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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 April 4, 2003
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 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 May 7, 2003
----- -----------------
Class A Common Stock-$.33 1/3 Par Value Per Share 2,520,647
Class B Common Stock-$.33 1/3 Par Value Per Share 3,560,030
---------
6,080,677
=========
SAUCONY, INC. AND SUBSIDIARIES
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Condensed Consolidated Balance Sheets as of April 4, 2003
and January 3, 2003.................................................3
Condensed Consolidated Statements of Income for the
thirteen weeks ended April 4, 2003 and April 5, 2002................4
Condensed Consolidated Statements of Cash Flows for the
thirteen weeks ended April 4, 2003 and April 5, 2002................5
Notes to Condensed Consolidated Financial Statements --
April 4, 2003....................................................6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................12-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........19
Item 4. Controls and Procedures............................................19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................20
Signature...................................................................21
Certifications...........................................................22-23
Exhibit Index...............................................................24
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
ASSETS
April 4, January 3,
2003 2003
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents.....................................$ 27,077 $ 34,483
Accounts receivable........................................... 26,202 15,496
Inventories................................................... 22,151 27,201
Prepaid expenses and other current assets..................... 3,529 3,490
--------- ---------
Total current assets........................................ 78,959 80,670
--------- ---------
Property, plant and equipment, net............................... 6,011 5,714
--------- ---------
Other assets..................................................... 1,110 1,156
--------- ---------
Total assets.....................................................$ 86,080 $ 87,540
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.................................................$ 635 $ --
Accounts payable.............................................. 4,691 8,543
Accrued expenses and other current liabilities................ 6,351 7,800
--------- ---------
Total current liabilities................................... 11,677 16,343
--------- ---------
Long-term obligations:
Deferred income taxes......................................... 2,048 1,859
--------- ---------
Minority interest in consolidated subsidiaries................... 751 642
--------- ---------
Stockholders' equity:
Preferred stock, $1.00 par value per share; authorized
500,000 shares; none issued................................. -- --
Common stock:
Class A $.333 par value per share, authorized 20,000,000
shares (issued 2003, 2,711,127 and 2002, 2,711,127)....... 904 904
Class B $.333 par value per share, authorized 20,000,000
shares (issued 2003, 4,131,646 and 2002, 4,106,343)....... 1,377 1,369
Additional paid in capital.................................... 17,906 17,769
Retained earnings............................................. 58,548 55,945
Accumulated other comprehensive loss.......................... (616) (870)
Common stock held in treasury, at cost
(2003, Class A, 190,480, Class B, 580,326
2002, Class A 186,080, Class B, 574,726).................. (6,400) (6,297)
Unearned compensation......................................... (115) (124)
--------- ---------
Total stockholders' equity.................................. 71,604 68,696
--------- ---------
Total liabilities and stockholders' equity.......................$ 86,080 $ 87,540
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the Thirteen Weeks Ended April 4, 2003 and April 5, 2002
(Unaudited)
(In thousands, except per share data)
Thirteen Weeks Thirteen Weeks
Ended Ended
April 4, 2003 April 5, 2002
------------- -------------
Net sales.....................................................$ 39,068 $ 34,787
Other revenue................................................. 95 64
--------- ---------
Total revenue................................................. 39,163 34,851
--------- ---------
Costs and expenses
Cost of sales.............................................. 23,872 22,888
Selling expenses........................................... 4,932 4,961
General and administrative expenses........................ 5,988 4,732
--------- ---------
Total costs and expenses................................. 34,792 32,581
--------- ---------
Operating income.............................................. 4,371 2,270
Non-operating income (expense)
Interest income............................................ 74 88
Interest expense........................................... (2) (2)
Foreign currency losses.................................... (15) (25)
Other...................................................... (11) 1
---------- ---------
Income before income taxes and minority interest.............. 4,417 2,332
Provision for income taxes.................................... 1,750 967
Minority interest in income of
consolidated subsidiaries.................................. 64 64
--------- ---------
Net income....................................................$ 2,603 $ 1,301
========= =========
Per share amounts:
Earnings per common share:
