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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 5, 2002
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 000-05083
SAUCONY, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
(Address of principal executive offices)
978-532-9000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class as of August 12, 2002
----- ---------------------
Class A Common Stock-$.33 1/3 Par Value Per Share 2,566,747
Class B Common Stock-$.33 1/3 Par Value Per Share 3,535,859
---- - - ---------
6,102,606
=========
SAUCONY, INC. AND SUBSIDIARIES
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Condensed Consolidated Balance Sheets as of July 5, 2002
and January 4, 2002................................................3
Condensed Consolidated Statements of Income for the thirteen and
twenty-six weeks ended July 5, 2002 and July 6, 2001...............4
Condensed Consolidated Statements of Cash Flows for the thirteen
and twenty-six weeks ended July 5, 2002 and July 6, 2001...........5
Notes to Condensed Consolidated Financial Statements --
July 5, 2002....................................................6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................11-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk........20
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...............21
Item 6. Exhibits and Reports on Form 8-K..................................21
Signature..................................................................22
Exhibit Index..............................................................23
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
ASSETS
July 5, January 4,
2002 2002
---- ----
Current assets:
Cash and cash equivalents....................................................$ 20,477 $ 22,227
Accounts receivable.......................................................... 26,559 14,742
Inventories.................................................................. 25,883 28,404
Prepaid expenses and other current assets.................................... 3,425 4,165
----- -----
Total current assets....................................................... 76,344 69,538
------ ------
Property, plant and equipment, net.............................................. 5,900 6,989
----- -----
Other assets.................................................................... 1,423 1,573
----- -----
Total assets....................................................................$ 83,667 $ 78,100
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 621 $ --
Current maturities of long-term debt......................................... 9 88
Accounts payable............................................................. 7,015 6,635
Accrued expenses and other current liabilities............................... 6,360 5,602
----- -----
Total current liabilities.................................................. 14,005 12,325
------ ------
Long-term obligations:
Deferred income taxes........................................................ 1,992 1,949
Other long-term obligations.................................................. 213 204
--- ---
Total long-term obligations................................................ 2,205 2,153
===== =====
Minority interest in consolidated subsidiaries.................................. 606 460
--- ---
Stockholders' equity:
Preferred stock, $1.00 par; authorized 500,000 shares; none issued........... -- --
Common stock:
Class A, $.333 par; authorized 20,000,000 shares
(issued 2002, 2,711,127 and 2001, 2,711,127)............................. 904 904
Class B, $.333 par; authorized 20,000,000 shares
(issued 2002, 4,057,455 and 2001, 4,037,399)............................. 1,352 1,346
Additional paid in capital................................................... 17,490 17,398
Retained earnings............................................................ 53,552 50,702
Accumulated other comprehensive loss......................................... (885) (1,301)
Common stock held in treasury,
at cost (2002, 665,976; 2001, 665,976)..................................... (5,417) (5,417)
Notes receivable............................................................. -- (303)
Unearned compensation........................................................ (145) (167)
---- ----
Total stockholders' equity............................................... 66,851 63,162
------ ------
Total liabilities and stockholders' equity......................................$ 83,667 $ 78,100
========= ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 5, 2002 AND JULY 6, 2001
(Unaudited)
(In thousands, except per share amounts)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 5, 2002 July 6, 2001 July 5, 2002 July 6, 2001
------------ ------------ ------------ ------------
Net sales....................................................$ 36,453 $ 35,491 $ 71,240 $ 79,184
Other revenue ............................................... 33 (36) 97 67
-- --- -- --
Total revenue ............................................... 36,486 35,455 71,337 79,251
------ ------ ------ ------
Costs and expenses
Cost of sales............................................. 24,046 23,638 46,934 53,632
Selling expenses.......................................... 5,106 6,587 10,067 13,008
General and administrative expenses....................... 4,661 4,803 9,393 9,777
Plant closing credit and other non-recurring charges...... (59) -- (59) --
--- ---
Total costs and expenses................................ 33,754 35,028 66,335 76,417
------ ------ ------ ------
Operating income............................................. 2,732 427 5,002 2,834
Non-operating income (expense)
Interest, net............................................. 12 (44) 36 (104)
Foreign currency.......................................... (19) 109 (44) 196
Other..................................................... 97 16 160 (18)
-- -- --- ---
Income before income taxes and minority interest............. 2,822 508 5,154 2,908
Provision for income taxes................................... 1,216 312 2,183 1,327
Minority interest in income of consolidated subsidiaries..... 57 20 121 59
-- -- --- --
Net income...................................................$ 1,549 $ 176 $ 2,850 $ 1,522
========= ========= ========= ========
Per share amounts:
Earnings per common share:
Basic.....................................................$ 0.25 $ 0.03 $ 0.47 $ 0.25
======== ========= ========= ========
Diluted...................................................$ 0.25 $ 0.03 $ 0.46 $ 0.25
======== ========= ========= ========
Weighted average common shares outstanding
and equivalents outstanding:
Primary EPS............................................. 6,099 6,074 6,092 6,078
===== ===== ===== =====
Diluted EPS............................................. 6,214 6,152 6,168 6,173
===== ===== ===== =====
Cash dividends per share of common stock..................... -- -- -- --
The accompanying notes are an integral part of these condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 5, 2002 AND JULY 6, 2001
(Unaudited)
(In thousands)
July 5, July 6,
2002 2001
---- ----
Cash flows from operating activities:
Net income.................................................................$ 2,850 $ 1,522
-------- ---------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization.............................................. 898 978
Provision for bad debts and discounts...................................... 2,662 3,795
Deferred income tax expense (benefit)...................................... 284 (648)
Gain on sale of equipment.................................................. (73) --
Other...................................................................... 39 91
Changes in operating assets and liabilities, net of effect
of acquisitions, dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Accounts receivable.................................................... (14,272) (6,204)
Inventories............................................................ 2,991 5,965
