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 October 4, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X ]
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 November 8, 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 3,581,639
---------
6,148,386
=========
SAUCONY, INC. AND SUBSIDIARIES
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Condensed Consolidated Balance Sheets as of October 4, 2002
and January 4, 2002...................................................3
Condensed Consolidated Statements of Income for the thirteen and
thirty-nine weeks ended October 4, 2002 and October 5, 2001...........4
Condensed Consolidated Statements of Cash Flows for the thirty-nine
weeks ended October 4, 2002 and October 5, 2001.......................5
Notes to Condensed Consolidated Financial Statements --
October 4, 2002....................................................6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................12-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........22
Item 4. Controls and Procedures..............................................22
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................23
Signature.....................................................................24
Certifications...........................................................25 - 26
Exhibit Index.................................................................27
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
ASSETS
October 4, January 4,
2002 2002
---- ----
Current assets:
Cash and cash equivalents....................................................$ 30,482 $ 22,227
Accounts receivable.......................................................... 20,538 14,742
Inventories.................................................................. 22,675 28,404
Prepaid expenses and other current assets.................................... 3,024 4,165
----- -----
Total current assets....................................................... 76,719 69,538
====== ======
Property, plant and equipment, net.............................................. 5,686 6,989
----- -----
Other assets.................................................................... 1,376 1,573
----- -----
Total assets....................................................................$ 83,781 $ 78,100
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt......................................... -- 88
Accounts payable............................................................. 4,960 6,635
Accrued expenses and other current liabilities............................... 7,221 5,602
----- -----
Total current liabilities.................................................. 12,181 12,325
------ ------
Long-term obligations:
Deferred income taxes........................................................ 2,024 1,949
Other long-term obligations.................................................. 218 204
--- ---
Total long-term obligations................................................ 2,242 2,153
----- -----
Minority interest in consolidated subsidiaries.................................. 636 460
--- ---
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, $.333 par; authorized 20,000,000 shares
(issued 2002, 4,103,235 and 2001, 4,037,399)............................. 1,367 1,346
Additional paid in capital................................................... 17,703 17,398
Retained earnings............................................................ 55,139 50,702
Accumulated other comprehensive loss......................................... (839) (1,301)
Common stock held in treasury, at cost
(2002, Class A, 144,380, Class B, 521,596;
2001, Class A, 144,380, Class B, 521,596)............................. (5,417) (5,417)
Notes receivable............................................................. -- (303)
Unearned compensation........................................................ (135) (167)
---- ----
Total stockholders' equity............................................... 68,722 63,162
------ ------
Total liabilities and stockholders' equity......................................$ 83,781 $ 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 WEEKS AND THIRTY-NINE WEEKS ENDED
OCTOBER 4, 2002 AND OCTOBER 5, 2001
(Unaudited)
(In thousands, except per share amounts)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 4, October 5, October 4, October 5,
2002 2001 2002 2001
---- ---- ---- ----
Net sales....................................................$ 33,745 $ 31,488 $ 104,985 $110,672
Other revenue ............................................... 105 1 202 68
--- - --- --
Total revenue ............................................... 33,850 31,489 105,187 110,740
------ ------ ------- -------
Costs and expenses
Cost of sales............................................. 21,683 21,181 68,617 74,813
Selling expenses.......................................... 4,520 5,208 14,587 18,216
General and administrative expenses....................... 4,900 4,357 14,293 14,134
Plant closing credit and other non-recurring charges...... -- -- (59) --
------ ----- ---- -------
Total costs and expenses................................ 31,103 30,746 97,438 107,163
------ ------ ------ -------
Operating income............................................. 2,747 743 7,749 3,577
Non-operating income (expense)
Interest, net............................................. 13 (14) 49 (118)
Foreign currency.......................................... (18) (8) (62) 188
Other..................................................... 2 (16) 162 (34)
- --- --- ---
Income before income taxes and minority interest............. 2,744 705 7,898 3,613
Provision for income taxes................................... 1,099 301 3,282 1,628
Minority interest in income of consolidated subsidiaries..... 58 42 179 101
-- -- --- ---
Net income...................................................$ 1,587 $ 362 $ 4,437 $ 1,884
========= ========= ========= ========
Per share amounts:
Earnings per common share:
Basic.....................................................$ 0.26 $ 0.06 $ 0.73 $ 0.31
======== ========= ========= ========
Diluted...................................................$ 0.26 $ 0.06 $ 0.72 $ 0.30
======== ========= ========= ========
Weighted average common shares outstanding
and equivalents outstanding:
Basic EPS............................................... 6,121 6,083 6,102 6,079
===== ===== ===== =====
Diluted EPS............................................. 6,160 6,107 6,173 6,188
===== ===== ===== =====
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 THIRTY-NINE WEEKS ENDED OCTOBER 4, 2002 AND OCTOBER 5, 2001
(Unaudited)
(In thousands)
October 4, October 5,
2002 2001
---- ----
Cash flows from operating activities:
Net income.................................................................$ 4,437 $ 1,884
-------- ---------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization.............................................. 1,146 1,456
Provision for bad debts and discounts...................................... 4,044 4,776
Deferred income tax expense (benefit)...................................... 99 (689)
Gain on sale of equipment.................................................. (75) --
Other...................................................................... 132 133
Changes in operating assets and liabilities, net of effect
of acquisitions, dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Accounts receivable.................................................... (9,850) (402)
Inventories............................................................ 6,162 10,573
Prepaid expenses and other current assets.............................. 655 183
Increase (decrease) in liabilities:
Accounts payable....................................................... (1,706) (3,039)
Accrued expenses....................................................... 2,695 (860)
----- ----
Total adjustments............................................................ 3,302 12,131
----- ------
Net cash provided (used) by operating activities................................ 7,739 14,015
----- ------
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (300) (1,042)
Proceeds from the sale of equipment.......................................... 83 --
Change in deferred charges, deposits and other............................... 23 43
Marketable securities - realized and unrealized losses....................... 110 93
--- --
Net cash used by investing activities........................................... (84) (906)
--- ----
Cash flows from financing activities:
Net short-term borrowings.................................................... -- (159)
Repayment of long-term debt and capital lease obligations.................... (79) (212)
Common stock repurchased..................................................... -- (133)
Receipt of payment on notes receivable....................................... 312 --
Tax benefit on option exercise............................................... 16 9
Issuances of common stock, including options................................. 310 84
--- --
Net cash provided (used) by financing activities................................ 559 (411)
Effect of exchange rate changes on cash and cash equivalents.................... 41 (419)
-- ----
Net increase (decrease) in cash and cash equivalents............................ 8,255 12,279
Cash and equivalents at beginning of period..................................... 22,227 4,738
------ -----
Cash and equivalents at end of period...........................................$ 30,482 $ 17,017
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds...............................................$ 1,106 $ 854
======== =========
Interest...................................................................$ 1 $ 172
======== =========
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
OCTOBER 4, 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 thirteen and thirty-nine weeks ended
October 4, 2002, are not necessarily indicative of the results for the entire
year.
NOTE 2 - INVENTORIES
Inventories at October 4, 2002 and January 4, 2002 consisted of the following:
October 4, January 4,
2002 2002
---- ----
Finished goods.........................$ 21,419 $ 25,466
Work in progress....................... 100 1,501
Raw materials.......................... 1,156 1,437
----- -----
$ 22,675 $ 28,404
=========== ===========
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per Common Share
-------------------------
Thirteen Weeks Ended Thirteen Weeks Ended
October 4, 2002 October 5, 2001
--------------- ---------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Consolidated income
Net income available for common
shares and assumed conversions.....................$ 1,587 $ 1,587 $ 362 $ 362
======== ======= ======== ========
Weighted-average common shares
and equivalents outstanding:
Weighted-average shares outstanding................ 6,121 6,121 6,083 6,083
Effect of dilutive securities:
Employee stock options........................... -- 39 -- 24
------- -- ------- --
6,121 6,160 6,083 6,107
===== ===== ===== =====
Earnings per share:
Net income.........................................$ 0.26 $ 0.26 $ 0.06 $ 0.06
======== ======= ======= ========
Earnings per Common Share
-------------------------
Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended
October 4, 2002 October 5, 2001
--------------- ---------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Consolidated income
Net income available for common
shares and assumed conversions.....................$ 4,437 $ 4,437 $ 1,884 $ 1,884
======== ======= ======== ========
Weighted-average common shares
and equivalents outstanding:
Weighted-average shares outstanding................ 6,102 6,102 6,079 6,079
Effect of dilutive securities:
Employee stock options........................... -- 71 -- 109
----- -- ----- ---
6,102 6,173 6,079 6,188
===== ===== ===== =====
Earnings per share:
Net income.........................................$ 0.73 $ 0.72 $ 0.31 $ 0.30
======== ======= ======= ========
Options to purchase 554 and 724 shares of common stock, outstanding at October
4, 2002 and October 5, 2001, respectively, were not included in the computations
of diluted earnings per share, for the thirteen weeks ended October 4, 2002 and
October 5, 2001, since the options were anti-dilutive. Options to purchase 513
and 561 shares of common stock, outstanding at October 4, 2002 and October 5,
2001, respectively, were not included in the computations of diluted earnings
per share, for the thirty-nine weeks ended October 4, 2002 and October 5, 2001,
since the options were anti-dilutive.