Basic......................................................$ 0.43 $ 0.21
========= =========
Diluted....................................................$ 0.42 $ 0.21
========= =========
Weighted average common shares
and equivalents outstanding:
Basic.................................................... 6,067 6,085
========= =========
Diluted.................................................. 6,241 6,120
========= =========
Cash dividends per share of common stock...................... -- --
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED APRIL 4, 2003 AND APRIL 5, 2002
(Unaudited)
(In thousands)
April 4, April 5,
2003 2002
---- ----
Cash flows from operating activities:
Net income.................................................................$ 2,603 $ 1,301
-------- --------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization.............................................. 330 448
Provision for bad debts and discounts...................................... 1,621 1,551
Deferred income tax expense ............................................... 56 140
Marketable securities - unrealized gains................................... -- (11)
Other...................................................................... 99 68
Changes in operating assets and liabilities, net of effect
of acquisitions, dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Accounts receivable.................................................... (12,160) (12,274)
Inventories............................................................ 5,296 3,359
Prepaid expenses and other current assets.............................. 97 (85)
Decrease in liabilities:
Accounts payable....................................................... (3,868) (1,706)
Accrued expenses....................................................... (1,475) (120)
--------- ---------
Total adjustments............................................................ (10,004) (8,630)
--------- ---------
Net cash used by operating activities........................................... (7,401) (7,329)
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (573) (61)
Change in deposits and other................................................. (1) (11)
Marketable securities - realized losses...................................... -- 10
--------- ---------
Net cash used by investing activities........................................... (574) (62)
--------- ---------
Cash flows from financing activities:
Net short-term borrowings.................................................... 633 --
Repayment of long-term debt and capital lease obligations.................... -- (16)
Common stock repurchased..................................................... (103) --
Receipt of payment on notes receivable....................................... -- 312
Issuances of common stock, including options................................. 120 65
--------- ---------
Net cash provided by financing activities....................................... 650 361
Effect of exchange rate changes on cash and cash equivalents.................... (81) 74
--------- ---------
Net decrease in cash and cash equivalents....................................... (7,406) (6,956)
Cash and equivalents at beginning of period..................................... 34,483 22,227
--------- ---------
Cash and equivalents at end of period...........................................$ 27,077 $ 15,271
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds...............................................$ 1,222 $ (473)
======== =========
Interest...................................................................$ -- $ 2
======== =========
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
APRIL 4, 2003
(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 3, 2003. Operating results for the thirteen weeks ended April 4,
2003 are not necessarily indicative of the results for the entire year. Certain
reclassifications have been made in the thirteen weeks ended April 5, 2002
presentation to conform to the thirteen weeks ended April 4, 2003.
NOTE 2 - INVENTORIES
Inventories at April 4, 2003 and January 3, 2003 consisted of the following:
April 4, January 3,
2003 2003
---- ----
Finished goods.............................$ 22,120 $ 26,528
Work in progress........................... 29 193
Raw materials.............................. 2 480
--------- ---------
$ 22,151 $ 27,201
========= =========
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per Common Share
-------------------------
Thirteen Weeks Ended Thirteen Weeks Ended
-------------------- --------------------
April 4, 2003 April 5, 2002
------------- -------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Consolidated income:
Net income available for common
shares and assumed conversions.....................$ 2,603 $ 2,603 $ 1,301 $ 1,301
======== ======== ======== ========
Weighted-average common shares
and equivalents outstanding:
Weighted-average shares outstanding................ 6,067 6,067 6,085 6,085
Effect of dilutive securities:
Employee stock options and warrants.............. -- 174 -- 35
-------- -------- -------- --------
6,067 6,241 6,085 6,120
======== ======== ======== ========
Earnings per share:
Net income.........................................$ 0.43 $ 0.42 $ 0.21 $ 0.21
======== ======== ======= ========
Options to purchase 455,000 shares of common stock, outstanding at April 4, 2003
and options to purchase 600,000 shares of common stock and warrants to purchase
50,000 shares of common stock, outstanding at April 5, 2002, were not included
in the computations of diluted earnings per share, for the respective periods,
since the options and warrants were anti-dilutive.