Prepaid expenses and other current assets.............................. 45 274
Increase (decrease) in liabilities:
Accounts payable....................................................... 357 (780)
Accrued expenses....................................................... 1,824 (678)
----- ----
Total adjustments............................................................ (5,245) 2,793
------ -----
Net cash provided (used) by operating activities................................ (2,395) 4,315
------ -----
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (215) (701)
Proceeds from the sale of equipment.......................................... 80 --
Change in deferred charges, deposits and other............................... 17 24
Marketable securities - realized and unrealized losses....................... 34 18
-- --
Net cash used by investing activities........................................... (84) (659)
--- ----
Cash flows from financing activities:
Net short-term borrowings.................................................... 610 147
Repayment of long-term debt and capital lease obligations.................... (79) (185)
Common stock repurchased..................................................... -- (133)
Receipt of payment on notes receivable....................................... 312 --
Issuances of common stock, including options................................. 94 84
-- --
Net cash provided (used) by financing activities................................ 937 (87)
Effect of exchange rate changes on cash and cash equivalents.................... (208) (21)
---- ---
Net increase (decrease) in cash and cash equivalents............................ (1,750) 3,548
Cash and equivalents at beginning of period..................................... 22,227 4,738
------ -----
Cash and equivalents at end of period...........................................$ 20,477 $ 8,286
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds...............................................$ 374 $ 664
======== =========
Interest...................................................................$ 3 $ 146
======== =========
Non-cash investing and financing activities:
Property purchased under capital leases......................................$ -- $ 102
======= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
(the "Company")
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 5, 2002
(Unaudited)
(In thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation have been included. These interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes, thereto, included in the Company's Annual Report on
Form 10-K, as filed with the Securities and Exchange Commission, for the year
ended January 4, 2002. Operating results for the twenty-six weeks ended July 5,
2002, are not necessarily indicative of the results for the entire year.
NOTE 2 - INVENTORIES
Inventories at July 5, 2002 and January 4, 2002 consisted of the following:
July 5, January 4,
2002 2002
---- ----
Finished goods........................$ 23,614 $ 25,466
Work in progress...................... 372 1,501
Raw materials......................... 1,897 1,437
----- -----
$ 25,883 $ 28,404
=========== ===========
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per Common Share
-------------------------
Thirteen Weeks Ended Thirteen Weeks Ended
July 5, 2002 July 6, 2001
------------ ------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Consolidated income
Net income available for common
shares and assumed conversions.....................$ 1,549 $ 1,549 $ 176 $ 176
======== ======= ======== ========
Weighted-average common shares
and equivalents outstanding:
Weighted-average shares outstanding................ 6,099 6,099 6,074 6,074
Effect of dilutive securities:
Employee stock options........................... -- 115 -- 78
----- --- ----- --
6,099 6,214 6,074 6,152
===== ===== ===== =====
Earnings per share:
Net income.........................................$ 0.25 $ 0.25 $ 0.03 $ 0.03
======== ======= ======= ========
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
July 5, 2002 July 6, 2001
------------ ------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Consolidated income
Net income available for common
shares and assumed conversions.....................$ 2,850 $ 2,850 $ 1,522 $ 1,522
======== ======= ======== ========
Weighted-average common shares
and equivalents outstanding:
Weighted-average shares outstanding................ 6,092 6,092 6,078 6,078
Effect of dilutive securities:
Employee stock options........................... -- 76 -- 95
------ ----- ----- -----
6,092 6,168 6,078 6,173
===== ===== ===== =====
Earnings per share:
Net income.........................................$ 0.47 $ 0.46 $ 0.25 $ 0.25
======== ======= ======= ========
Options to purchase 336 and 564 shares of common stock, outstanding at July 5,
2002 and July 6, 2001, respectively, were not included in the computations of
diluted earnings per share, for the thirteen weeks ended July 5, 2002 and July
6, 2001, since the options were anti-dilutive. Options to purchase 493 and 480
shares of common stock, outstanding at July 5, 2002 and July 6, 2001,
respectively, were not included in the computations of diluted earnings per
share, for the twenty-six weeks ended July 5, 2002 and July 6, 2001, since the
options were anti-dilutive.
NOTE 4 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 5, 2002 July 6, 2001 July 5, 2002 July 6, 2001
------------ ------------ ------------ ------------
Net income................................................$ 1,549 $ 176 $ 2,850 $ 1,522
Other comprehensive income:
Foreign currency translation adjustments,
net of tax........................................... 393 (125) 417 (553)
--- ---- --- ----
Comprehensive income......................................$ 1,942 $ 51 $ 3,267 $ 969
======= ======== ======== =======
NOTE 5 - OPERATING SEGMENT DATA
The Company's operating segments are organized based on the nature of products
and consist of the Saucony segment and Other Products segment. The determination
of the reportable segments for the thirteen and twenty-six weeks ended July 5,
2002 and July 6, 2001, as well as the basis of measurement of segment profit or
loss, is consistent with the segment reporting disclosed in the Company's Annual
Report on Form 10-K for the fiscal year ended January 4, 2002.
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 5, 2002 July 6, 2001 July 5, 2002 July 6, 2001
------------ ------------ ------------ ------------
Revenues:
Saucony...........................................$ 32,095 $ 30,834 $ 61,050 $ 69,885
Other Products.................................... 4,391 4,621 10,287 9,366
----- ----- ------ -----
Total revenue..................................$ 36,486 $ 35,455 $ 71,337 $ 79,251
========= ========= ========= ========
Income (loss) before income taxes and minority interest:
Saucony...........................................$ 3,619 $ 661 $ 5,847 $ 3,187
Other Products.................................... (797) (153) (693) (279)
---- ---- ---- ----
Total ........................................$ 2,822 $ 508 $ 5,154 $ 2,908
========= ========= ========= ========
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 142
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
(SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets acquired individually or with a group of
other assets (excluding those acquired in a business combination) at
acquisition. The statement also addresses financial accounting and reporting for
goodwill and other intangibles subsequent to their acquisition. SFAS 142
supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" (APB
17). The Company adopted SFAS 142 on January 5, 2002. In applying SFAS 142 the
Company performed the transitional reassessment and impairment test required as
of January 4, 2002 and determined that there was no impairment of goodwill. The
Company discontinued amortizing goodwill on January 4, 2002. At January 4, 2002
and July 5, 2002 the carrying value of goodwill was $912, and is included in
"Other Assets" on the balance sheet.
