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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 October 3, 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, including zip code)
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 3, 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 3,620,834
---------
6,141,481
=========
SAUCONY, INC. AND SUBSIDIARIES
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Condensed Consolidated Balance Sheets as of October 3, 2003
and January 3, 2003 - (Audited).........................................3
Condensed Consolidated Statements of Income for the thirteen and
thirty-nine weeks ended October 3, 2003 and October 4, 2002.............4
Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended October 3, 2003 and October 4, 2002.............5
Notes to Condensed Consolidated Financial Statements --
October 3, 2003......................................................6-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................16-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........26
Item 4. Controls and Procedures..............................................26
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................27
Signature.....................................................................27
Exhibit Index.................................................................28
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
ASSETS
October 3, January 3,
2003 2003
---------- ----------
Current assets:
Cash and cash equivalents....................................................$ 43,681 $ 34,483
Accounts receivable.......................................................... 19,830 15,496
Inventories.................................................................. 17,874 27,201
Prepaid expenses and other current assets.................................... 2,808 3,490
--------- ---------
Total current assets....................................................... 84,193 80,670
--------- ---------
Property, plant and equipment, net.............................................. 5,822 5,714
--------- ---------
Other assets:
Goodwill, net................................................................ 912 912
Intangible assets, net....................................................... 155 208
Other........................................................................ 37 36
--------- ---------
Total other assets......................................................... 1,104 1,156
--------- ---------
Total assets....................................................................$ 91,119 $ 87,540
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................$ 5,156 $ 8,543
Accrued expenses and other current liabilities............................... 6,527 7,800
--------- ---------
Total current liabilities 11,683 16,343
--------- ---------
Long-term obligations:
Deferred income taxes........................................................ 2,407 1,859
--------- ---------
Minority interest in consolidated subsidiaries.................................. 296 642
--------- ---------
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 October 3, 2003, 2,711,127 and January 3, 2003, 2,711,127)....... 904 904
Class B $.333 par value per share, authorized 20,000,000 shares
(issued October 3, 2003, 4,198,810 and January 3, 2003, 4,106,343)....... 1,399 1,369
Additional paid in capital................................................... 18,518 17,769
Retained earnings............................................................ 62,442 55,945
Accumulated other comprehensive loss......................................... (11) (870)
Common stock held in treasury, at cost
(October 3, 2003, Class A, 190,480, Class B, 582,326
January 3, 2003, Class A 186,080, Class B, 574,726)...................... (6,423) (6,297)
Unearned compensation........................................................ (96) (124)
Total stockholders' equity................................................. 76,733 68,696
--------- ---------
Total liabilities and stockholders' equity......................................$ 91,119 $ 87,540
========= ==========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 3, 2003 AND OCTOBER 4, 2002
(Unaudited)
(In thousands, except per share amounts)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 3, October 4, October 3, October 4,
2003 2002 2003 2002
--------- --------- ---------- ---------
Net sales...................................................$ 31,978 $ 33,745 $ 105,518 $ 104,985
Other revenue .............................................. 94 105 257 202
--------- --------- --------- ---------
Total revenue .............................................. 32,072 33,850 105,775 105,187
========= ========= ========= =========
Costs and expenses
Cost of sales............................................ 18,983 21,683 63,899 68,617
Selling expenses......................................... 4,396 4,520 14,266 14,587
General and administrative expenses...................... 5,172 4,900 16,127 14,293
Plant closing and other credits............................. -- -- -- (59)
---------- --------- --------- --------
Total costs and expenses............................... 28,551 31,103 94,292 97,438
---------- --------- --------- --------
Operating income............................................ 3,521 2,747 11,483 7,749
Non-operating income (expense)
Interest income.......................................... 49 94 176 249
Interest expense......................................... -- (1) (5) (4)
Foreign currency (losses) gains............................. (41) (18) 17 (62)
Other.................................................... 38 (78) 55 (34)
---------- --------- -------- --------
Income before income taxes and minority interest............ 3,567 2,744 11,726 7,898
Provision for income taxes.................................. 1,359 1,099 4,577 3,282
Minority interest in income of consolidated subsidiaries.... 29 58 135 179
---------- --------- --------- --------
Net income..................................................$ 2,179 $ 1,587 $ 7,014 $ 4,437
========== ========= ========= ========
Per share amounts:
Weighted average common shares and equivalents outstanding:
Basic:
Class A common stock................................. 2,521 2,567 2,522 2,567
Class B common stock................................. 3,603 3,554 3,570 3,535
---------- --------- --------- --------
6,124 6,121 6,092 6,102
========== ========= ========= ========
Diluted:
Class A common stock................................. 2,521 2,567 2,522 2,567
Class B common stock................................. 3,899 3,593 3,808 3,606
---------- --------- --------- --------
6,420 6,160 6,330 6,173
========== ========= ========= ========
Earnings per share:
Basic:
Class A common stock.................................$ 0.34 $ 0.25 $ 1.09 $ 0.69
========= ========= ========= ========
Class B common stock.................................$ 0.37 $ 0.27 $ 1.20 $ 0.76
========= ========= ========= ========
Diluted:
Class A common stock.................................$ 0.32 $ 0.24 $ 1.05 $ 0.68
========= ========= ========= ========
Class B common stock.................................$ 0.35 $ 0.27 $ 1.15 $ 0.75
========= ========= ========= ========
Cash dividends per share of common stock:
Class A common stock.................................$ 0.040 $ -- $ 0.080 $ --
Class B common stock.................................$ 0.044 $ -- $ 0.088 $ --
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 3, 2003 AND OCTOBER 4, 2002
(Unaudited)
(In thousands)
October 3, October 4,
2003 2002
--------- ---------
Cash flows from operating activities:
Net income.................................................................$ 7,014 $ 4,437
-------- ---------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization.............................................. 1,000 1,146
Provision for bad debts and discounts...................................... 4,106 4,044
Deferred income tax expense................................................ 830 99
Litigation settlement benefit.............................................. (566) --
Gain on sale of equipment.................................................. -- (75)
Marketable securities - unrealized losses.................................. -- 115
Compensation from stock warrants........................................... 164 33
Minority interest in income of consolidated subsidiaries................... 135 179
Other...................................................................... 112 (64)
Changes in operating assets and liabilities, net of effect
of acquisitions, dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Accounts receivable.................................................... (7,425) (9,850)
Inventories............................................................ 10,162 6,162
Prepaid expenses and other current assets.............................. 434 655
Increase (decrease) in liabilities:
Accounts payable....................................................... (3,436) (1,706)
Accrued expenses................................................................ (1,678) 2,695
-------- --------
Total adjustments............................................................ 3,838 3,433
-------- --------
Net cash provided by operating activities....................................... 10,852 7,870
-------- --------
Cash flows from investing activities:
Share purchase - Saucony Canada.............................................. (547) --
Purchases of property, plant and equipment................................... (1,042) (300)
Proceeds from the sale of equipment.......................................... -- 83
Change in deposits and other................................................. (4) 23
Marketable securities - realized gains....................................... -- (5)
-------- --------
Net cash used by investing activities........................................... (1,593) (199)
-------- --------
Cash flows from financing activities:
Dividends paid............................................................... (259) --
Repayment of long-term debt and capital lease obligations.................... -- (79)
Common stock repurchased..................................................... (126) --
Receipt of payment on notes receivable....................................... -- 312
Issuances of common stock, stock option exercises............................ 546 310
-------- --------
Net cash provided by financing activities....................................... 161 543
Effect of exchange rate changes on cash and cash equivalents.................... (222) 41
-------- --------
Net increase in cash and cash equivalents....................................... 9,198 8,255
Cash and equivalents at beginning of period..................................... 34,483 22,227
-------- --------
Cash and equivalents at end of period...........................................$ 43,681 $ 30,482
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds...............................................$ 4,318 $ 1,106
======== ========
Interest...................................................................$ 4 $ 1
======== ========
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
(the "Company")
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2003
(Unaudited)
(In thousands, except share and 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, for the year ended January 3, 2003, as filed with the Securities and
Exchange Commission. Operating results for the thirty-nine weeks ended October
3, 2003, are not necessarily indicative of the results for the entire year.