NOTE 4 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Weeks Thirteen Weeks
Ended Ended
April 4, 2003 April 5, 2002
------------- -------------
Net income........................................................$ 2,603 $ 1,301
Other comprehensive income:
Foreign currency translation adjustments, net of tax............ 254 23
--------- ---------
Comprehensive income..............................................$ 2,857 $ 1,324
========= =========
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 weeks ended April 4, 2003 and April
5, 2002, 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 3, 2003.
Thirteen Weeks Thirteen Weeks
Ended Ended
April 4, 2003 April 5, 2002
------------- -------------
Revenues:
Saucony....................................................$ 32,551 $ 28,955
Other Products............................................. 6,612 5,896
---------- ---------
Total revenue.........................................$ 39,163 $ 34,851
========== =========
Income before income taxes and minority interest:
Saucony....................................................$ 3,982 $ 2,235
Other Products............................................. 435 97
---------- ---------
Total.................................................$ 4,417 $ 2,332
========== =========
NOTE 6 - PLANT CLOSING ACCRUAL
Included in accrued expenses at April 4, 2003 are $35 of costs 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
the second quarter of fiscal 2003.
NOTE 7 - ASSETS HELD FOR SALE
In February 2002, the Company commenced marketing its Bangor, Maine real
property, which had been previously used for the assembly of our domestic
Saucony footwear. The property is available for immediate sale in its current
condition and the Company expects that the property will be sold during fiscal
2003. The property is being actively marketed for sale at a price that is
reasonable in relation to its current fair value. As of April 4, 2003, the fair
value of the property exceeds the net book value of the property, which was $357
as of April 4, 2003. As a result of the Company's decision to sell the property,
the Bangor, Maine real property has been reclassified to current assets as "Held
For Sale" and is included on the balance sheet at April 4, 2003 under the
caption "Prepaid Expenses and Other Current Assets".
NOTE 8 - GOODWILL AND INTANGIBLE ASSETS
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", "SFAS 142", eliminates the requirement to amortize goodwill
and indefinite-lived assets, rather, requiring that the Company assesses the
realizability of those assets at least annually or whenever events or changes in
circumstances indicate that the assets may be impaired. Intangible assets with
finite lives continue to be amortized over their useful lives. Goodwill and
intangible assets as of April 4, 2003 and January 3, 2003 are as follows:
April 4, 2003 January 3, 2003
-------------------------------- --------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Goodwill...................$ 1,463 $ (551) $ 912 $ 1,463 $ (551) $ 912
Software licenses.......... 1,060 (945) 115 1,060 (928) 132
Capitalized debt
financing costs.......... 87 (42) 45 87 (14) 73
Other...................... 381 (379) 2 381 (378) 3
-------- ---------- ------- -------- ---------- -------
Total......................$ 2,991 $ (1,917) $ 1,074 $ 2,991 $ (1,871) $ 1,120
======== ========= ======= ======== ========= =======
NOTE 9 - STOCK-BASED COMPENSATION
The Company accounts for employee stock options and share awards under the
intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", "APB 25", as interpreted, with
pro-forma disclosures of net earnings and earnings per share, as if the fair
value method of accounting defined in Statement of Financial Accounting
Standards No. 123, "SFAS 123", applied. SFAS 123 establishes a fair value based
method of accounting for stock-based employee compensation plans. Under the fair
value method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually the
vesting period.
All stock options granted during the thirteen weeks ended April 4, 2003 and the
thirteen weeks ended April 5, 2002 were at exercise prices equal to the fair
market value of the Company's common stock at the date of the grant.
Accordingly, no compensation cost has been recognized for such options granted.