The transitional disclosure of reported net earnings for the thirteen and
twenty-six weeks ended July 6, 2001, as adjusted, is presented below:
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 5, 2002 July 6, 2001 July 5, 2002 July 6, 2001
------------ ------------ ------------ ------------
Reported net income $ 1,549 $ 176 $ 2,850 $ 1,522
Addback amortization of goodwill,
net of tax benefit -- 21 -- 43
--------- -------- --------- ---------
Adjusted net income $ 1,549 $ 197 $ 2,850 $ 1,565
========= ======== ========= =========
Basic earnings per share:
As reported $ 0.25 $ 0.03 $ 0.47 $ 0.25
Addback goodwill -- -- -- .01
--------- -------- -------- ---------
Adjusted net income $ 0.25 $ 0.03 $ 0.47 $ 0.26
========= ======== ======== =========
Diluted earnings per share:
As reported $ 0.25 $ 0.03 $ 0.46 $ 0.25
Addback goodwill -- -- -- --
--------- -------- -------- ---------
Adjusted net income $ 0.25 $ 0.03 $ 0.46 $ 0.25
========= ======== ======== =========
SFAS 143
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations", (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement cost. SFAS 143 applies to all companies that
incur legal obligations to retire tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The
Company has not determined the impact of adopting SFAS 143 on its results of
operations or financial position.
SFAS 144
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of',
(SFAS 121), and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", (APB 30) for the disposal of a
segment of a business as previously defined in APB 30. SFAS 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", (ARB
51) to eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. The provisions of SFAS 144 are to be applied
to all long-lived assets, with the exception of goodwill. SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss only if the carry
amount of the long-lived asset is not recoverable from its undiscounted cash
flows and measure an impairment loss as the difference the carrying amount and
the fair value of the asset. SFAS 144 expands upon the criteria, beyond that
previously specified in SFAS 121 to determine when a long-lived asset is held
for sale and provides guidance on the accounting for long-lived assets
classified as held for sale if the asset is being reclassified as held and used.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
adoption permitted. The provisions of SFAS 144 generally are to be applied
prospectively. The Company adopted SFAS 144 in the first quarter of fiscal 2002
and the adoption did not have a material impact on the Company's earnings or
financial position.
SFAS 146
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Cost Associated with
Exit or Disposal Activities", (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of SFAS
No. 146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company believes that the adoption of SFAS No. 146 will
not have a material impact on earnings or on the Company's financial position.
NOTE 7 - PLANT CLOSING AND OTHER NON-RECURRING CHARGE ACCRUALS
Included in accrued expenses at July 5, 2002 are $270 of costs primarily
associated with the Bangor, Maine plant closing recorded in the fourth quarter
of fiscal 2001. The Company expects that a majority of these costs will be paid
by the end of fiscal 2002.
The following table summarizes the activity in the plant closing and other
non-recurring charge accruals for the twenty-six weeks ended July 5, 2002.
Balance at January 4, 2002..................$ 1,461
Payments.................................... (990)
Expenses reversed........................... (201)
----
Balance at July 5, 2002.....................$ 270
=========
NOTE 8 - ASSETS HELD FOR SALE
The Company has commenced marketing its Bangor, Maine real property, which had
been previously used for the assembly of our domestic Saucony footwear, in
February 2002. The property is available for immediate sale in its current
condition and the Company expects that the property will be sold during fiscal
2002. The property is being actively marketed for sale at a price that
management believes is reasonable in relation to its current fair value. As of
July 5, 2002, the fair value of the property, based upon an independent
appraisal, exceeds the net book value of the property, which was $357 as of July
5, 2002. As a result of the Company's decision to sell the property, the Bangor,
Maine real property has been reclassified to current assets as "Held For Sale"
and is included on the balance sheet at July 5, 2002 under the caption "Prepaid
Expenses and Other Current Assets".
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion together with the condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q. This Item contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that involve risks and uncertainties. All
statements other than statements of historical fact included in this report are
forward-looking statements. When used in this report, the words "will",
"believes", "anticipates", "intends", "estimates", "expects", "projects" and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
Actual results may differ materially from those included in such forward-looking
statements. Important factors which could cause actual results to differ
materially include those set forth in our Annual Report on Form 10-K for the
fiscal year ended January 4, 2002 under "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Other
Factors That May Affect Future Results" ("Certain Factors") filed by us with the
Securities and Exchange Commission on April 3, 2002, which Certain Factors
discussion is filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q and
incorporated herein by this reference. The forward-looking statements provided
by us in this Quarterly Report on Form 10-Q represent our estimates as of the
date this report is filed with the Securities and Exchange Commission. We
anticipate that subsequent events and developments will cause these estimates to
change. However, while we may elect to update our forward-looking statements in
the future, we specifically disclaim any obligation to do so. The
forward-looking statements contained in this report should not be relied upon as
representing our estimates as of any date subsequent to the date this report is
filed with the Securities and Exchange Commission.
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Areas where significant judgments are made include,
but are not limited to: revenue recognition - defective products returns and
other allowances, accounts receivable - allowances for doubtful accounts,
inventories and income taxes. Actual results could differ materially from these
estimates. For a more detailed explanation of the judgments made in these areas,
refer to our Annual Report on Form 10-K for the year ended January 4, 2002, as
filed with the Securities and Exchange Commission on April 3, 2002.