NOTE 4 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 4, October 5, October 4, October 5,
2002 2001 2002 2001
---- ---- ---- ----
Net income................................................$ 1,587 $ 362 $ 4,437 $ 1,884
Other comprehensive income:
Foreign currency translation adjustments,
net of tax........................................... 46 (192) 462 (745)
-- ---- --- ----
Comprehensive income......................................$ 1,633 $ 170 $ 4,899 $ 1,139
======= ======== ======== =======
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 thirty-nine weeks ended October
4, 2002 and October 5, 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 Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 4, October 5, October 4, October 5,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Saucony...........................................$ 27,419 $ 24,563 $ 88,469 $ 94,448
Other Products.................................... 6,431 6,926 16,718 16,292
----- ----- ------ ------
Total revenue..................................$ 33,850 $ 31,489 $ 105,187 $ 110,740
========= ========= ========== ==========
Income (loss) before income taxes and minority interest:
Saucony...........................................$ 2,724 $ 295 $ 8,571 $ 3,482
Other Products.................................... 20 410 (673) 131
-- --- ---- ---
Total ........................................$ 2,744 $ 705 $ 7,898 $ 3,613
========= ========= ========== ==========
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 October 4, 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
thirty-nine weeks ended October 4, 2002 and October 5, 2001, as adjusted, is
presented below:
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 4, October 5, October 4, October 5,
2002 2001 2002 2001
---- ---- ---- ----
Reported net income $ 1,587 $ 362 $ 4,437 $ 1,884
Addback amortization of goodwill,
net of tax benefit -- 21 -- 64
---- -- ---- --
Adjusted net income $ 1,587 $ 383 $ 4,437 $ 1,948
========= ======== ========= =========
Basic earnings per share:
As reported $ 0.26 $ 0.06 $ 0.73 $ 0.31
Addback goodwill -- -- -- .01
---- ---- ---- ---
Adjusted net income $ 0.26 $ 0.06 $ 0.73 $ 0.32
========= ======== ======== =========
Diluted earnings per share:
As reported $ 0.26 $ 0.06 $ 0.72 $ 0.30
Addback goodwill -- -- -- .01
---- ---- ---- ---
Adjusted net income $ 0.26 $ 0.06 $ 0.72 $ 0.31
========= ======== ======== =========
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 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 October 4, 2002 are $182 of costs primarily
associated with the Bangor, Maine plant closing recorded in the fourth quarter
of fiscal 2001. The Company expects that a majority of these costs will be paid
by the end of fiscal 2002.
The following table summarizes the activity in the plant closing and other
non-recurring charge accruals for the thirty-nine weeks ended October 4, 2002.