In connection with the exercise of options, the Company has realized income tax
benefits of $4 and $5 for the thirteen weeks ended April 4, 2003 and April 5,
2002, respectively, that have been credited to additional paid-in capital.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for stock
option awards for the thirteen weeks ended April 4, 2003 and April 5, 2002,
consistent with the provisions of SFAS 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below:
April 4, 2003 April 5, 2002
----------------------- -----------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income :
As reported...................................$ 2,603 $ 2,603 $ 1,301 $ 1,301
Add: Stock-based compensation expense
included in reported net income (loss),
net of related tax benefit.................... 5 5 7 7
Less: Total stock-based compensation
expense determined under the fair
value based method for all rewards,
net of related tax benefit.................... (147) (147) (144) (144)
--------- -------- --------- ---------
Pro forma net income ..........................$ 2,461 $ 2,461 $ 1,164 $ 1,164
======== ======= ======== ========
April 4, 2003 April 5, 2002
----------------------- ------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
As reported...................................$ 0.43 $ 0.42 $ 0.21 $ 0.21
Add: Stock-based compensation expense
included in reported net income (loss),
net of related tax............................ 0.00 0.00 0.00 0.00
Less: Total stock-based compensation
expense determined under the fair
value based method for all rewards,
net of related tax benefit.................... (0.02) (0.03) (0.02) (0.02)
--------- -------- -------- --------
Pro forma net income per share.................$ 0.41 $ 0.39 $ 0.19 $ 0.19
======== ======= ======= =======
The fair value of options at date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Thirteen Weeks Thirteen Weeks
Ended Ended
April 4, 2003 April 5, 2002
------------- -------------
Expected life (years)............... 5.0 4.0
Risk-free interest rate............. 3.1% 3.9%
Expected volatility................. 66.6% 67.3%
Expected dividend yield............. 0.0% 0.0%
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 149
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", "SFAS 149". SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", "SFAS 133". SFAS 149 requires that
contracts with comparable characteristics be accounted for similarly. In
particular, SFAS 149 (1) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative discussed in
paragraph 6(b) of SFAS 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to language
used in Financial Accounting Standards Interpretation No. 45, "Guarantors of
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", and (4) amends certain other existing
accounting pronouncements. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, except as stated in paragraph 40. This statement
is also effective for hedging relationships designated after June 30, 2003,
except as stated in paragraph 40. The Company has not determined the impact of
adopting SFAS 149 on its financial position, results of operations or cash flows
FIN 45
In November 2002, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 45, "Guarantors of Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", "FIN 45". FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about
obligations under specified guarantees that have been issued. The interpretation
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The recognition of a guarantor's obligation should be applied
prospectively to guarantees issued after December 15, 2002. The adoption of FIN
45 did not have a material impact on the Company's financial position, results
of operations or cash flows.
FIN 46
In January 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities", "FIN 46". FIN 46 explains how to identify variable interest
entities and how to determine when a business enterprise should include the
assets, liabilities, non-controlling interests and results of activities of a
variable interest entity in its consolidated financial statements. The
interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risks will not be consolidated unless a single party holds
an interest or combination of interest that effectively recombines risks that
were previously dispersed. FIN 46 applies immediately to variable interest
entities created after January 31, 2003 and to variable interest entities in
which an enterprise obtains an interest after that date. The interpretation
applies in the first fiscal year or interim period beginning after June 15, 2003
to variable interest entities in which an enterprise holds a variable interest
that is acquired before February 1, 2003. The adoption of FIN 46 did not have a
material impact on the Company's financial positions, results of operations or
cash flows.
NOTE 11 - SUBSEQUENT EVENT
On May 6, 2003, the United States Bankruptcy Court for the District of Delaware,
upon consideration of the Trustee's Motion for Entry of Order Approving
Settlement with Saucony, Inc., ordered that the proposed settlement entered into
on March 11, 2003, between the trustee, appointed to oversee the liquidation of
assets of a former customer of the Company which filed for bankruptcy protection
on November 4, 1999, and the Company was approved. The Company will pay $530 to
settle all preferential claims by no later than May 16, 2003. As a consequence
of the court's approval of the settlement, the Company will record a pre-tax
benefit of $566 in the quarter ending on July 4, 2003 to reduce the amount
accrued as of January 3, 2003. The benefit will be recorded in general and
administrative expenses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note Regarding Forward-Looking Statements
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 3, 2003 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, 2003, 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. Actual results may differ materially from these
estimates. Critical accounting policies are those policies that are reflective
of significant judgments and uncertainties and could potentially result in
materially different results under different assumptions and conditions. Our
most critical accounting policies involve: revenue recognition, accounts
receivable - allowances for doubtful accounts, inventories, property, plant and
equipment, impairment of long-lived assets, income taxes, stock-based
compensation, hedge accounting for derivatives and contingencies. For a more
detailed explanation of our critical accounting policies, refer to our Annual
Report on Form 10-K for the year ended January 3, 2003, as filed with the
Securities and Exchange Commission on April 3, 2003.