NOTE 2 - INVENTORIES
Inventories at October 3, 2003 and January 3, 2003 consisted of the following:
October 3, January 3,
2003 2003
--------- ---------
Finished goods......................$ 17,863 $ 26,528
Work in progress.................... 1 193
Raw materials....................... 10 480
----------- -----------
Total...............................$ 17,874 $ 27,201
=========== ===========
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per Common Share
----------------------------------------------------
Thirteen Weeks Ended Thirteen Weeks Ended
October 3, 2003 October 4, 2002
--------------------- --------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income:
Net income available for common
shares and assumed conversions..................$ 2,179 $ 2,179 $ 1,587 $ 1,587
========= ======== ========= =========
Weighted-average common shares and
equivalents outstanding:
Weighted-average shares outstanding............... 6,124 6,124 6,121 6,121
Effect of dilutive securities:
Stock options and warrants........................ -- 296 -- 39
--------- -------- --------- ---------
6,124 6,420 6,121 6,160
========= ========= ========= =========
Earnings per share:
Net income........................................$ 0.36 $ 0.34 $ 0.26 $ 0.26
========= ======== ======== =========
Earnings per Common Share
-------------------------------------------------------
Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended
October 3, 2003 October 4, 2002
----------------------- ------------------------
Basic Diluted Basic Diluted
------- ------- ------- -------
Net income:
Net income available for common
shares and assumed conversions..................$ 7,014 $ 7,014 $ 4,437 $ 4,437
========= ======== ========= =========
Weighted-average common shares and
equivalents outstanding:
Weighted-average shares outstanding............... 6,092 6,092 6,102 6,102
Effect of dilutive securities:
Stock options and warrants........................ -- 238 -- 71
--------- -------- --------- ---------
6,092 6,330 6,102 6,173
========= ======== ========= =========
Earnings per share:
Net income........................................$ 1.15 $ 1.11 $ 0.73 $ 0.72
========= ======== ======== =========
Options to purchase 93,000 shares of common stock outstanding at October 3, 2003
and options to purchase 504,000 shares of common stock and warrants to purchase
50,000 shares of common stock outstanding at October 4, 2002, respectively, were
not included in the computations of diluted earnings per share, for the
respective thirteen week periods, since the options and warrants were
anti-dilutive. Options to purchase 252,000 shares of common stock outstanding at
October 3, 2003 and options to purchase 480,000 shares of common stock and
warrants to purchase 33,000 shares of common stock, outstanding at October 4,
2002, were not included in the computations of diluted earnings per share, for
the respective thirty-nine week periods, since the options and warrants were
anti-dilutive.
The Company presents basic and diluted earnings per share using the two-class
method. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common stock according to dividends
declared and participation rights in undistributed earnings.
Basic earnings per share for the Company's Class A and Class B common stock is
calculated by dividing net income by the weighted average number of shares of
Class A and Class B common stock outstanding. Diluted earnings per share for the
Company's Class A and Class B common stock is calculated similarly, except that
the calculation includes the dilutive effect of the assumed exercise of options
issuable under the Company's stock incentive plans and the assumed exercise of
stock warrants.
Net income available to the Company's common stockholders is allocated among our
two classes of common stock, Class A common stock and Class B common stock. The
allocation among each class was based upon the two-class method. Under the
two-class method, earnings per share for each class of common stock is
determined according to dividends declared. Net income allocated to Class A
common stockholders and Class B common stockholders and the calculation of basic
and diluted earnings per share are as follows:
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
-------------------------- -------------------------
October 3, October 4, October 3, October 4,
2003 2002 2003 2002
---- ---- ---- ----
Net income available to Class A
and Class B common stockholders..................$ 2,179 $ 1,587 $ 7,014 $ 4,437
--------- --------- --------- ---------
Allocation of net income:
Basic:
Class A common stock.............................$ 847 $ 629 $ 2,743 $ 1,764
Class B common stock............................. 1,332 958 4,271 2,673
--------- --------- --------- ---------
$ 2,179 $ 1,587 $ 7,014 $ 4,437
========= ========= ========= =========
Diluted:
Class A common stock.............................$ 807 $ 625 $ 2,636 $ 1,743
Class B common stock............................. 1,372 962 4,378 2,694
--------- --------- --------- ---------
$ 2,179 $ 1,587 $ 7,014 $ 4,437
========= ========= ========= =========
Weighted average common shares
and equivalents outstanding:
Basic:
Class A common stock............................. 2,521 2,567 2,522 2,567
Class B common stock............................. 3,603 3,554 3,570 3,535
----- ----- ----- -----
6,124 6,121 6,092 6,102
===== ===== ===== =====
Diluted:
Class A common stock............................. 2,521 2,567 2,522 2,567
Class B common stock............................. 3,899 3,593 3,808 3,606
----- ----- ----- -----
6,420 6,160 6,330 6,173
===== ===== ===== =====
Earnings per share:
Basic:
Class A common stock.............................$ 0.34 $ 0.25 $ 1.09 $ 0.69
========= ========= ======== =========
Class B common stock.............................$ 0.37 $ 0.27 $ 1.20 $ 0.76
========= ========= ======== =========
Diluted:
Class A common stock.............................$ 0.32 $ 0.24 $ 1.05 $ 0.68
========= ========= ======== =========
Class B common stock.............................$ 0.35 $ 0.27 $ 1.15 $ 0.75
========= ========= ======== =========
NOTE 4 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 3, October 4, October 3, October 4,
2003 2002 2003 2002
---- ---- ---- ----
Net income................................................$ 2,179 $ 1,587 $ 7,014 $ 4,437
Other comprehensive income:
Foreign currency translation adjustments,
net of tax........................................... 27 44 859 462
------- -------- -------- -------
Comprehensive income......................................$ 2,206 $ 1,631 $ 7,873 $ 4,899
======= ======== ======== =======
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
3, 2003 and October 4, 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 Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 3, October 4, October 3, October 4,
2003 2002 2003 2002
--------- --------- ----------- ----------
Revenues:
Saucony..........................................$ 24,964 $ 27,419 $ 87,389 $ 88,469
Other Products................................... 7,108 6,431 18,386 16,718
---------- ---------- ---------- ----------
Total revenue.................................$ 32,072 $ 33,850 $ 105,775 $ 105,187
========== ========== ========== ==========
Income (loss) before income taxes and minority interest:
Saucony..........................................$ 2,296 $ 2,724 $ 10,071 $ 8,571
Other Products................................... 1,271 20 1,655 (673)
---------- ---------- ---------- ----------
Total ..............................................$ 3,567 $ 2,744 $ 11,726 $ 7,898
========== ========== ========== ==========
NOTE 6 - LITIGATION SETTLEMENT
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. On May 16, 2003, the Company
paid $530 to settle all preferential claims. As a consequence of the court's
approval of the settlement, the Company recorded a pre-tax benefit of $566 in
the thirty-nine weeks ending on October 3, 2003 to reduce the amount accrued as
of January 3, 2003. The benefit was recorded in general and administrative
expenses.