Balance at January 4, 2002..................$ 1,461
Payments.................................... (1,078)
Expenses reversed........................... (201)
----
Balance at October 4, 2002..................$ 182
=========
NOTE 8 - ASSETS HELD FOR SALE
The Company 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 October 4, 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 October 4, 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 October 4, 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, except as permitted by the Securities and Exchange Commission
with respect to the preparation of interim financial statements for inclusion in
Quarterly Reports on Form 10-Q. 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: reserves for 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 Thirty-Nine Weeks Ended
October 4, 2002 Compared to Thirteen Weeks and
Thirty-Nine Weeks Ended October 5, 2001
---------------------------------------
Increase (Decrease)
-------------------
Thirteen Weeks Thirty-Nine Weeks
-------------- -----------------
Net sales............................................ $2,257 7.2% ($5,687) (5.1%)
Gross profit......................................... 1,755 17.0% 509 1.4%
Selling, general and administrative expenses......... (145) (1.5%) (3,470) (10.7%)
$ Change
--------
Thirteen Weeks Thirty-Nine Weeks
-------------- -----------------
Operating income......................................... $2,004 $4,172
Income before income taxes and minority interest......... 2,039 4,285
Net income............................................... 1,225 2,553
Percent of Net Sales
--------------------
Thirteen Weeks Thirty-Nine Weeks
2002 2001 2002 2001
---- ---- ---- ----
Gross profit......................................... 35.7% 32.7% 34.6% 32.4%
Selling, general and administrative expenses......... 27.9 30.4 27.5 29.2
Operating income..................................... 8.1 2.4 7.4 3.2
Income before income taxes........................... 8.1 2.2 7.5 3.3
Net income........................................... 4.7 1.1 4.2 1.7
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the thirteen and thirty-nine
weeks ended October 4, 2002 and October 5, 2001:
Thirteen Weeks Ended
October 4, 2002 October 5, 2001
--------------- ---------------
Saucony........................$ 27,366 81.1% $ 24,560 78.0%
Other Products................. 6,379 18.9% 6,928 22.0%
----- ---- ----- ----
Total..........................$ 33,745 100.0% $ 31,488 100.0%
=========== ===== =========== =====
Thirty-Nine Weeks Ended
October 4, 2002 October 5, 2001
--------------- ---------------
Saucony........................$ 88,348 84.2% $ 94,383 85.3%
Other Products................. 16,637 15.8% 16,289 14.7%
------ ---- ------ ----
Total..........................$ 104,985 100.0% $ 110,672 100.0%
=========== ===== =========== =====
Thirteen Weeks Ended October 4, 2002 Compared to Thirteen Weeks Ended October 5,
2001
Consolidated Net Sales
Net sales increased $2,257 or 7%, to $33,745 in the thirteen weeks ended October
4, 2002 from $31,488 in the thirteen weeks ended October 5, 2001.
On a geographic basis, domestic sales increased $1,747, or 7%, to $26,171 in the
thirteen weeks ended October 4, 2002 from $24,424 in the thirteen weeks ended
October 5, 2001. International sales increased $510, or 7%, to $7,574 in the
thirteen weeks ended October 4, 2002 from $7,064 in the thirteen weeks ended
October 5, 2001.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and apparel increased $2,806, or
11%, to $27,366 in the thirteen weeks ended October 4, 2002 from $24,560 in the
thirteen weeks ended October 5, 2001, due primarily to higher domestic footwear
unit volumes and higher average domestic wholesale per pair selling prices.
Worldwide footwear unit volumes increased 4% in the thirteen weeks ended October
4, 2002 compared to the thirteen weeks ended October 5, 2001. The overall
average domestic wholesale selling price per pair of domestic footwear increased
5% in the thirteen weeks ended October 4, 2002 compared to the thirteen weeks
ended October 5, 2001, due to an increase in first quality technical unit
volumes and decreased Originals footwear and closeout footwear, all of which are
sold at prices below our first quality technical footwear.
Domestic net sales increased $2,353, or 13%, to $20,590 in the thirteen weeks
ended October 4, 2002 from $18,237 in the thirteen weeks ended October 5, 2001,
due primarily to higher average wholesale per pair selling prices and an 8%
increase in footwear unit volumes. The footwear unit volume increase in the
thirteen weeks ended October 4, 2002 was due primarily to a 44% increase in
first quality technical footwear unit volumes and, to a lesser extent, a 26%
increase in special makeup footwear unit volumes. These increases were partially
offset by a 41% decrease in Originals footwear unit volumes and, to a lesser
extent, a 40% decrease in closeout 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
and closeout footwear. Sales of closeout footwear accounted for approximately 4%
of domestic Saucony net sales in the thirteen weeks ended October 4, 2002
compared to 11% in the thirteen weeks ended October 5, 2001. The Originals
footwear accounted for 14% of domestic footwear unit volume in the thirteen
weeks ended October 4, 2002 compared to 25% in the thirteen weeks ended October
5, 2001.
