company, as agent, and (the "Credit Agreement"), and is entitled to the benefits thereof. Pursuant to the Credit Agreement, any Advance outstanding hereunder may be prepaid without penalty at any time that the Floating Rate Option (as defined in the Credit Agreement) is in effect. Any Advance outstanding hereunder that bears interest at the Fixed Rate Option may not be prepaid except upon payment to the holder of certain amounts provided for in the Credit Agreement. Pursuant to the Credit Agreement, the maturity of the principal hereof may be accelerated upon the occurrence of a Default, as defined in the Credit Agreement. This note is executed as an instrument under seal, and shall be governed by the laws of Massachusetts. HYDE ATHLETIC INDUSTRIES, INC. By: /s/ Charles A. Gottesman EX-21 3 EXHIBIT 21 SUBSIDIARIES OF HYDE ATHLETIC INDUSTRIES, INC. ---------------------------------------------- Jurisdiction of Percentage Name Incorporation Ownership ---- ------------ -------- Hyde International Services, Ltd. Hong Kong 100% Brookfield Athletic Co., Inc.* Massachusetts 100% Spot-Bilt, Inc.** Maine 100% Saucony Canada, Inc.*** Ontario 85% Saucony, Inc.*** Massachusetts 100% Saucony Sports, B.V.*** Netherlands 76% Saucony SP Pty. Ltd.*** Australia 50% Saucony Deutschland Vertriebs GmbH *** Germany 100% Quintana Roo, Inc.**** Delaware 100% * Does business as "Brookfield." ** Does business as "Spot-Bilt." *** Does business as "Saucony." **** Does business as "Quintana Roo." EX-23 4 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Hyde Athletic Industries, Inc. on Forms S-8 (file numbers 33-50922, 33-61532, 33-66482, 33-80726) of our report dated March 14, 1997, on our audits of the consolidated financial statements and financial statement schedule of Hyde Athletic Industries, Inc. and Subsidiaries as of January 3, 1997 and January 5, 1996 and for the years ended January 3, 1997, January 5, 1996 and December 30, 1994 which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Boston, Massachusetts April 2, 1997 EX-23 5 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation in this Annual Report on Form 10-K of our report dated March 14, 1997, on our audits of the financial statements and financial statement schedule of Saucony SP Pty., Ltd. as of January 3, 1997 and January 5, 1996 and for the years ended January 3, 1997, January 5, 1996 and December 30, 1994 which report is included in this Annual Report on Form 10-K. Grant Thornton Sydney, Australia April 2, 1997 EX-27 6
5 This schedule contains summary financial information extracted from Hyde Athletic Industries, Inc. 10-K Report for the year ended January 3, 1997 and is qualified in its entirety by reference to such 10-K. YEAR JAN-03-1997 JAN-03-1997 2,802,864 236,128 22,840,161 576,312 28,632,511 57,815,101 16,737,085 7,519,617 71,591,726 14,208,783 4,885,342 0 0 2,145,095 47,933,522 71,591,726 110,809,169 111,884,834 77,449,171 77,449,171 31,254,370 536,106 951,737 2,229,556 427,468 1,494,090 0 0 0 1,494,090 0.24 0.24
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