Highlights
Dollar amounts throughout this Item 2 are in thousands, except per share
amounts.
Thirteen Weeks and Twenty-Six Weeks Ended
July 5, 2002 Compared to Thirteen Weeks and
Twenty-Six Weeks Ended July 6, 2001
-----------------------------------
Increase (Decrease)
Thirteen Weeks Twenty-Six Weeks
-------------- ----------------
Net sales............................................ $962 2.7% ($7,944) (10.0%)
Gross profit......................................... 554 4.7% (1,246) (4.9%)
Selling, general and administrative expenses......... (1,623) (14.2%) (3,325) (14.6%)
$ Change
--------
Thirteen Weeks Twenty-Six Weeks
-------------- ----------------
Operating income......................................... $2,305 $2,168
Income before income taxes and minority interest......... 2,314 2,246
Net income............................................... 1,373 1,328
Percent of Net Sales
--------------------
Thirteen Weeks Twenty-Six Weeks
2002 2001 2002 2001
---- ---- ---- ----
Gross profit......................................... 34.0% 33.4% 34.1% 32.3%
Selling, general and administrative expenses......... 26.8 32.1 27.3 28.8
Operating income..................................... 7.5 1.2 7.0 3.6
Income before income taxes........................... 7.7 1.4 7.2 3.7
Net income........................................... 4.2 0.5 4.0 1.9
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the thirteen and twenty-six
weeks ended July 5, 2002 and July 6, 2001:
Thirteen Weeks Ended
--------------------
July 5, 2002 July 6, 2001
------------ ------------
Saucony................$ 32,075 88.0% $ 30,871 87.0%
Other Products......... 4,378 12.0% 4,620 13.0%
Total..................$ 36,453 100.0% $ 35,491 100.0%
Twenty-Six Weeks Ended
----------------------
July 5, 2002 July 6, 2001
------------ ------------
Saucony................$ 60,982 85.6% $ 69,823 88.2%
Other Products......... 10,258 14.4% 9,361 11.8%
Total..................$ 71,240 100.0% $ 79,184 100.0%
Thirteen Weeks Ended July 5, 2002 Compared to Thirteen Weeks Ended July 6, 2001
- -------------------------------------------------------------------------------
Consolidated Net Sales
- ----------------------
Net sales increased $962, or 3%, to $36,453 in the thirteen weeks ended July 5,
2002 from $35,491 in the thirteen weeks ended July 6, 2001.
On a geographic basis, domestic sales increased $18, to $29,120 in the thirteen
weeks ended July 5, 2002 from $29,102 in the thirteen weeks ended July 6, 2001.
International sales increased $944, or 15%, to $7,333 in the thirteen weeks
ended July 5, 2002 from $6,389 in the thirteen weeks ended July 6, 2001.
Saucony Brand Segment
- ---------------------
Worldwide net sales of Saucony branded footwear and apparel increased $1,204, or
4%, to $32,075 in the thirteen weeks ended July 5, 2002 from $30,871 in the
thirteen weeks ended July 6, 2001, due primarily to higher international
footwear unit volumes and higher average domestic wholesale per pair selling
prices, partially offset by lower domestic footwear unit volumes. The overall
average domestic wholesale selling price per pair of domestic footwear increased
6% in the thirteen weeks ended July 5, 2002 compared to the thirteen weeks ended
July 6, 2001, due to an increase in first quality technical unit volumes and
decreased Originals footwear, closeout footwear and special makeup footwear unit
volumes, all of which are sold at prices below our first quality technical
footwear.
Domestic net sales increased $269, or 1%, to $25,003 in the thirteen weeks ended
July 5, 2002 from $24,734 in the thirteen weeks ended July 6, 2001, due
primarily to higher average wholesale per pair selling prices, partially offset
by a 5% decrease in footwear unit volumes. The footwear unit volume decrease in
the thirteen weeks ended July 5, 2002 was due primarily to a 10% decrease in
Original footwear unit volumes and, to a lesser extent, a 25% decrease in
closeout footwear unit volumes and a 9% decrease in special makeup footwear unit
volumes. These decreases were partially offset by a 7% increase in first quality
technical footwear unit volumes. The average wholesale per pair selling prices
for domestic footwear increased due to a change in the product mix to increased
technical footwear unit volumes and decreased Originals, closeout footwear and
special makeup footwear unit volumes. Sales of closeout footwear accounted for
approximately 5% of domestic Saucony net sales in the thirteen weeks ended July
5, 2002 compared to 8% in the thirteen weeks ended July 6, 2001. The Originals
footwear accounted for 24% of domestic footwear unit volume in the thirteen
weeks ended July 5, 2002 compared to 26% in the thirteen weeks ended July 6,
2001.
International net sales increased $935, or 15%, to $7,072 in the thirteen weeks
ended July 5, 2002 from $6,137 in the thirteen weeks ended July 6, 2001, due
primarily to a 12% increase in footwear unit volumes, partially offset by lower
average wholesale per pair selling prices. The footwear average wholesale per
pair selling price decreased primarily due to a change in product mix to lower
priced technical footwear sold at our international subsidiaries, offset
partially by higher international distributor average wholesale per pair selling
prices, due to a change in the product mix to increased sales of technical
footwear unit volumes. Footwear unit volumes at our European and Canadian
subsidiaries, increased 60% in the thirteen weeks ended July 5, 2002 compared to
the thirteen weeks ended July 6, 2001. International distributor footwear unit
volumes decreased 19%, due to decreased European distributor unit volumes and a
33% decrease in Originals footwear unit volumes sold in Japan. Distributor sales
into the Japanese footwear market accounted for 12% of international sales in
the thirteen weeks ended July 5, 2002, compared to 19% in the thirteen weeks
ended July 6, 2001.