International net sales increased $453, or 7%, to $6,776 in the thirteen weeks
ended October 4, 2002 from $6,323 in the thirteen weeks ended October 5, 2001,
due primarily to higher average wholesale per pair selling prices, partially
offset by a 7% decrease in footwear unit volumes. The footwear average wholesale
per pair selling price increased due to increased unit volumes of higher priced
technical footwear sold at our international subsidiaries and decreased
international distributor unit volumes which products are sold a lower unit
prices. Footwear unit volumes at our European and Canadian subsidiaries,
increased 16% in the thirteen weeks ended October 4, 2002 compared to the
thirteen weeks ended October 5, 2001. International distributor footwear unit
volumes decreased 44% due to decreased European distributor unit volumes and a
62% decrease in Originals footwear unit volumes sold in Japan. Distributor sales
into the Japanese footwear market accounted for 5% of international sales in the
thirteen weeks ended October 4, 2002, compared to 10% in the thirteen weeks
ended October 5, 2001.
Other Products Segment
Worldwide sales of Other Products decreased $549, or 8%, to $6,379 in the
thirteen weeks ended October 4, 2002 from $6,928 in the thirteen weeks ended
October 5, 2001 due primarily to a decrease in sales of our Hyde Authentics
footwear products, which line has been phased out, and a decrease in sales of
our Hind brand apparel.
Domestic net sales of Other Products decreased $606, or 10%, to $5,581 in the
thirteen weeks ended October 4, 2002 from $6,187 in the thirteen weeks ended
October 5, 2001, due primarily to an 80% decrease in sales of our Hyde
Authentics footwear products, due to lower unit volumes and lower average
wholesale per pair selling prices and an 8% decrease in sales of our Hind brand
apparel due primarily to a 9% decrease in Hind apparel unit volumes, partially
offset by a 2% increase in average wholesale unit selling prices in the thirteen
weeks ended October 4, 2002. The increase in the average unit wholesale unit
selling prices for our Hind apparel brand is due to new product introductions,
which carry higher selling prices. Sales at our factory outlet stores increased
2% in the thirteen weeks ended October 4, 2002 compared to the thirteen weeks
ended October 5, 2001 due primarily to the opening of a factory outlet store in
the thirteen weeks ended October 4, 2002, offset partially by lower closeout
sales volume.
International net sales of Other Products increased $57, or 8%, to $798 in the
thirteen weeks ended October 4, 2002 from $741 in the thirteen weeks ended
October 5, 2001, due primarily to increased Hind apparel sales at our Europe
subsidiaries.
Costs and Expenses
Our gross margin in the thirteen weeks ended October 4, 2002 increased 3.0% to
35.7% from 32.7% in the thirteen weeks ended October 5, 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 and improved margins on certain domestic
footwear products, partially offset by increased inventory provisions for Hind
apparel obsolete raw material.
Selling, general and administrative expenses expressed as a percentage of net
sales decreased 2.5% to 27.9% of net sales in the thirteen weeks ended October
4, 2002 from 30.4% in the thirteen weeks ended October 5, 2001. In absolute
dollars, selling, general and administrative expenses decreased $145, or 2%, to
$9,420 in the thirteen weeks ended October 4, 2002 from $9,565 in the thirteen
weeks ended October 5, 2001. Decreased spending in the thirteen weeks ended
October 4, 2002 was due primarily to decreased print advertising and, to a
lesser extent, decreased promotional spending, partially offset by increased
variable selling expenses, increased administrative payroll and increased
incentive compensation.
Net interest expense decreased $27, to interest income of $13 in the thirteen
weeks ended October 4, 2002 from interest expense of $14 in the thirteen weeks
ended October 5, 2001, due primarily to the absence of borrowings against our
domestic and foreign credit facilities and, to a lesser extent, increased
interest income.
Income Before Tax and Minority Interest
Thirteen Weeks Ended
October 4, October 5,
2002 2001
---- ----
Segment
Saucony........................$ 2,724 $ 295
Other Products................. 20 410
-- ---
Total..........................$ 2,744 $ 705
========= ========
Income before tax increased $2,039 in the thirteen weeks ended October 4, 2002
to $2,744 compared to $705 in the thirteen weeks ended October 5, 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, offset
partially by increased profitability at our factory outlet store due to higher
gross margins and lower operating expenses, due principally to the closing of
underperforming retail stores in fiscal 2002.