NOTE 7 - GOODWILL AND INTANGIBLE ASSETS
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") eliminates the requirement to amortize goodwill
and indefinite-lived assets, rather, requiring that the Company assesses the
realizability of those assets at least annually or whenever events or changes in
circumstances indicate that the assets may be impaired. Intangible assets with
finite lives continue to be amortized over their useful lives. Goodwill and
intangible assets as of October 3, 2003 and January 3, 2003 are as follows:
October 3, 2003 January 3, 2003
------------------------------------- ------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Intangible assets,
not subject to amortization:
Goodwill..................$ 1,463 $ (551) $ 912 $ 1,463 $ (551) $ 912
--------- --------- -------- --------- --------- --------
Intangible assets,
subject to amortization:
Software licenses......... 1,060 (977) 83 1,060 (928) 132
Capitalized debt
financing costs......... 87 (68) 19 87 (14) 73
Other..................... 444 (391) 53 381 (378) 3
--------- ---------- -------- --------- ---------- --------
1,591 (1,436) 155 1,528 (1,320) 208
--------- ---------- -------- --------- ---------- --------
Total.....................$ 3,054 $ (1,987) $ 1,067 $ 2,991 $ (1,871) $ 1,120
========= ========== ======== ========= ========== ========
NOTE 8 - 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 and thirty-nine weeks ended
October 3, 2003 and the thirteen weeks and thirty-nine weeks ended October 4,
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 $21 and $11 in the thirteen weeks ended October 3, 2003 and October
4, 2002, respectively and, $97 and $16 in the thirty-nine weeks ended October 3,
2003 and October 4, 2002, respectively, that have been credited to additional
paid-in capital.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for stock
option awards for the thirteen weeks and thirty-nine weeks ended October 3, 2003
and October 4, 2002, consistent with the provisions of SFAS 123, the Company's
net income and net income per share would have been reduced to the pro forma
amounts indicated below:
Thirteen Weeks Ended Thirteen Weeks Ended
October 3, 2003 October 4, 2002
--------------------- --------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income:
As reported........................................$ 2,179 $ 2,179 $ 1,587 $ 1,587
Add:Stock-based compensation expense
included in reported net income, net
of related tax benefit............................. 5 5 7 7
Less:Total stock-based compensation
expense determined under the fair value
based method for all awards, net of
related tax benefit................................ (191) (191) (216) (216)
-------- --------- --------- ---------
Pro forma net income ................................$ 1,993 $ 1,993 $ 1,378 $ 1,378
======== ========= ========= =========
Thirteen Weeks Ended Thirteen Weeks Ended
October 3, 2003 October 4, 2002
--------------------- ---------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
As reported........................................$ 0.36 $ 0.34 $ 0.26 $ 0.26
Add:Stock-based compensation expense
included in reported net income, net
of related tax benefit............................. 0.00 0.00 0.00 0.00
Less: Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax benefit......................... (0.03) (0.03) (0.03) (0.04)
-------- -------- --------- ---------
Pro forma net income per share.......................$ 0.33 $ 0.31 $ 0.23 $ 0.22
======== ======== ========= =========
Thirty-Nine Weeks Thirty-Nine Weeks
Ended Ended
October 3, 2003 October 4, 2002
-------------------- -------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income:
As reported.........................................$ 7,014 $ 7,014 $ 4,437 $ 4,437
Add:Stock-based compensation expense
included in reported net income,
net of related tax benefit......................... 16 16 20 20
Less:Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax benefit........................ (586) (586) (537) (537)
-------- --------- --------- ---------
Pro forma net income.................................$ 6,444 $ 6,444 $ 3,920 $ 3,920
======== ========= ========= =========
Thirty-Nine Weeks Thirty-Nine Weeks
Ended Ended
October 3, 2003 October 4, 2002
---------------------- ---------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
As reported........................................$ 1.15 $ 1.11 $ 0.73 $ 0.72
Add:Stock-based compensation expense
included in reported net income,
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 awards,
net of related tax benefit......................... (0.09) (0.09) (0.09) (0.08)
-------- -------- --------- ---------
Pro forma net income per share.......................$ 1.06 $ 1.02 $ 0.64 $ 0.64
======== ======== ========= =========
The fair value of options at date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Thirty-Nine Weeks Thirty-Nine Weeks
Ended Ended
October 3, 2003 October 4, 2002
---------------- ---------------
Expected life (years)............... 5.0 3.2
Risk-free interest rate............. 2.9% 3.8%
Expected volatility................. 62.8% 67.3%
Expected dividend yield............. 1.3% 0.0%
Pro forma net income available to the Company's common stockholders is allocated
among our two classes of common stock, Class A common stock and Class B common
stock. The allocation among each class was based upon the two-class method.