Dollar amounts throughout this Item 2 are in thousands, except per share
amounts.
Highlights
Increase (Decrease)
Thirteen Weeks Ended
April 4, 2003 vs. April 5, 2002
-------------------------------
Net sales...................................... $4,281 12.3%
Gross profit................................... 3,297 27.7%
Selling, general and administrative expenses... 1,227 12.7%
$ Change
Thirteen Weeks Ended
April 4, 2003 vs. April 5, 2002
-------------------------------
Operating income............................... $2,101
Income before income taxes..................... 2,085
Net income..................................... 1,302
Percent of Net Sales
Thirteen Weeks Ended
April 4, 2003 vs. April 5, 2002
-------------------------------
Gross profit.................................. 38.9% 34.2%
Selling, general and administrative expenses.. 28.0 27.9
Operating income.............................. 11.2 6.5
Income before income taxes.................... 11.3 6.7
Net income.................................... 6.7 3.7
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the thirteen weeks ended
April 4, 2003 and April 5, 2002:
Thirteen Weeks Ended
--------------------
April 4, 2003 April 5, 2002
------------- -------------
Saucony.................$ 32,485 83.1% $ 28,907 83.1%
Other Products.......... 6,583 16.9% 5,880 16.9%
Total...................$ 39,068 100.0% $ 34,787 100.0%
Thirteen Weeks Ended April 4, 2003 Compared to Thirteen Weeks Ended April 5,
2002
Consolidated Net Sales
Net sales increased $4,281, or 12%, to $39,068 in the thirteen weeks ended April
4, 2003 from $34,787 in the thirteen weeks ended April 5, 2002.
On a geographic basis, domestic net sales increased $3,336, or 13%, to $29,576
in the thirteen weeks ended April 4, 2003 from $26,240 in the thirteen weeks
ended April 5, 2002. International net sales increased $945, or 11%, to $9,492
in the thirteen weeks ended April 4, 2003 from $8,547 in the thirteen weeks
ended April 5, 2002.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $3,578, or 12%, to $32,485 in the thirteen weeks ended April 4, 2003
from $28,907 in the thirteen weeks ended April 5, 2002, due primarily to a 15%
increase in domestic footwear unit volume, favorable currency exchange resulting
from a weaker U.S. dollar against European and Canadian currencies and, to a
lesser extent, increased technical footwear unit volume at our international
subsidiaries, partially offset by lower domestic wholesale per pair average
selling prices. The overall average domestic wholesale per pair selling price
for domestic footwear decreased 8% in the thirteen weeks ended April 4, 2003
compared to the thirteen weeks ended April 5, 2002, due to an increase in
Originals and special makeup footwear unit volumes, which are sold at prices
below our first quality technical footwear.