Income Taxes
The provision for income taxes increased to $1,099 in the thirteen weeks ended
October 4, 2002 from $301 in the thirteen weeks ended October 5, 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 2.6% to 40.1% in the thirteen weeks ended October 4, 2002 from
42.7% in the thirteen weeks ended October 5, 2001 due to a shift in the
composition of domestic and foreign pre-tax earnings.
Net Income
Net income for thirteen weeks ended October 4, 2002 increased to $1,587, or
$0.26 per fully diluted share, compared to $362 or $0.06 per fully diluted
share, in the thirteen weeks ended October 5, 2001. Weighted average common
shares and equivalent shares used to calculate fully diluted earnings per share
were 6,160 and 6,107, respectively, in the thirteen weeks ended October 4, 2002
and October 5, 2001.
Thirty-Nine Weeks Ended October 4, 2002 Compared to Thirty-Nine Weeks Ended
October 5, 2001
Consolidated Net Sales
Net sales decreased $5,687, or 5%, to $104,985 in the thirty-nine weeks ended
October 4, 2002 from $110,672 in the thirty-nine weeks ended October 5, 2001.
Domestic sales decreased $8,133, or 9%, to $81,531 in the thirty-nine weeks
ended October 4, 2002 from $89,664 in the thirty-nine weeks ended October 5,
2001. International sales increased $2,446, or 12%, to $23,454 in the
thirty-nine weeks ended October 4, 2002 from $21,008 in the thirty-nine weeks
ended October 5, 2001.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and apparel decreased $6,035 or
6%, to $88,348 in the thirty-nine weeks ended October 4, 2002 from $94,383 in
the thirty-nine weeks ended October 5, 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.
Worldwide footwear unit volumes decreased 16% in the thirty-nine weeks ended
October 4, 2002 compared to the thirty-nine weeks ended October 5, 2001. The
overall average domestic wholesale selling price per pair of domestic footwear
increased 12% in the thirty-nine weeks ended October 4, 2002 compared to the
thirty-nine weeks ended October 5, 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 $8,337, or 11%, to $66,551 in the thirty-nine weeks
ended October 4, 2002 from $74,888 in the thirty-nine weeks ended October 5,
2001, due primarily to a 21% decrease in footwear unit volumes, partially offset
by higher average wholesale per pair selling prices. The footwear unit volume
decrease in the thirty-nine weeks ended October 4, 2002 was due primarily to a
50% decrease in Originals footwear unit volumes and, to a lesser extent, a 45%
decrease in closeout footwear unit volumes and a 14% 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 6% of domestic Saucony net sales in the thirty-nine weeks ended
October 4, 2002 compared to 11% in the thirty-nine weeks ended October 5, 2001.
The Originals footwear accounted for 19% of domestic footwear unit volume in the
thirty-nine weeks ended October 4, 2002 compared to 31% in the thirty-nine weeks
ended October 5, 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 $2,302, or 12%, to $21,797 in the thirty-nine
weeks ended October 4, 2002 from $19,495 in the thirty-nine weeks ended October
5, 2001, due primarily to a 6% increase in footwear unit volumes and higher
average wholesale per pair selling prices. The footwear average wholesale per
pair selling price increased primarily due to increased technical footwear unit
volume sold at our international subsidiaries, which products carry higher
average wholesale per pair selling prices and decreased Originals footwear unit
volumes sold by our international distributor business. Footwear unit volumes at
our European and Canadian subsidiaries, increased 30% in the thirty-nine weeks
ended October 4, 2002 versus the thirty-nine weeks ended October 5, 2001.
International distributor footwear unit volumes decreased 23%, due to decreased
European distributor unit volumes and a 32% decrease in Originals footwear unit
volumes sold in Japan. Distributor sales into the Japanese footwear market
accounted for 9% of international sales in the thirty-nine weeks ended October
4, 2002, compared to 14% in the thirty-nine weeks ended October 5, 2001.
Other Products Segment
Worldwide sales of Other Products increased $348, or 2%, to $16,637 in the
thirty-nine weeks ended October 4, 2002 from $16,289 in the thirty-nine weeks
ended October 5, 2001 due primarily to increased domestic sales of our Hind
brand apparel, offset partially by lower sales of Hyde Authentics footwear
products, which line has been phased out, and lower sales at our factory outlet
stores.