Under the two-class method, pro forma earnings per share for each class of
common stock is determined according to dividends declared. Pro forma net income
allocated to Class A common stockholders and Class B common stockholders and the
calculation of pro forma basic and diluted earnings per share are as follows:
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
-------------------------- -------------------------
October 3, October 4, October 3, October 4,
2003 2002 2003 2002
---- ---- ---- ----
Net income available to Class A
and Class B common stockholders
Net income..........................................$ 2,179 $ 1,587 $ 7,014 $ 4,437
Add: Stock-based compensation expense
included in reported net income, net
of related tax benefit....................... 5 7 16 20
Less: Total stock-based compensation expense
determined under the fair value based
method for all awards, net of related tax
benefit...................................... (191) (216) (586) (537)
--------- --------- --------- ---------
Pro forma net income................................$ 1,993 $ 1,378 $ 6,444 $ 3,920
========= ========= ========= =========
Pro forma net income allocated:
Basic:
Class A common stock.............................$ 775 $ 546 $ 2,520 $ 1,559
Class B common stock............................. 1,218 832 3,924 2,361
--------- --------- --------- ---------
$ 1,993 $ 1,378 $ 6,444 $ 3,920
========= ========= ========= =========
Diluted:
Class A common stock.............................$ 738 $ 543 $ 2,422 $ 1,540
Class B common stock............................. 1,255 835 4,022 2,380
--------- --------- --------- ---------
$ 1,993 $ 1,378 $ 6,444 $ 3,920
========= ========= ========= =========
Pro forma earnings per share:
Basic:
Class A common stock.............................$ 0.31 $ 0.21 $ 1.00 $ 0.61
========= ========= ======== =========
Class B common stock.............................$ 0.34 $ 0.23 $ 1.10 $ 0.67
========= ========= ======== =========
Diluted:
Class A common stock.............................$ 0.29 $ 0.21 $ 0.96 $ 0.60
========= ========= ======== =========
Class B common stock.............................$ 0.32 $ 0.23 $ 1.06 $ 0.66
========= ========= ======== =========
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 150
In May 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 150. "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 requires that an issuer classify a financial
instrument that is within its scope as a liability, or an asset in some
circumstances, because that financial instrument embodies an obligation of the
issuer. SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003, and with one exception, is effective at the beginning of the
first interim period beginning after June 15, 2003. The effect of adopting SFAS
150 will be recognized as a cumulative effect of a change in an accounting
principle as of the beginning of the interim period of adoption. Restatement of
prior periods is not permitted. The adoption of SFAS 150 did not have a material
impact on the Company's financial position, results of operations or cash flows.
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 adoption of SFAS 149 did not have a
material impact on the Company's 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 for fiscal years ending after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that is acquired
before February 1, 2003. The Company does not expect the adoption of FIN 46 to
have a material impact on the Company's financial position, results of
operations or cash flows.
NOTE 10 - SHARE PURCHASE AGREEMENT
On July 24, 2003, the Company entered into a Share Purchase Agreement with the
minority shareholder of Saucony Canada, Inc. whereby the Company increased its
ownership percentage of Saucony Canada, Inc. to 95% from 85% effective as of
July 4, 2003. The purchase price of $547 equaled the net book value of Saucony
Canada, Inc., as of July 4, 2003. The net book value approximated the fair value
of the assets acquired.
NOTE 11 - DIVIDENDS
On July 16, 2003, the Company paid its first regular quarterly cash dividends,
in the amount of $0.040 per share on the Class A Common Stock and $0.044 per
share on the Class B Common Stock, to all stockholders of record at the close of
business on June 18, 2003. The dividends paid aggregated to $259. On August 21,
2003, the Company's Board of Directors declared regular quarterly cash
dividends, in the amount of $0.040 per share on the Class A Common Stock and
$0.044 per share on the Class B Common Stock. The dividends were paid on October
16, 2003 to all stockholders of record at the close of business on September 18,
2003. As of October 3, 2003, $260, representing the aggregate dividend
liability, was recorded in current liabilities, under accrued expenses. As
provided in the Company's corporate charter, regular cash dividends paid on
Class B Common Stock are in an amount equal to 110% of the amount paid on Class
A Common Stock. The Company's credit facilities contain restrictions that may
limit the Company's ability to pay cash dividends that, together with any
repurchases or redemptions of our common stock, exceed an aggregate of $3,000 in
any fiscal year.
NOTE 12 - SUBSEQUENT EVENT
On November 7, 2003, the Company completed the sale of its Bangor, Maine real
property which had previously been used in the assembly of domestic Saucony
footwear. As a result of the transaction, the Company will record a pre-tax gain
of $329, net of costs directly related with the transaction, in the quarter
ending on January 2, 2004. The gain realized from the sale will be recorded in
non-operating income.
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 we use the words "will", "believes",
"anticipates", "intends", "estimates", "expects", "projects" and similar
expressions in this report, we intend 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" filed by us with the Securities and
Exchange Commission on April 3, 2003, which 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.
Highlights
Dollar amounts throughout this Item 2 are in thousands, except per share
amounts.
Thirteen Weeks and Thirty-Nine Weeks Ended
October 3, 2003 Compared to Thirteen Weeks and
Thirty-Nine Weeks Ended October 4, 2002
--------------------------------------------------
Increase (Decrease)
-------------------
Thirteen Weeks Thirty-Nine Weeks
-------------- -----------------
Net sales.................................................$ (1,767) (5.2%) $ 533 0.5%
Gross profit............................................. 933 7.7% 5,251 14.4%
Selling, general and administrative expenses............. 148 1.6% 1,513 5.2%
$ Change
--------
Thirteen Weeks Thirty-Nine Weeks
-------------- -----------------
Operating income............................................. $774 $3,734
Income before income taxes and minority interest............. 823 3,828
Net income................................................... 592 2,577
Percent of Net Sales
--------------------
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
------------------ -------------------
Oct. 3, Oct. 4, Oct. 3, Oct. 4,
2003 2002 2003 2002
Gross profit............................................. 40.6% 35.7% 39.4% 34.6%
Selling, general and administrative expenses............. 29.9 27.9 28.8 27.5
Operating income......................................... 11.0 8.1 10.9 7.4
Income before income taxes and minority interest......... 11.2 8.1 11.1 7.5
Net income............................................... 6.8 4.7 6.6 4.2
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the thirteen and thirty-nine
weeks ended October 3, 2003 and October 4, 2002:
Thirteen Weeks Ended
-------------------------------------------------
October 3, 2003 October 4, 2002
--------------- ---------------
Saucony...................$ 24,900 77.9% $ 27,366 81.1%
Other Products............ 7,078 22.1% 6,379 18.9%
-------- ------ -------- ------
Total.....................$ 31,978 100.0% $ 33,745 100.0%
======== ===== ======== =====
Thirty-Nine Weeks Ended
-------------------------------------------------
October 3, 2003 October 4, 2002
--------------- ---------------
Saucony...................$ 87,213 82.7% $ 88,348 84.2%
Other Products............ 18,305 17.3% 16,637 15.8%
-------- ------ -------- ------
Total.....................$105,518 100.0% $104,985 100.0%
======== ===== ======== =====
Thirteen Weeks Ended October 3, 2003 Compared to Thirteen Weeks Ended October 4,
2002
Consolidated Net Sales
Net sales decreased $1,767, or 5%, to $31,978 in the thirteen weeks ended
October 3, 2003 from $33,745 in the thirteen weeks ended October 4, 2002. The
decrease in net sales in the thirteen weeks ended October 3, 2003 was offset in
part by the effects of favorable changes in foreign exchange rates that
increased net sales by $788, compared to the thirteen weeks ended October 4,
2002.