Other Products Segment
- ----------------------
Worldwide sales of Other Products decreased $242, or 5%, to $4,378 in the
thirteen weeks ended July 5, 2002 from $4,620 in the thirteen weeks ended July
6, 2001 due primarily to a decrease in sales of our Hyde Authentics footwear
products, which line is being phased out, and a decrease in sales at our factory
outlet stores.
Domestic net sales of Other Products decreased $251, or 6%, to $4,117 in the
thirteen weeks ended July 5, 2002 from $4,368 in the thirteen weeks ended July
6, 2001, due primarily to an 83% decrease in sales of our Hyde Authentics
footwear products, due to lower unit volumes and lower average wholesale per
pair selling prices and an 18% decrease in sales at our factory outlet stores
due to the closing of one store, the closing and relocation of a second store
and the absence of tent sale closeout volume in the thirteen weeks ended July 5,
2002. Tent sale closeout volume accounted for approximately 13% of factory
outlet sales in the thirteen weeks ended July 6, 2001. These decreases were
partially offset by a 32% increase in Hind apparel sales due primarily to a 50%
increase in the average wholesale unit selling prices for our Hind apparel brand
due to new product introductions, which carry higher selling prices, partially
offset by a 12% decrease in Hind apparel unit volumes.
International net sales of Other Products increased $9, or 4%, to $261 in the
thirteen weeks ended July 5, 2002 from $252 in the thirteen weeks ended July 6,
2001, due primarily to increased Hind apparel sales in Europe.
Costs and Expenses
- ------------------
Our gross margin in the thirteen weeks ended July 5, 2002 increased 0.6% to
34.0% from 33.4% in the thirteen weeks ended July 6, 2001, due primarily to
increased Saucony domestic sales of first quality footwear products at full
margin. Other factors contributing to the margin increase were proportionately
lower sales of closeout footwear, reduced expenses resulting from the closure of
our Bangor, Maine production facility, decreased sales of special makeup
footwear, which carry lower gross margins, partially offset by increased
inventory provisions for Hind apparel obsolete raw material and increased
footwear mold cost due to commitments to our footwear suppliers for
under-utilized molds.
Selling, general and administrative expenses expressed as a percentage of net
sales decreased 5.3% to 26.8% of net sales in the thirteen weeks ended July 5,
2002 from 32.1% in the thirteen weeks ended July 6, 2001. In absolute dollars,
selling, general and administrative expenses decreased $1,623, or 14%, to $9,767
in the thirteen weeks ended July 5, 2002 from $11,390 in the thirteen weeks
ended July 6, 2001. Decreased spending in the thirteen weeks ended July 5, 2002
was due primarily to decreased print advertising and, to a lesser extent, lower
provisions for bad debts decreased account-specific advertising and promotion
and reduced variable selling expenses, partially offset by increased
administrative payroll, increased incentive compensation and increased business
insurance costs.
In the thirteen weeks ended July 5, 2002 we recorded a pre-tax non-recurring
benefit of $59, $28 after-tax, or $0.00 per fully diluted share. The
non-recurring benefit consists of a pre-tax benefit of $201, $121 after-tax, or
$0.02 per fully diluted share, to reduce expenses accrued in the fourth quarter
of fiscal 2001 associated with the closing of our Bangor, Maine manufacturing
facility, primarily facility and lease exit costs and employee termination
benefits, partially offset by a non-recurring pre-tax charge of $142, $93 after
tax, or $0.02 per fully diluted share, incurred to close an underperforming
retail store and to close and relocate a second retail store. Expenses
associated with the store closings included lease termination and other
contractual costs of $47 and $95 to writeoff leasehold improvements.
Net interest expense decreased $56, to interest income of $12 in the thirteen
weeks ended July 5, 2002 from interest expense of $44 in the thirteen weeks
ended July 5, 2001, due primarily to the absence of borrowings against our
domestic and foreign credit facilities and, to a lesser extent, increased
interest income.
Income Before Tax and Minority Interest
- ---------------------------------------
Thirteen Weeks Ended
July 5, July 6,
2002 2001
---- ----
Segment
Saucony.......................$ 3,619 $ 661
Other Products................ (797) (153)
---- ----
Total.........................$ 2,822 $ 508
========= ========
Income before tax increased $2,314 in the thirteen weeks ended July 5, 2002 to
$2,822 compared to $508 in the thirteen weeks ended July 6, 2001, due primarily
to higher pre-tax income realized by the domestic Saucony segment due to
improved gross margins and lower operating spending and improved profitability
in our Saucony international business, due primarily to increased sales at our
Canadian subsidiary. Income before tax in our Other Products segment decreased
due to lower gross margins realized by our Hind apparel brand due to increased
provisions for obsolete raw material inventory and increased operating expenses
and reduced profitability at our factory outlets due to lower sales and the
charge taken in the thirteen weeks ended July 5, 2002 to close two
underperforming retail stores, one of which was subsequently relocated.
Income Taxes
- ------------
The provision for income taxes increased to $1,216 in the thirteen weeks ended
July 5, 2002 from $312 in the thirteen weeks ended July 6, 2001, due primarily
to higher pre-tax income realized by the domestic Saucony segment and increased
pre-tax income realized by our Canadian subsidiary. The effective tax rate
decreased 18.3% to 43.1% in the thirteen weeks ended July 5, 2002 from 61.4% in
the thirteen weeks ended July 6, 2001 due to a shift in the composition of
domestic and foreign pre-tax earnings and the impact of increased deferred tax
valuation allowances in the thirteen weeks ended July 5, 2001.
Net Income
- ----------
Net income for thirteen weeks ended July 5, 2002 increased to $1,549, or $0.25
per fully diluted share, compared to $176 or $0.03 per fully diluted share, in
the thirteen weeks ended July 5, 2001. Weighted average common shares and
equivalent shares used to calculate fully diluted earnings per share were 6,214
and 6,152, respectively, in the thirteen weeks ended July 5, 2002 and July 6,
2001.