Domestic net sales of Other Products increased $204, or 1%, to $14,980 in the
thirty-nine weeks ended October 4, 2002 from $14,776 in the thirty-nine weeks
ended October 5, 2001, due primarily to a 13% increase in domestic sales of our
Hind brand apparel, offset partially due to a 64% decrease in sales of our Hyde
Authentics footwear products, due to lower unit volume and lower average per
pair wholesale selling prices. Hind brand apparel sales increased due primarily
to an 11% increase in the average wholesale unit selling prices for our Hind
apparel brand and, to a lesser extent, a 2% increase in Hind apparel unit
volume. The increase in the average wholesale unit selling price for our Hind
apparel brand is due to new product introductions, which carry higher selling
prices. Sales at our factory outlet stores decreased 1% due to lower closeout
sales volume in the thirty-nine weeks ended October 4, 2002. Closeout volume
accounted for approximately 4% of factory outlet sales in the thirty-nine weeks
ended October 4, 2002 compared to 11% of factory outlet sales in the thirty-nine
weeks ended October 5, 2001.
International net sales of Other Products increased $144, or 10%, to $1,657 in
the thirty-nine weeks ended October 4, 2002 from $1,513 in the thirty-nine weeks
ended October 5, 2001, due primarily to increased Hind apparel sales at our
European and Canadian subsidiaries.
Costs and Expenses
Our gross margin in the thirty-nine weeks ended October 4, 2002 increased 2.2%
to 34.6% from 32.4% in the thirty-nine weeks ended October 5, 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.
Selling, general and administrative expenses expressed as a percentage of net
sales decreased 1.7% to 27.5% of net sales in the thirty-nine weeks ended
October 4, 2002 from 29.2% in the thirty-nine weeks ended October 5, 2001. In
absolute dollars, selling, general and administrative expenses decreased $3,470,
or 11%, to $28,880 in the thirty-nine weeks ended October 4, 2002 from $32,350
in the thirty-nine weeks ended October 5, 2001. Decreased spending in the
thirty-nine weeks ended October 4, 2002 was due primarily to decreased print
advertising and, to a lesser extent, lower provisions for doubtful accounts,
decreased account-specific advertising and promotional spending, reduced
variable selling expenses, partially offset by increased administrative payroll,
increased incentive compensation and increased business insurance costs.
In the thirty-nine weeks ended October 4, 2002 we recorded a pre-tax
non-recurring credit of $59, $28 after-tax, or $0.00 per fully diluted share.
The net non-recurring credit consists of a pre-tax credit 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 employee termination benefits and facility and
lease exit costs, 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 $167, to interest income of $49 in the
thirty-nine weeks ended October 4, 2002 from interest expense of $118 in the
thirty-nine weeks ended October 5, 2001, due primarily to the absence of
borrowings against our domestic and foreign credit facilities and, to a lesser
extent, increased interest income.
Income Before Tax and Minority Interest
Thirty-Nine Weeks Ended
October 4, October 5,
2002 2001
---- ----
Segment
Saucony..........................$ 8,571 $ 3,482
Other Products................... (673) 131
---- ---
Total............................$ 7,898 $ 3,613
========= ========
Income before tax increased to $7,898 in the thirty-nine weeks ended October 4,
2002 compared to $3,613 in the thirty-nine weeks ended October 5, 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 and European subsidiaries. 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, partially offset by increased
profitability at our factory outlets due to higher gross margins and lower
operating expenses, due principally to the closing of underperforming retail
stores in fiscal 2002.
Income Taxes
The provision for income taxes increased to $3,282 in the thirty-nine weeks
ended October 4, 2002 from $1,628 in the thirty-nine weeks ended October 5,
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 3.5% to 41.6% in the thirty-nine weeks ended
October 4, 2002 from 45.1% in the thirty-nine weeks ended October 5, 2001 due to
a shift in the composition of domestic and foreign pre-tax earnings and the
impact of increased deferred tax valuation allowances recorded in the
thirty-nine weeks ended October 5, 2001.
Net Income
Net income for thirty-nine weeks ended October 4, 2002 increased to $4,437, or
$0.72 per fully diluted share, compared to $1,884 or $0.30 per fully diluted
share, in the thirty-nine weeks ended October 5, 2001. Weighted average common
shares and equivalent shares used to calculate fully diluted earnings per share
were 6,173 and 6,188, respectively, in the thirty-nine weeks ended October 4,
2002 and October 5, 2001.