Domestic net sales increased $2,698, or 13%, to $23,656 in the thirteen weeks
ended April 4, 2003 from $20,958 in the thirteen weeks ended April 5, 2002, due
primarily to a 20% increase in footwear unit volumes, partially offset by lower
wholesale per pair average selling prices. The footwear unit volume increase in
the thirteen weeks ended April 4, 2003 was due primarily to an 82% increase in
special makeup footwear unit volumes, a 49% increase in Original footwear unit
volumes and, to a lesser extent, a 4% increase in first quality technical
footwear unit volumes. These increases were partially offset by a 36% decrease
in closeout footwear unit volumes. The average wholesale per pair selling prices
for domestic footwear decreased due to a change in the product mix to increased
special makeup and Original footwear unit volumes, and a change in the first
quality technical footwear product mix to lower priced product. Sales of
closeout footwear accounted for approximately 4% of domestic Saucony net sales
in the thirteen weeks ended April 4, 2003 compared to 9% in the thirteen weeks
ended April 5, 2002. The Originals footwear accounted for 24% of domestic
footwear unit volume in the thirteen weeks ended April 4, 2003 versus 19% in the
thirteen weeks ended April 5, 2002. The unit volume increase in Originals
footwear was primarily due to the introduction of new products in the thirteen
weeks ended April 4, 2003.
International net sales increased $880, or 11%, to $8,829 in the thirteen weeks
ended April 4, 2003 from $7,949 in the thirteen weeks ended April 5, 2002, due
primarily to favorable currency exchange resulting from a weaker U.S. dollar
against European and Canadian currencies, and to a lesser extent a 2% increase
in footwear unit volumes and higher average wholesale per pair selling prices.
Footwear unit volumes at our European and Canadian subsidiaries, increased 4% in
the thirteen weeks ended April 4, 2003 versus the thirteen weeks ended April 5,
2002, with the majority of the increased footwear unit volume occurring in
Europe. International distributor footwear unit volumes decreased 1%, due to a
26% decrease in Originals footwear unit volumes sold in Japan, partially offset
by an overall 37% increase in footwear unit volumes sold throughout our
international distribution channel, excluding Japan. Distributor sales into the
Japanese footwear market accounted for 6% of international sales in the thirteen
weeks ended April 4, 2003, compared to 10% in the thirteen weeks ended April 5,
2002. The footwear average wholesale per pair selling price increased primarily
due to a change in product mix to increased technical footwear sold at our
international subsidiaries, offset partially by lower international distributor
average wholesale per pair selling prices, due to a change in the product mix
for technical footwear to lower priced product.
Other Products Segment
Worldwide sales of Other Products increased $703, or 12%, to $6,583 in the
thirteen weeks ended April 4, 2003 from $5,880 in the thirteen weeks ended April
5, 2002, due primarily to a 29% increase in sales of our Hind brand apparel,
partially offset by decreased sales of Hyde Authentics and a 14% decrease in
sales at our factory outlet stores.
Domestic net sales of Other Products increased $638, or 12%, to $5,920 in the
thirteen weeks ended April 4, 2003 from $5,282 in the thirteen weeks ended April
5, 2002. Hind apparel sales increased 32% due primarily to a 56% increase in
Hind apparel unit volume, partially offset by a 15% decrease in the average
wholesale per item selling price of our Hind apparel. Both the increase in Hind
apparel unit volume and the decrease in average wholesale per item selling price
of our Hind apparel were due to higher closeout unit volumes sold in the
thirteen weeks ended April 4, 2003. Sales at our factory outlet division stores
decreased due to the prolonged winter weather in the Northeast and lower foot
traffic at our stores in Florida.
International net sales of Other Products increased $65, or 11%, to $663 in the
thirteen weeks ended April 4, 2003 from $598 in the thirteen weeks ended April
5, 2002, due primarily to increased Hind apparel sales in the United Kingdom.
Costs and Expenses
Our gross margin in the thirteen weeks ended April 4, 2003 increased 4.7% to
38.9% from 34.2% in the thirteen weeks ended April 5, 2002, due primarily to
increased Saucony domestic sales of first quality footwear products at full
margin. Other factors contributing to the margin increase were lower sales of
closeout footwear, lower product cost, lower provisions for obsolete inventory
and favorable currency exchange due to the impact of a weaker U.S. dollar
against European and Canadian currencies.