Twenty-Six Weeks Ended July 5, 2002 Compared to Twenty-Six Weeks
Ended July 6, 2001
- ------------------
Consolidated Net Sales
- ----------------------
Net sales decreased $7,944, or 10%, to $71,240 in the twenty-six weeks ended
July 5, 2002 from $79,184 in the twenty-six weeks ended July 6, 2001.
Domestic sales decreased $9,880, or 15%, to $55,360 in the twenty-six weeks
ended July 5, 2002 from $65,240 in the twenty-six weeks ended July 6, 2001.
International sales increased $1,936, or 14%, to $15,880 in the twenty-six weeks
ended July 5, 2002 from $13,944 in the twenty-six weeks ended July 6, 2001.
Saucony Brand Segment
- ---------------------
Worldwide net sales of Saucony branded footwear and apparel decreased $8,841 or
13%, to $60,982 in the twenty-six weeks ended July 5, 2002 from $69,823 in the
twenty-six weeks ended July 6, 2001, due primarily to a decrease in domestic
footwear unit volume, partially offset by higher international footwear unit
volumes and higher average domestic wholesale per pair selling prices. The
overall average domestic wholesale selling price per pair of domestic footwear
increased 15% in the twenty-six weeks ended July 5, 2002 compared to twenty-six
weeks ended July 6, 2001, due to an increase in first quality technical unit
volumes and decreased Originals footwear, closeout footwear and special makeup
footwear unit volumes, all of which are sold at prices below our first quality
technical footwear.
Domestic net sales decreased $10,690, or 19%, to $45,961 in the twenty-six weeks
ended July 5, 2002 from $56,651 in the twenty-six weeks ended July 6, 2001, due
primarily to a 29% decrease in footwear unit volumes, partially offset by higher
average wholesale per pair selling prices. The footwear unit volume decrease in
the twenty-six weeks ended July 5, 2002 was due primarily to a 52% decrease in
Original footwear unit volumes and, to a lesser extent, a 46% decrease in
closeout footwear unit volumes and a 26% decrease in special makeup footwear
unit volumes. The average wholesale per pair selling prices for domestic
footwear increased due to a change in the product mix to increased technical
footwear unit volumes and decreased Originals, closeout footwear and special
makeup footwear unit volumes. Sales of closeout footwear accounted for
approximately 7% of domestic Saucony net sales in the twenty-six weeks ended
July 5, 2002 compared to 11% in the twenty-six weeks ended July 6, 2001. The
Originals footwear accounted for 22% of domestic footwear unit volume in the
twenty-six weeks ended July 5, 2002 compared to 33% in the twenty-six weeks
ended July 6, 2001. The unit volume decrease in Originals footwear was primarily
due to a shift in consumer preference to other product categories, primarily
basketball footwear, which we do not sell.
International net sales increased $1,849, or 14%, to $15,021 in the twenty-six
weeks ended July 5, 2002 from $13,172 in the twenty-six weeks ended July 6,
2001, due primarily to an 11% increase in footwear unit volumes, partially
offset by lower average wholesale per pair selling prices and the negative
impact of the stronger U.S. dollar against the Canadian and European currencies.
The footwear average wholesale per pair selling price decreased primarily due to
a change in product mix to lower priced technical footwear sold at our
international subsidiaries, offset partially by higher international distributor
average wholesale per pair selling prices, due to a change in the product mix to
increased sales of technical footwear unit volumes. Footwear unit volumes at our
European and Canadian subsidiaries, increased 39% in the twenty-six weeks ended
July 5, 2002 versus the twenty-six weeks ended July 6, 2001. International
distributor footwear unit volumes decreased 16%, due to decreased European
distributor unit volumes and a 23% decrease in Originals footwear unit volumes
sold in Japan. Distributor sales into the Japanese footwear market accounted for
11% of international sales in the twenty-six weeks ended July 5, 2002, compared
to 20% in the twenty-six weeks ended July 6, 2001.
Other Products Segment
- ----------------------
Worldwide sales of Other Products increased $897, or 10%, to $10,258 in the
twenty-six weeks ended July 5, 2002 from $9,361 in the twenty-six weeks ended
July 6, 2001 due primarily to a 29% increase in domestic sales of our Hind brand
apparel, offset partially by lower sales of Hyde Authentics footwear products,
which line is being phased out, and lower sales at our factory outlet stores.
Domestic net sales of Other Products increased $810, or 9%, to $9,399 in the
twenty-six weeks ended July 5, 2002 from $8,589 in the twenty-six weeks ended
July 6, 2001, due primarily to a 29% increase in domestic sales of our Hind
brand apparel, due primarily to a 22% increase in the average wholesale unit
selling prices for our Hind apparel brand and, to a lesser extent, a 6% increase
in Hind apparel unit volume, offset partially due to a 54% decrease in sales of
our Hyde Authentics footwear products, due to lower unit volume and lower
average wholesale per pair selling prices and a 3% decrease in sales at our
factory outlet stores due to the closing of one store, the relocation of a
second store and the absence of tent sale closeout volume in the twenty-six
weeks ended July 5, 2002. Tent sale closeout volume accounted for approximately
8% of factory outlet sales in the twenty-six weeks ended July 6, 2001.
International net sales of Other Products increased $87, or 11%, to $859 in the
twenty-six weeks ended July 5, 2002 from $772 in the twenty-six weeks ended July
6, 2001, due primarily to increased Hind apparel sales in Europe and Canada.
Costs and Expenses
- ------------------
Our gross margin in the twenty-six weeks ended July 5, 2002 increased 1.8% to
34.1% from 32.3% in the twenty-six weeks ended July 6, 2001, due primarily to
increased Saucony domestic sales of first quality footwear products at full
margin. Other factors contributing to the margin increase were proportionately
lower sales of closeout footwear, reduced expenses resulting from the closure of
our Bangor, Maine production facility and decreased sales of special makeup
footwear, which carry lower gross margins, partially offset by increased
inventory provisions for Hind apparel for obsolete raw material and increased
footwear mold cost due to commitments to our footwear suppliers for
under-utilized molds.