On a geographic basis, domestic net sales decreased $3,604, or 14%, to $22,567
in the thirteen weeks ended October 3, 2003 from $26,171 in the thirteen weeks
ended October 4, 2002 due primarily to lower Saucony footwear unit volume.
International net sales increased $1,837, or 24%, to $9,411 in the thirteen
weeks ended October 3, 2003 from $7,574 in the thirteen weeks ended October 4,
2002 due primarily to increased Saucony footwear unit volume and favorable
currency exchange.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
decreased $2,466, or 9%, to $24,900 in the thirteen weeks ended October 3, 2003
from $27,366 in the thirteen weeks ended October 4, 2002, due primarily to a 13%
decrease in worldwide footwear unit volume and, to a lesser extent, lower
international wholesale per pair average selling prices, partially offset by
favorable currency exchange resulting from a weaker U.S. dollar against European
and Canadian currencies, higher domestic wholesale per pair average selling
prices and increased international sales of Saucony apparel. The overall average
domestic wholesale per pair selling price for domestic footwear increased 2% in
the thirteen weeks ended October 3, 2003 compared to the thirteen weeks ended
October 4, 2002, due to a change in the product mix of our Originals footwear
sold in the thirteen weeks ended October 3, 2003 to higher priced products and
lower sales of closeout footwear.
Domestic net sales decreased $4,761, or 23%, to $15,829 in the thirteen weeks
ended October 3, 2003 from $20,590 in the thirteen weeks ended October 4, 2002,
due primarily to a 25% decrease in footwear unit volumes. The footwear unit
volume decrease in the thirteen weeks ended October 3, 2003 was due primarily to
a 13% decrease in technical footwear unit volumes, a 38% decrease in special
makeup footwear unit volumes, a 73% decrease in closeout footwear unit volumes,
reflecting improved inventory management, and a 20% decrease in Original
footwear unit volumes. Due to shifts in consumer preferences, we expect the
decline in Originals footwear unit volume may continue through the balance of
fiscal 2003. The average wholesale per pair selling prices for domestic footwear
increased due to a change in the Originals footwear product mix to higher priced
products and lower sales of closeout footwear. Sales of closeout footwear
accounted for approximately 2% of domestic Saucony net sales in the thirteen
weeks ended October 3, 2003 compared to 4% in the thirteen weeks ended October
4, 2002. The Originals footwear accounted for 14% of domestic footwear unit
volume in both the thirteen weeks ended October 3, 2003 and the thirteen weeks
ended October 4, 2002.
International net sales increased $2,295, or 34%, to $9,071 in the thirteen
weeks ended October 3, 2003 from $6,776 in the thirteen weeks ended October 4,
2002, due primarily to a 30% increase in footwear unit volumes and, to a lesser
extent, favorable currency exchange, resulting from a weaker U.S. dollar against
European and Canadian currencies and increased sales of Saucony brand apparel,
partially offset by lower average wholesale per pair selling prices.
International distributor footwear unit volumes increased 86%, due primarily to
a 180% increase in footwear unit volumes sold through our international
distribution channel, outside of Japan. Footwear unit volumes sold in Japan
decreased 37% in the thirteen weeks ended October 3, 2003 compared to the
thirteen weeks ended October 4, 2002. Distributor sales in Japan accounted for
approximately 3% and 5%, respectively, of international sales in the thirteen
weeks ended October 3, 2003 and in the thirteen weeks ended October 4, 2002.
Footwear unit volumes sold by our European and Canadian subsidiaries, increased
13% in the thirteen weeks ended October 3, 2003 versus the thirteen weeks ended
October 4, 2002, with the increased footwear unit volume occurring in the United
Kingdom and Canada, partially offset by lower unit volume at our Dutch
subsidiary. The international footwear average wholesale per pair selling price
decreased primarily due to a change in the product mix for technical footwear to
lower priced products sold at our United Kingdom and Canadian subsidiaries,
partially offset by a change in the international distributors product mix to
higher priced technical footwear products.
Other Products Segment
Worldwide sales of Other Products increased $699, or 11%, to $7,078 in the
thirteen weeks ended October 3, 2003 from $6,379 in the thirteen weeks ended
October 4, 2002, due primarily to increased domestic sales of our Hind brand
apparel and increased sales at our factory outlet stores.
Domestic net sales of Other Products increased $1,157, or 21%, to $6,738 in the
thirteen weeks ended October 3, 2003 from $5,581 in the thirteen weeks ended
October 4, 2002. Hind apparel sales increased 23% due primarily to a 68%
increase in unit volume, partially offset by a 27% 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 increased special makeup unit volumes sold in
the thirteen weeks ended October 3, 2003, which products are sold at unit prices
below our first quality apparel and a change in the first quality product mix to
lower priced products. Sales at our factory outlet division stores increased
25%, due primarily to the net addition of four factory outlet stores in 2003.
International net sales of Other Products decreased $458, or 57%, to $340 in the
thirteen weeks ended October 3, 2003 from $798 in the thirteen weeks ended
October 4, 2002, due primarily to decreased Hind apparel sales in Europe.
Costs and Expenses
Our gross margin in the thirteen weeks ended October 3, 2003 increased 4.9% to
40.6% from 35.7% in the thirteen weeks ended October 4, 2002, due primarily to
improved margins on Hind brand apparel, reflecting increased sales of first
quality product at higher margins and lower provisions for obsolete raw material
taken in 2003 and favorable currency exchange on our Canadian and European gross
margins, due to the impact of a weaker U.S. dollar against European and Canadian
currencies. The margin improvement in Hind first quality product sales is due to
a change in Hind inventory procurement from contracted third party manufacturing
of raw materials owned by us to procuring finished goods from third-party
manufacturers, which reduced our product costs. Other factors contributing to
our margin increase are lower Saucony footwear product costs, lower sales of
low-margin Saucony closeout footwear and improved margins at our factory outlet
stores.