The ratio of selling, general and administrative expenses to net sales increased
0.1% to 28.0% in the thirteen weeks ended April 4, 2003 from 27.9% in the
thirteen weeks ended April 5, 2002. The increase in the ratio resulted from
increased selling, general and administrative spending in the thirteen weeks
ended April 4, 2003. In absolute dollars, selling, general and administrative
expenses increased $1,227, or 13%, to $10,920 in the thirteen weeks ended April
4, 2003 from $9,693 in the thirteen weeks ended April 5, 2002. Increased
spending in the thirteen weeks ended April 4, 2003 was due primarily to
increased incentive compensation, increased insurance costs, increased
administrative payroll and employee fringe benefit costs and higher professional
fees, partially offset by lower depreciation expense and reduced athlete
sponsorship.
Interest Income
Interest income decreased to $74 in the thirteen weeks ended April 4, 2003 from
$88 in the thirteen weeks ended April 5, 2002 due to lower interest rates in the
thirteen weeks ended April 4, 2003.
Interest Expense
Interest expense remained consistent at $2 in the thirteen weeks ended April 4,
2003 and the thirteen weeks ended April 5, 2002.
Income Before Tax and Minority Interest
Thirteen Weeks Ended
-----------------------------------
April 4, April 5,
2003 2002
---- ----
Segment
Saucony..........................$ 3,982 $ 2,235
Other Products................... 435 97
--------- --------
Total............................$ 4,417 $ 2,332
========= ========
Income before tax and minority interest increased $2,085 in the thirteen weeks
ended April 4, 2003 to $4,417 compared to $2,332 in the thirteen weeks ended
April 5, 2002, due primarily to increased pre-tax income realized by both our
domestic and international Saucony segments, due to higher sales and improved
gross margins. The improvement in our Other Products segment income before tax
and minority interest was due primarily to improved profitability at our Hind
apparel brand due to increased sales and lower operating expenses.
Income Taxes
The provision for income taxes increased to $1,750 in the thirteen weeks ended
April 4, 2003 from $967 in the thirteen weeks ended April 5, 2002, due primarily
to higher pre-tax income realized by the our domestic and international Saucony
segments and higher pre-tax income realized by our Hind apparel brand. The
effective tax rate decreased 1.9% to 39.6% in the thirteen weeks ended April 4,
2003 from 41.5% in the thirteen weeks ended April 5, 2002 due to a shift in the
composition of domestic and foreign pre-tax earnings.
Minority Interest in Net Income of Consolidated Subsidiary
Minority interest expense represents a minority shareholders' allocable share of
our Canadian subsidiary's earnings after deducting for income tax. Minority
interest expense remained consistent at $64 in the thirteen weeks ended April 4,
2003 compared to the thirteen weeks ended April 5, 2002.
Net Income
Net income for the thirteen weeks ended April 4, 2003 increased to $2,603, or
$0.42 per diluted share, compared to $1,301 or $0.21 per diluted share, in the
thirteen weeks ended April 5, 2002. Weighted average common shares and
equivalent shares used to calculate diluted earnings per share were 6,241 and
6,120, respectively, in the thirteen weeks ended April 4, 2003 and April 5,
2002.
Liquidity and Capital Resources
As of April 4, 2003, our cash and cash equivalents totaled $27,077, a decrease
of $7,406 from January 3, 2003. The decrease is due primarily to a use of cash
from operations of $7,401, cash outlays for capital assets of $573 and the
repurchase of shares of our common stock of $103. This decrease in cash was
offset partially by $633 in borrowings against our Canadian credit facility and
the receipt of $120 from the issuance of shares of our common stock.