Liquidity and Capital Resources
As of October 4, 2002, our cash and cash equivalents totaled $30,482, an
increase of $8,255 from January 4, 2002. The increase is due primarily to the
generation of $7,739 in cash from operations and, to a lesser extent, the
receipt of payment on notes receivable of $312, the receipt of $310 from the
issuance of shares of our common stock and the receipt of $83 from the sale of
capital assets, partially offset by cash outlays for capital assets of $300 and
the repayment of long-term debt of $79.
Our accounts receivable increased $5,806 net of the provision for bad debts and
discounts, due to increased sales of our Saucony footwear products in the
thirty-nine weeks ended October 4, 2002, compared to our sales for the
thirty-nine weeks ended January 4, 2002. Our days sales outstanding for accounts
receivable decreased to 53 days in the thirty-nine weeks ended October 4, 2002
from 55 days in the thirty-nine weeks ended October 5, 2001. Days sales
outstanding is defined as the number of average daily sales days in our accounts
receivables as of the period end date. The provision for bad debts and discounts
decreased to $4,044 in the thirty-nine weeks ended October 4, 2002 from $4,776
in the thirty-nine weeks ended October 5, 2001, due to a decrease in the
provision for doubtful accounts. Inventories decreased $6,162 in the thirty-nine
weeks ended October 4, 2002 from January 4, 2002, due to seasonal inventory
requirements. The number of day's sales in inventory decreased to 90 days in the
thirty-nine weeks ended October 4, 2002 from 100 days in the thirty-nine weeks
ended October 5, 2001. Days sales in inventory is defined as the number of
average daily cost of sales days in our inventory as of the period end date.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting our operating cash flows in the
thirty-nine weeks ended October 4, 2002 included a decrease of $1,706 in
accounts payable (due to lower inventories), an increase of $2,695 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 $655 (due to the timing of
business insurance prepayments).
On August 30, 2002, we entered into a revolving credit agreement with a bank
under the terms of which the bank committed to a maximum of $15,000,000 to us
for cash borrowings and letters of credit. The credit facility which terminates
on August 30, 2004, amends and restates, in its entirety, the revolving credit
agreement which terminated on August 30, 2002. Maximum borrowings under the
credit facility are limited to the lesser of $15,000,000 or, the sum of 65% of
eligible receivables plus 20% of eligible finished goods inventory, each as
defined in the credit agreement. At October 4, 2002, there were no borrowings
outstanding under the facility. We had open commitments under letters of credit
in the amount of $172,000 at October 4, 2002. Borrowings under the credit
facility are made at our election at either (1) the bank's prime rate of
interest, less 1.0%, or (2) at the LIBOR rate, plus 1.5%. The credit facility
contains various covenants including; restrictions on our ability to incur
additional indebtedness, limitations on the annual amount of capital
expenditures and limits repurchases of our common stock to $3,000,000 over the
term of the facility.
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 thirty-nine weeks ended October 4, 2002,
we generated $7,739 in cash from operations, due primarily to a decrease in
inventories. In the thirty-nine weeks ended October 5, 2001, we generated
$14,015 in cash from operations due primarily to a decrease in inventories. At
October 4, 2002, we had no borrowings outstanding under our credit facilities,
compared to $2,307 at October 5, 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 October 4, 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. 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date
within 90 days of the filing date of this Quarterly Report on Form 10-Q, the
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
PART II. OTHER INFORMATION
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
Saucony did not file any Current Reports on Form 8-K during the
fiscal quarter ended October 4, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Saucony, Inc.
Date: November 14, 2002 By: /s/ Michael Umana
- ----- ----------------- ---------------------
Michael Umana
Senior Vice President, Finance
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
CERTIFICATIONS
I, John H. Fisher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Saucony, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ John H. Fisher
- ------------------------ ------------------
Name: John H. Fisher
Title: President and Chief Executive
Officer
I, Michael Umana, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Saucony, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ Michael Umana
- ------------------------ -----------------
Name: Michael Umana
Title: Senior Vice President, Finance
Chief Financial Officer
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.1 Amended and Restated Credit Agreement, dated August 30, 2002,
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 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.