Selling, general and administrative expenses expressed as a percentage of net
sales decreased 1.5% to 27.3% of net sales in the twenty-six weeks ended July 5,
2002 from 28.8% in the twenty-six weeks ended July 6, 2001. In absolute dollars,
selling, general and administrative expenses decreased $3,325, or 15%, to
$19,460 in the twenty-six weeks ended July 5, 2002 from $22,785 in the
twenty-six weeks ended July 6, 2001. Decreased spending in the twenty-six weeks
ended July 5, 2002 was due primarily to decreased print advertising and, to a
lesser extent, lower provisions for bad debts, decreased account-specific
advertising and promotion and reduced variable selling expenses, partially
offset by increased administrative payroll, increased incentive compensation and
increased business insurance costs.
In the twenty-six weeks ended July 5, 2002 we recorded a pre-tax non-recurring
benefit of $59, $28 after-tax, or $0.00 per fully diluted share. The
non-recurring benefit consists of a pre-tax benefit of $201, $121 after-tax, or
$0.02 per fully diluted share, to reduce expenses accrued in the fourth quarter
of fiscal 2001 associated with the closing of our Bangor, Maine manufacturing
facility, primarily facility and lease exit costs and employee termination
benefits, partially offset by a non-recurring pre-tax charge of $142, $93 after
tax, or $0.02 per fully diluted share, incurred to close an underperforming
retail store and to close and relocate a second retail store. Expenses
associated with the store closings included lease termination and other
contractual costs of $47 and $95 to writeoff leasehold improvements.
Net interest expense decreased $140, to interest income of $36 in the twenty-six
weeks ended July 5, 2002 from interest expense of $104 in the twenty-six weeks
ended July 5, 2001, due primarily to the absence of borrowings against our
domestic and foreign credit facilities and, to a lesser extent, increased
interest income.
Income Before Tax and Minority Interest
Twenty-Six Weeks Ended
July 5, July 6,
2002 2001
---- ----
Segment
Saucony......................$ 5,847 $ 3,187
Other Products............... (693) (279)
---- ----
Total........................$ 5,154 $ 2,908
========= ========
Income before tax increased to $5,154 in the twenty-six weeks ended July 5, 2002
compared to $2,908 in the twenty-six weeks ended July 6, 2001, due primarily to
higher pre-tax income realized by the domestic Saucony segment, due to improved
gross margins and lower operating expenses and improved profitability in our
Saucony international business, due to increased sales at our Canadian
subsidiary. The decrease in our Other Products segment income before tax is due
primarily to lower gross margins realized by our Hind apparel brand due to
increased provisions for obsolete raw material inventory and increased operating
expenses and reduced profitability at our factory outlets due to the charge
taken in the twenty-six weeks ended July 5, 2002 to close two underperforming
retail stores, one of which was subsequently relocated.
Income Taxes
- ------------
The provision for income taxes increased to $2,183 in the twenty-six weeks ended
July 5, 2002 from $1,327 in the twenty-six weeks ended July 6, 2001, due
primarily to higher pre-tax income realized by the domestic Saucony segment and
increased pre-tax income realized by our Canadian subsidiary. The effective tax
rate decreased 3.2% to 42.4% in the twenty-six weeks ended July 5, 2002 from
45.6% in the twenty-six weeks ended July 6, 2001 due to a shift in the
composition of domestic and foreign pre-tax earnings and the impact of increased
deferred tax valuation allowances in the twenty-six weeks ended July 6, 2001.
Net Income
- ----------
Net income for twenty-six weeks ended July 5, 2002 increased to $2,850, or $0.46
per fully diluted share, compared to $1,522 or $0.25 per fully diluted share, in
the twenty-six weeks ended July 6, 2001. Weighted average common shares and
equivalent shares used to calculate fully diluted earnings per share were 6,168
and 6,173, respectively, in the twenty-six weeks ended July 5, 2002 and July 6,
2001.
Liquidity and Capital Resources
- -------------------------------
As of July 5, 2002, our cash and cash equivalents totaled $20,477, a decrease of
$1,750 from January 4, 2002. The decrease is due primarily to a use of cash from
operations of $2,395, cash outlays for capital assets of $215 and the repayment
of long-term debt of $79. This decrease in cash was offset partially by the
receipt of payment on notes receivable of $312, the receipt of $94 from the
issuance of shares of our common stock and the receipt of $80 from the sale of
capital assets.
Our accounts receivable increased $11,610 net of the provision for bad debts and
discounts, due to increased sales of our Saucony footwear products in the
twenty-six weeks ended July 5, 2002, compared to our sales for the twenty-six
weeks ended January 4, 2002. Our days sales outstanding for accounts receivable
increased to 68 days in the twenty-six weeks ended July 5, 2002 from 67 days in
the twenty-six weeks ended July 6, 2001. Days sales outstanding is defined as
the number of average daily sales in our accounts receivables as of the period
end date. The provision for bad debts and discounts decreased to $2,662 in the
twenty-six weeks ended July 5, 2002 from $3,795 in the twenty-six weeks ended
July 6, 2001, due to a decrease in the provision for doubtful accounts.
Inventories decreased $2,991 in the twenty-six weeks ended July 5, 2002 from
January 4, 2002, due to seasonal inventory requirements. The number of day's
sales in inventory decreased to 100 days in the twenty-six weeks ended July 5,
2002 from 108 days in the twenty-six weeks ended July 6, 2001.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting our operating cash flows in the
twenty-six weeks ended July 5, 2002 included an increase of $357 in accounts
payable (due to the lengthening of payment terms with key inventory suppliers),
an increase of $1,824 in accrued expenses (due primarily to increased accruals
for sales commissions, incentive compensation and inventory procurement costs
and the receipt of $653 in income tax refunds) and a decrease in prepaid
expenses of $45 (due to the timing of business insurance prepayments).