Our accounts receivable increased $10,539, net of the provision for bad debts
and discounts, due to increased sales of our Saucony footwear products in the
thirteen weeks ended April 4, 2003, compared to our sales for the thirteen weeks
ended January 3, 2003. Our days sales outstanding for accounts receivable
improved to 61 days in the thirteen weeks ended April 4, 2003 from 66 days in
the thirteen weeks ended April 5, 2002 due to a shift in the domestic sales mix
to products and programs which offer less dating. Days sales outstanding is
defined as the number of average daily net sales in our accounts receivable as
of the period end date and is calculated by dividing the end of period accounts
receivable by the average daily net sales for the period. The provision for bad
debts and discounts increased to $1,621 in the thirteen weeks ended April 4,
2003 from $1,551 in the thirteen weeks ended April 5, 2002 due to an increase in
the provision for doubtful accounts and higher discounts in the thirteen weeks
ended April 4, 2003. Inventories decreased $5,296 in the thirteen weeks ended
April 4, 2003 from January 3, 2003, due primarily to improvements in our supply
chain and lower seasonal inventory requirements. Our inventory turns increased
to 3.9 turns in the thirteen weeks ended April 4, 2003 from 3.4 turns in the
thirteen weeks ended April 5, 2002. The number of day's sales in inventory
decreased to 84 days in the thirteen weeks ended April 4, 2003 from 99 days in
the thirteen weeks ended April 5, 2002. The inventory turns ratio represents our
cost of sales for a period divided by our average inventory during the period.
Days sales in inventory is defined as the number of average daily cost of sales
in our inventory as of the period end date and is calculated by dividing the end
of period inventories by the average daily cost of sales for the period.
Principal factors, other than net income, accounts receivable, provision for bad
debts and discounts and inventory, affecting our operating cash flows in the
thirteen weeks ended April 4, 2003 included a $3,868 decrease in accounts
payable, due to payments made for inventory received in the fourth quarter of
fiscal 2002, and a $1,475 decrease in accrued expenses, due primarily to the
payment of fiscal 2002 incentive compensation and the payment of freight and
import duty accrued for inventory purchased in the fourth quarter of fiscal
2002, partially offset by increased income tax accruals and a $97 decrease in
prepaid expenses.
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 thirteen weeks ended April 4, 2003, we
used $7,401 in cash to fund operations, due primarily to an increase in accounts
receivable. In the thirteen weeks ended April 5, 2002, we used $7,329 in cash to
fund operations also due to an increase in accounts receivable. At April 4,
2003, we had $635 in borrowings outstanding under our credit facilities,
compared to no borrowings outstanding at April 5, 2002.
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 149
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", "SFAS 149". SFAS amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", "SFAS 133". SFAS 149 requires that
contracts with comparable characteristics be accounted for similarly. In
particular, SFAS 149 (1) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative discussed in
paragraph 6(b) of SFAS 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to language
used in Financial Accounting Standards Interpretation No. 45, "Guarantors of
Accounting And Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", and (4) amends certain other existing
accounting pronouncements. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, except as stated in paragraph 40. This statement
is also effective for hedging relationships designated after June 30, 2003,
except as stated in paragraph 40. We have not determined the impact of adopting
SFAS 149 on our financial position, results of operations or cash flows
FIN 45
In November 2002, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 45, "Guarantors of Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", "FIN 45". FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about our
obligations under specified guarantees that have been issued. The interpretation
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The recognition of a guarantor's obligation should be applied
prospectively to guarantees issued after December 15, 2002. The adoption of FIN
45 did not have a material impact on our financial position, results of
operations or cash flows.
FIN 46
In January 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities", "FIN 46". FIN 46 explains how to identify variable interest
entities and how to determine when a business enterprise should include the
assets, liabilities, non-controlling interests and results of activities of a
variable interest entity in its consolidated financial statements. The
interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risks will not be consolidated unless a single party holds
an interest or combination of interest that effectively recombines risks that
were previously dispersed. FIN 46 applies immediately to variable interest
entities created after January 31, 2003 and to variable interest entities in
which an enterprise obtains an interest after that date. The interpretation
applies in the first fiscal year or interim period beginning after June 15, 2003
to variable interest entities in which an enterprise holds a variable interest
that is acquired before February 1, 2003. The adoption of FIN 46 did not have a
material impact on our financial positions, results of operations or cash flows.
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 April 4, 2003.
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: May 19, 2003 By: /s/ 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: May 19, 2003 /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: May 19, 2003 /s/ Michael Umana
-----------------------------------------
Name: Michael Umana
Title: Senior Vice President, Finance
Chief Financial Officer
EXHIBIT INDEX
Exhibit
No. Description
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 3, 2003 filed with the Securities and Exchange
Commission on April 3, 2003.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.