The ratio of selling, general and administrative expenses to net sales increased
2.0% to 29.9% in the thirteen weeks ended October 3, 2003 from 27.9% in the
thirteen weeks ended October 4, 2002. The increase in the ratio resulted from
lower sales in the thirteen weeks ended October 3, 2003 and, to a lesser extent,
increased selling, general and administrative spending. In absolute dollars,
selling, general and administrative expenses increased $148, or 2%, to $9,568 in
the thirteen weeks ended October 3, 2003 from $9,420 in the thirteen weeks ended
October 4, 2002. Increased spending in the thirteen weeks ended October 3, 2003
was due primarily to increased administrative and selling payroll, increased
insurance costs, increased depreciation, increased print media advertising and
to a lesser extent, in part due to the effects of foreign exchange rate changes,
which increased spending by $136 compared to the prior period. These increases
were partially offset by decreased account specific advertising, reduced
sponsorship and promotional spending, reduced incentive compensation, lower
employee healthcare costs and reduced variable selling expenses.
Interest Income
Interest income decreased to $49 in the thirteen weeks ended October 3, 2003
from $94 in the thirteen weeks ended October 4, 2002 due to lower interest rates
in the thirteen weeks ended October 3, 2003.
Income Before Tax and Minority Interest
Thirteen Weeks Ended
October 3, October 4,
2003 2002
---- ----
Segment
Saucony......................$ 2,296 $ 2,724
Other Products............... 1,271 20
--------- --------
Total........................$ 3,567 $ 2,744
========= ========
Income before tax and minority interest increased $823 in the thirteen weeks
ended October 3, 2003 to $3,567 compared to $2,744 in the thirteen weeks ended
October 4, 2002, due primarily to increased pre-tax income realized by our Other
Products segment. The improvement in our Other Products segment income before
tax and minority interest was due primarily to improved profitability of our
Hind apparel brand due to improved margins and lower operating expenses and
improved profitability at our factory outlet stores due to increased sales and
improved gross margins. Income before tax and minority interest for our Saucony
segment decreased due to lower domestic sales.
Income Taxes
The provision for income taxes increased to $1,359 in the thirteen weeks ended
October 3, 2003 from $1,099 in the thirteen weeks ended October 4, 2002, due
primarily to higher pre-tax income realized by our Hind apparel brand and
factory outlet stores. The effective tax rate decreased 2.0% to 38.1% in the
thirteen weeks ended October 3, 2003 from 40.1% in the thirteen weeks ended
October 4, 2002 due to a shift in the pre-tax income mix to jurisdictions with
lower income tax rates and the rate benefit derived from the utilization of net
operating loss carryforwards.
Minority Interest in Net Income of Consolidated Subsidiary
Minority interest expense represents a minority shareholder's allocable share of
our Canadian subsidiary's earnings after deducting for income tax. On July 24,
2003, the Company entered into a Share Purchase Agreement with the minority
shareholder of Saucony Canada, Inc. whereby the Company increased its ownership
percentage of Saucony Canada, Inc. to 95% from 85% effective July 4, 2003.
Minority interest expense decreased to $29 in the thirteen weeks ended October
3, 2003 compared to $58 in the thirteen weeks ended October 4, 2002 due to
increasing our ownership in Saucony Canada, Inc.
Net Income
Net income for the thirteen weeks ended October 3, 2003 increased to $2,179, or
$0.34 per diluted share, compared to $1,587, or $0.26 per diluted share, in the
thirteen weeks ended October 4, 2002. Diluted earnings per share, allocable to
our class A common stock and our class B common stock were $0.32 and $0.35,
respectively, in the thirteen weeks ended October 3, 2003 and $0.24 and $0.27,
respectively, in the thirteen weeks ended October 3, 2003. Weighted average
common shares and equivalent shares used to calculate diluted earnings per share
were 6,420 and 6,160, respectively, in the thirteen weeks ended October 3, 2003
and October 4, 2002.
Thirty-Nine Weeks Ended October 3, 2003 Compared to Thirty-Nine Weeks Ended
October 4, 2002
Consolidated Net Sales
Net sales increased $533 to $105,518 in the thirty-nine weeks ended October 3,
2003 from $104,985 in the thirty-nine weeks ended October 4, 2002. Net sales in
the thirty-nine weeks ended October 3, 2003 reflect the effects of favorable
changes in foreign exchange rates that increased net sales by $2,375, compared
to the thirty-nine weeks ended October 4, 2002.
On a geographic basis, domestic net sales decreased $2,249, or 3%, to $79,282 in
the thirty-nine weeks ended October 3, 2003 from $81,531 in the thirty-nine
weeks ended October 4, 2002 due to lower Saucony footwear unit volume.
International net sales increased $2,782, or 12%, to $26,236 in the thirty-nine
weeks ended October 3, 2003 from $23,454 in the thirty-nine weeks ended October
4, 2002 due to favorable currency exchange and increased Saucony footwear unit
volume.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
decreased $1,135, or 1%, to $87,213 in the thirty-nine weeks ended October 3,
2003 from $88,348 in the thirty-nine weeks ended October 4, 2002, due primarily
to a 2% decrease in footwear unit volume and lower domestic wholesale per pair
average selling prices, partially offset by favorable currency exchange
resulting from a weaker U.S. dollar against European and Canadian currencies.
The average domestic wholesale per pair selling price for domestic footwear
decreased 3% in the thirty-nine weeks ended October 3, 2003 compared to the
thirty-nine weeks ended October 4, 2002, due to a change in the product mix of
our technical and special makeup footwear sold in the thirty-nine weeks ended
October 3, 2003 to lower priced product and an increase in special makeup
footwear unit volumes, which are sold at prices below our technical footwear.
Domestic net sales decreased $4,382, or 7%, to $62,169 in the thirty-nine weeks
ended October 3, 2003 from $66,551 in the thirty-nine weeks ended October 4,
2002, due primarily to a 4% decrease in footwear unit volumes and, to a lesser
extent, lower wholesale per pair average selling prices. The footwear unit
volume decrease in the thirty-nine weeks ended October 3, 2003 was due primarily
to a 64% decrease in closeout footwear unit volumes, partially offset by a 6%
increase in special makeup footwear unit volumes, a 2% increase in technical
footwear unit volumes and a 2% increase in Originals footwear unit volumes. The
decrease in closeout footwear unit volumes was due primarily to improved
inventory management. The average wholesale per pair selling prices for domestic
footwear decreased due to a change in the product mix to increased special
makeup footwear unit volumes and a change in the technical footwear product mix
to lower priced product. Sales of closeout footwear accounted for approximately
2% of domestic Saucony net sales in the thirty-nine weeks ended October 3, 2003
compared to 6% in the thirty-nine weeks ended October 4, 2002. The Originals
footwear accounted for 21% of domestic footwear unit volume in the thirty-nine
weeks ended October 3, 2003 compared to 19% in the thirty-nine weeks ended
October 4, 2002.
International net sales increased $3,247, or 15%, to $25,044 in the thirty-nine
weeks ended October 3, 2003 from $21,797 in the thirty-nine weeks ended October
4, 2002, due primarily to favorable currency exchange resulting from a weaker
U.S. dollar against European and Canadian currencies and, to a lesser extent,
from a 5% increase in footwear unit volumes and increased sales of Saucony
apparel, partially offset by lower average wholesale per pair selling prices.