Our liquidity is contingent upon a number of factors, principally our future
operating results. Management believes that our current cash and cash
equivalents, credit facilities and internally generated funds are adequate to
meet our working capital requirements and to fund our capital investment needs
and debt service payments. During the twenty-six weeks ended July 5, 2002, we
used $2,395 in cash to fund operations, due primarily to an increase in accounts
receivable. In the twenty-six weeks ended July 6, 2001, we generated $4,315 in
cash from operations due primarily to a decrease in inventories. At July 5,
2002, we had $621 in borrowings outstanding under our credit facilities,
compared to $2,533 at July 6, 2001.
INFLATION AND CURRENCY RISK
The effect of inflation on our results of operations over the past three years
has been minimal. The impact of currency fluctuation on our purchase of
inventory from foreign suppliers has been minimal as the transactions were
denominated in U.S. dollars. We are, however, subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. We have entered into forward
foreign exchange contracts to minimize certain transaction currency risks. We
believe that our forward foreign currency contracts function as economic hedges
of our cash flows and that our foreign exchange management program effectively
minimizes certain transaction currency risks.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 142
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
(SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets acquired individually or with a group of
other assets (excluding those acquired in a business combination) at
acquisition. The statement also addresses financial accounting and reporting for
goodwill and other intangibles subsequent to their acquisition. SFAS 142
supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" (APB
17). We adopted SFAS 142 on January 5, 2002. In applying SFAS 142 we performed
the transitional reassessment and impairment test required as of January 4, 2002
and determined that there was no impairment of goodwill. We discontinued
amortizing goodwill on January 4, 2002. At January 4, 2002 and July 5, 2002, the
carrying value of goodwill was $912.
SFAS 143
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations", (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement cost. SFAS 143 applies to all companies that
incur legal obligations to retire tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We
have not determined the impact of our adoption of SFAS 143 on our results of
operations or financial position.
SFAS 144
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of',
(SFAS 121), and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", (APB 30) for the disposal of a
segment of a business as previously defined in APB 30. SFAS 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", (ARB
51) to eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. The provisions of SFAS 144 are to be applied
to all long-lived assets, with the exception of goodwill. SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss only if the carry
amount of the long-lived asset is not recoverable from its undiscounted cash
flows and measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. SFAS 144 expands upon the criteria,
beyond that previously specified in SFAS 121 to determine when a long-lived
asset is held for sale and provides guidance on the accounting for long-lived
assets classified as held for sale if the asset is being reclassified as held
and used. The provisions of SFAS 144 are effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years, with
early adoption permitted. The provisions of SFAS 144 generally are to be applied
prospectively. We adopted SFAS 144 in the first quarter of fiscal 2002 and the
adoption did not have a material impact on our earnings or on our financial
position.
SFAS 146
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Cost Associated with
Exit or Disposal Activities", (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of SFAS
No. 146 are effective for exit or disposal activities that are initiated after
December 31, 2002. We believe that the adoption of SFAS No. 146 will not have a
material impact on our earnings or on our financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have performed an analysis to assess the potential effect of reasonably
possible near-term changes in inflation and foreign currency exchange rates. The
effect of inflation on our results of operations over the past three years has
been minimal. The impact of currency fluctuation on the purchase of inventory by
us from foreign suppliers has been non-existent as all the transactions were
denominated in U.S. dollars. However, we are subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. We have entered into certain
forward foreign exchange contracts to minimize the transaction currency risk.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2002 Annual Meeting of Stockholders of the Company (the "Annual Meeting")
held on May 23, 2002, the following matter was acted upon by the stockholders of
the Company:
1. The election of John H. Fisher, Phyllis H. Fisher, Charles A. Gottesman,
Robert J. LeFort, Jr., Jonathan O. Lee and John J. Neuhauser as directors
of the Company.
The results of the voting on this matter presented to stockholders at the Annual
Meeting is set forth below:
Votes Votes Broker
For Withheld Abstentions Non-votes
--- -------- ----------- ---------
1. Election of Directors
John H. Fisher 2,071,954 57,765 -- N.A.
Phyllis H. Fisher 2,071,954 57,765 -- N.A.
Charles A. Gottesman 2,071,954 57,765 -- N.A.
Jonathan O. Lee 2,071,954 57,765 -- N.A.
Robert J. LeFort, Jr. 2,071,954 57,765 -- N.A.
John J. Neuhauser 2,071,954 57,765 -- N.A.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed
on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is
incorporated herein by reference.
b. Reports on Form 8-K
On July 1, 2002, the Company filed a Current Report on Form 8-K reporting
under Item 4 (Changes in Registrant's Certifying Accountants) its dismissal of
Arthur Andersen LLP as its principal accountants.
On July 10, 2002, the Company filed a Current Report on Form 8-K reporting
under Item 4 (Changes in Registrant's Certifying Accountants) its engagement of
Deloitte & Touche LLP as its principal accountants.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Saucony, Inc.
Date: August 16, 2002 By: /s/ Michael Umana
- ----- --------------- ---------------------
Michael Umana
Senior Vice President, Finance
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Letter Amendment dated June 28, 2002 to the Credit Agreement,
dated August 31, 1998, between Saucony, Inc. and State Street Bank
and Trust Company.
10.2 Letter Amendment dated July 31, 2002 to the Credit Agreement dated
August 31, 1998, between Saucony, Inc. and State Street Bank and
Trust Company.
99.1 "Certain Factors That May Affect Future Results", as set forth within
"Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation" of the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 4, 2002 filed with the Securities and
Exchange Commission on April 3, 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.