International distributor footwear unit volumes increased 3%, due primarily to a
43% increase in footwear unit volumes sold throughout our international
distribution channel, outside of Japan, offset by a 38% decrease in Originals
footwear unit volumes sold in Japan. Distributor sales into the Japanese
footwear market accounted for 5% of international sales in the thirty-nine weeks
ended October 3, 2003, compared to 9% in the thirty-nine weeks ended October 4,
2002. Footwear unit volumes at our European and Canadian subsidiaries, increased
2% in the thirty-nine weeks ended October 3, 2003 versus the thirty-nine weeks
ended October 4, 2002, with the majority of the increased footwear unit volume
occurring in Europe. The international footwear average wholesale per pair
selling price decreased due to a change in product mix to lower priced technical
footwear and increased unit volumes of special makeup footwear sold at our
European subsidiaries and by a change in the international distributors product
mix for technical footwear to lower priced product.
Other Products Segment
Worldwide sales of Other Products increased $1,668, or 10%, to $18,305 in the
thirty-nine weeks ended October 3, 2003 from $16,637 in the thirty-nine weeks
ended October 4, 2002, due primarily to an 18% increase in domestic sales of our
Hind brand apparel and, to a lesser extent, increased sales at our factory
outlet stores and increased Spot-bilt brand footwear sales.
Domestic net sales of Other Products increased $2,133, or 14%, to $17,113 in the
thirty-nine weeks ended October 3, 2003 from $14,980 in the thirty-nine weeks
ended October 4, 2002. Hind apparel sales increased 18% due primarily to a 49%
increase in Hind apparel unit volume, partially offset by a 21% decrease in the
average wholesale per item selling price of our Hind apparel. The Hind apparel
unit volume increase is due primarily to increased special makeup unit volumes
sold in the thirty-nine weeks ended October 3, 2003, which products are sold at
unit prices below our first quality apparel, and increased unit volume in our
running and fitness product categories. The decrease in our average wholesale
per item selling price of our Hind apparel was due to increased special makeup
unit volumes sold in the thirty-nine weeks ended October 3, 2003 and a change in
the first quality product mix to lower priced product. Sales at our factory
outlet division increased 15% due primarily to the addition of four factory
outlet stores in the thirty-nine weeks ended October 3, 2003. Spot-bilt brand
sales increased 25% in the thirty-nine weeks ended October 3, 2003, due
primarily to increased footwear unit volumes and, to a lesser extent, higher
wholesale per pair selling prices.
International net sales of Other Products decreased $465, or 28%, to $1,192 in
the thirty-nine weeks ended October 3, 2003 from $1,657 in the thirty-nine weeks
ended October 4, 2002, due primarily to decreased Hind apparel sales at our
Dutch and Canadian subsidiaries.
Costs and Expenses
Our gross margin in the thirty-nine weeks ended October 3, 2003 increased 4.8%
to 39.4% from 34.6% in the thirty-nine weeks ended October 4, 2002, due
primarily to lower Saucony footwear product costs, lower sales of low-margin
closeout footwear, improved margins on our Hind brand apparel, reflecting
increased sales of first quality product at higher margins and lower inventory
reserve provisions taken in 2003, favorable currency exchange due to the impact
of a weaker U.S. dollar against European and Canadian currencies and improved
margins at our factory outlet stores. The margin improvement in Hind first
quality product sales is due to a change in Hind inventory procurement from
contracted third party manufacturing of raw materials owned by us to procuring
finished goods from third-party manufacturers, which reduced our product costs.
The ratio of selling, general and administrative expenses to net sales increased
1.3% to 28.8% in the thirty-nine weeks ended October 3, 2003 from 27.5% in the
thirty-nine weeks ended October 4, 2002. The increase in the ratio resulted from
increased selling, general and administrative spending in the thirty-nine weeks
ended October 3, 2003. In absolute dollars, selling, general and administrative
expenses increased $1,513, or 5%, to $30,393 in the thirty-nine weeks ended
October 3, 2003 from $28,880 in the thirty-nine weeks ended October 4, 2002. The
increased spending in the thirty-nine weeks ended October 3, 2003 was due
primarily to increased administrative and selling payroll, increased incentive
compensation, increased employee healthcare costs, increased insurance costs,
increased print media advertising and higher professional fees and, to a lesser
extent, due to the effects of foreign exchange rate changes, which increased
spending by $442, compared with the prior period. These increases were partially
offset by lower provisions for bad debt expense due to a litigation settlement
which reduced bad debt expense by $566, lower account specific advertising and
promotional spending, lower depreciation expense and reduced variable selling
expenses.
Interest Income
Interest income decreased to $176 in the thirty-nine weeks ended October 3, 2003
from $249 in the thirty-nine weeks ended October 4, 2002 due to lower interest
rates in the thirty-nine weeks ended October 3, 2003.
Interest Expense
Interest expense increased to $5 in the thirty-nine weeks ended October 3, 2003
from $4 in the thirty-nine weeks ended October 4, 2002 due to borrowings by our
Canadian subsidiary under its bank credit facility.
Income Before Tax and Minority Interest
Thirty-Nine Weeks Ended
---------------------------
October 3, October 4,
2003 2002
---- ----
Segment
Saucony...........................$ 10,071 $ 8,571
Other Products.................... 1,655 (673)
--------- ---------
Total.............................$ 11,726 $ 7,898
Income before tax and minority interest increased $3,828 in the thirty-nine
weeks ended October 3, 2003 to $11,726 compared to $7,898 in the thirty-nine
weeks ended October 4, 2002, due primarily to increased pre-tax income realized
by our Other Products segment and, to a lesser extent, increased pre-tax income
realized by our Saucony segment. 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, improved gross
margins and lower operating expenses and, to a lesser extent, improved
profitability at our factory outlets stores due to increased sales and improved
gross margins. Pre-tax income at our Saucony segment increased due to lower
product costs and favorable currency exchange, both of which improved gross
margins.
Income Taxes
The provision for income taxes increased to $4,577 in the thirty-nine weeks
ended October 3, 2003 from $3,282 in the thirty-nine weeks ended October 4,
2002, due primarily to higher pre-tax income realized by our Saucony segment and
higher pre-tax income realized by our Hind apparel brand and at our factory
outlet stores. The effective tax rate decreased 2.6% to 39.1% in the thirty-nine
weeks ended October 3, 2003 from 41.6% in the thirty-nine weeks ended October 4,
2002 due to a shift in the pre-tax income mix to jurisdictions with lower income
tax rates and the rate benefit derived from the utilization of net operating
loss carryforwards.
Minority Interest in Net Income of Consolidated Subsidiary
Minority interest expense represents a minority shareholder's allocable share of
our Canadian subsidiary's earnings after deducting for income tax. On July 24,
2003, the Company entered into a Share Purchase Agreement with the minority
shareholder of Saucony Canada, Inc. whereby the Company increased its ownership
percentage of Saucony Canada, Inc. to 95% from 85% effective July 4, 2003.
Minority interest expense decreased to $135 in the thirty-nine weeks ended
October 3, 2003 compared to $179 the thirty-nine weeks ended October 4, 2002 due
to increasing our ownership in Saucony Canada, Inc.
Net Income
Net income for the thirty-nine weeks ended October 3, 2003 increased to $7,014
or $1.11 per diluted share, compared to $4,437 or $0.72 per diluted share, in
the thirty-nine weeks ended October 4, 2002. Diluted earnings per share,
allocable to our class A common stock and our class B common stock were $1.05
and $1.15, respectively, in the thirty-nine weeks ended October 3, 2003 and
$0.68 and $0.75, respectively, in the thirty-nine weeks ended October 4, 2002.
Weighted average common shares and equivalent shares used to calculate diluted
earnings per share were 6,330 and 6,173, respectively, in the thirty-nine weeks
ended October 3, 2003 and October 4, 2002.
Liquidity and Capital Resources
As of October 3, 2003, our cash and cash equivalents totaled $43,681, an
increase of $9,198 from January 3, 2003. The increase is due primarily to the
generation of $10,852 of cash from operations and the receipt of $546 from the
issuance of shares of our common stock. The cash generated from operations in
the thirty-nine weeks ended October 3, 2003 was due primarily to $7,014 of net
income and a $10,162 decrease in inventories, partially offset by a $3,885
increase in accounts receivable, a $3,436 decrease in accounts payable and a
$1,678 decrease in accrued expenses. The increase in cash from operations was
offset in part by a decrease in cash from investing activities due to the
purchase of capital assets, including computer technology upgrades, facility
improvements and the expansion of our factory outlet stores of $1,042 and the
purchase of additional common shares of Saucony Canada, Inc. of $547, and a
decrease in cash due to the payment of cash dividends of $259 and the repurchase
of shares of our common stock of $126.
Our accounts receivable at October 3, 2003 increased $3,885 from January 3,
2003, net of the provision for bad debts and discounts and the litigation
settlement, due to increased sales of our Saucony footwear products in the
thirty-nine weeks ended October 3, 2003 compared to the thirty-nine weeks ended
January 3, 2003. Our days' sales outstanding for accounts receivable improved to
51 days in the thirty-nine weeks ended October 3, 2003 from 53 days in the
thirty-nine weeks ended October 4, 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, excluding the litigation settlement, increased to $4,106 in
the thirty-nine weeks ended October 3, 2003 from $4,044 in the thirty-nine weeks
ended October 4, 2002 due to higher discounts in the thirty-nine weeks ended
October 3, 2003. Inventories decreased $10,162 in the thirty-nine weeks ended
October 3, 2003 from January 3, 2003, due primarily to improvements in our
supply chain and lower seasonal inventory requirements. Our inventory turns
increased to 3.8 turns in the thirty-nine weeks ended October 3, 2003 from 3.6
turns in the thirty-nine weeks ended October 4, 2002. The number of days' sales
in inventory decreased to 76 days in the thirty-nine weeks ended October 3, 2003
from 90 days in the thirty-nine weeks ended October 4, 2002. The inventory turns
ratio is calculated as 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 inventory 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
thirty-nine weeks ended October 3, 2003 included a $3,436 decrease in accounts
payable, due to payments made for inventory received in the fourth quarter of
fiscal 2002 and lower inventory levels, a $1,678 decrease in accrued expenses,
due primarily to the payment of fiscal 2002 incentive compensation, the payment
of freight and import duty accrued for inventory purchased in the fourth quarter
of fiscal 2002 and decreased income tax accruals due to higher income tax
payments, the payment of $530 to settle litigation with the court appointed
trustee of a former customer of ours and a $434 decrease in prepaid expenses,
due to timing.
On July 16, 2003, we paid our first regular quarterly cash dividends, in the
amount of $0.040 per share on our Class A Common Stock and $0.044 per share on
our Class B Common Stock, to all stockholders of record at the close of business
on June 18, 2003. As provided in our corporate charter, regular cash dividends
paid on our Class B Common Stock are in an amount equal to 110% of the amount
paid on our Class A Common Stock. Our credit facilities contain restrictions
that may limit our ability to pay cash dividends that, together with any
repurchases or redemptions of our common stock, exceed an aggregate of $3,000 in
any fiscal year.
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.
During the thirty-nine weeks ended October 3, 2003, we generated $10,852 in cash
from operations, due primarily to decreased inventories. In the thirty-nine
weeks ended October 4, 2002, we generated $7,870 in cash from operations, due
primarily to decreased inventories. At October 3, 2003 and October 4, 2002, we
had no borrowings outstanding under our credit facilities.
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 various 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 various transaction currency risks.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 150
In May 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 150. "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 establishes standards
for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires that an issuer classify a financial instrument that is
within its scope as a liability, or an asset in some circumstances, because that
financial instrument embodies an obligation of the issuer. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and with
one exception, is effective at the beginning of the first interim period
beginning after June 15, 2003. We will recognize the effect of adopting SFAS 150
as a cumulative effect of a change in an accounting principle as of the
beginning of the interim period of adoption. Restatement of prior periods is not
permitted. The adoption of SFAS 150 did not have a material impact on our
financial position, results of operations or cash flows.
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 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 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 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 adoption
of SFAS 149 did no have a material impact 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 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 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 for fiscal years
ending after June 15, 2003 to variable interest entities in which an enterprise
holds a variable interest that is acquired before February 1, 2003. We do not
expect the adoption of FIN 46 to 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 some
foreign currency denominated payables. We have entered into certain forward
foreign exchange contracts to minimize the transaction currency risk.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of October 3, 2003. Based on this evaluation, our chief executive officer and
chief financial officer concluded that, as of October 3, 2003, our disclosure
controls and procedures were (1) designed to ensure that material information
relating to our company, including our consolidated subsidiaries, is made known
to our chief executive officer and chief financial officer by others within
those entities, particularly during the period in which this report was being
prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended October 3, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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
On July 29, 2003, we furnished a Current Report on Form 8-K dated
the same date. The report contains a copy of our press release
announcing our earnings for the period ended July 4, 2003. We
furnished the report pursuant to Item 12 (Results of Operations
and Financial Condition).
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: November 17, 2003 By: /s/ Michael Umana
---------------------------------
Michael Umana
Executive Vice President, Finance
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
EXHIBIT INDEX
Exhibit Description
No.
31.1 Certification of President and Chief Executive Officer pursuant to Exchange
Act Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a).
32.1 Certification of President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.