-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QPEIHtCfjwkIl2Q7NnY3USizfHTA2H8jIQ0pX0rlPVyAsF7a49iR3K8WNU+rOCvz 6Z4hW5Dwual1JM0xF8OpvQ== 0000049401-04-000045.txt : 20040514 0000049401-04-000045.hdr.sgml : 20040514 20040514094606 ACCESSION NUMBER: 0000049401-04-000045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040402 FILED AS OF DATE: 20040514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAUCONY INC CENTRAL INDEX KEY: 0000049401 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 041465840 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05083 FILM NUMBER: 04804811 BUSINESS ADDRESS: STREET 1: 13 CENTENNIAL DR STREET 2: CENTENNIAL INDUSTRIAL PK CITY: PEABODY STATE: MA ZIP: 01961 BUSINESS PHONE: 5085329000 MAIL ADDRESS: STREET 1: 13 CENTENNIAL DRIVE STREET 2: CENTENNIAL INDUSTRIAL PARK CITY: PEABODY STATE: MA ZIP: 01960 FORMER COMPANY: FORMER CONFORMED NAME: HYDE ATHLETIC INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: HYDE A R & SONS CO DATE OF NAME CHANGE: 19701030 10-Q 1 q1.txt FORM 10-Q 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 2, 2004 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 4, 2004 ----- ------------------ 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 3,983,690 --------- 6,504,337 ========= SAUCONY, INC. AND SUBSIDIARIES INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements - Unaudited.....................................3 Condensed Consolidated Balance Sheets as of April 2, 2004 and January 2, 2004..................................................3 Condensed Consolidated Statements of Income for the thirteen weeks ended April 2, 2004 and April 4, 2003.................4 Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended April 2, 2004 and April 4, 2003.................5 Notes to Condensed Consolidated Financial Statements -- April 2, 2004.....................................................6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................11-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk..........18 Item 4. Controls and Procedures.............................................18 Part II. OTHER INFORMATION Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities...........................................19 Item 6. Exhibits and Reports on Form 8-K....................................20 Signature....................................................................21 Exhibit Index................................................................22 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - UNAUDITED SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (In thousands, except share and per share amounts) ASSETS April 2, January 2, 2004 2004 ---- ---- (Unaudited) Current assets: Cash and cash equivalents.....................................$ 12,689 $ 41,781 Short-term investments........................................ -- 5,788 Accounts receivable........................................... 32,153 19,167 Inventories................................................... 22,239 22,421 Deferred income taxes......................................... 1,712 2,340 Prepaid expenses and other current assets..................... 1,364 1,329 --------- --------- Total current assets........................................ 70,157 92,826 --------- --------- Property, plant and equipment, net............................... 6,571 6,201 --------- --------- Other assets: Goodwill, net................................................. 912 912 Deferred charges, net......................................... 166 124 Other......................................................... 124 130 --------- --------- Total other assets.......................................... 1,202 1,166 --------- --------- Total assets.....................................................$ 77,930 $ 100,193 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capitalized lease obligations..............$ 70 $ -- Accounts payable.............................................. 7,244 9,259 Accrued expenses and other current liabilities................ 7,614 9,544 --------- --------- Total current liabilities................................... 14,928 18,803 --------- --------- Long-term obligations: Capitalized lease obligations, net of current portion......... 210 -- Deferred income taxes......................................... 2,048 2,016 --------- --------- Total long-term obligations................................. 2,258 2,016 --------- --------- Minority interest in consolidated subsidiary..................... 351 320 --------- --------- 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 April 2, 2004, 2,711,127 and January 2, 2004, 2,711,127)............................ 904 904 Class B, $.333 par value per share, authorized 20,000,000 shares (issued April 2, 2004, 4,566,455 and January 2, 2004, 4,210,560).......................... 1,522 1,403 Additional paid in capital.................................... 22,652 19,010 Retained earnings............................................. 41,551 63,655 Accumulated other comprehensive income........................ 329 505 Common stock held in treasury, at cost (April 2, 2004, Class A, 190,480, Class B, 589,544 January 2, 2004, Class A, 190,480, Class B, 582,326)...... (6,565) (6,423) --------- --------- Total stockholders' equity.................................. 60,393 79,054 --------- --------- Total liabilities and stockholders' equity.......................$ 77,930 $ 100,193 ========= ========= 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 2, 2004 and April 4, 2003
(Unaudited) (In thousands, except per share amounts) Thirteen Weeks Thirteen Weeks Ended Ended April 2, April 4, 2004 2003 ---- ---- Net sales..............................................................$ 46,969 $ 39,068 Other revenue ......................................................... 179 95 ---------- ---------- Total revenue ......................................................... 47,148 39,163 ---------- ---------- Costs and expenses Cost of sales....................................................... 27,912 23,872 Selling expenses.................................................... 6,058 4,932 General and administrative expenses................................. 6,078 5,988 ---------- ---------- Total costs and expenses.......................................... 40,048 34,792 ---------- ---------- Operating income....................................................... 7,100 4,371 Non-operating income (expense) Interest income..................................................... 69 74 Interest expense.................................................... -- (2) Foreign currency losses ............................................... (144) (15) Other............................................................... 3 (11) ---------- ---------- Income before income taxes and minority interest....................... 7,028 4,417 Provision for income taxes............................................. 2,759 1,750 Minority interest in income of consolidated subsidiaries............... 38 64 ---------- ---------- Net income.............................................................$ 4,231 $ 2,603 ========== ========== Per share amounts: Earnings per share: Basic: Class A common stock............................................$ 0.63 $ 0.41 ========== ========== Class B common stock............................................$ 0.69 $ 0.45 ========== ========== Diluted: Class A common stock............................................$ 0.58 $ 0.39 ========== ========== Class B common stock............................................$ 0.64 $ 0.43 ========== ========== Weighted average common shares and equivalents outstanding: Basic: Class A common stock............................................ 2,521 2,524 Class B common stock............................................ 3,801 3,543 ---------- ---------- Total......................................................... 6,322 6,067 ========== ========== Diluted: Class A common stock............................................ 2,521 2,524 Class B common stock............................................ 4,323 3,717 ---------- ---------- Total......................................................... 6,844 6,241 ========== ========== Cash dividends per share of common stock: Class A common stock............................................$ 4.050 $ -- Class B common stock...................................................$ 4.055 $ -- 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 2, 2004 and April 4, 2003
(Unaudited) (In thousands) Thirteen Weeks Thirteen Weeks Ended Ended April 2, April 4, 2004 2003 ---- ---- Cash flows from operating activities: Net income.................................................................$ 4,231 $ 2,603 -------- -------- Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization.............................................. 361 330 Provision for bad debts and discounts...................................... 2,032 1,621 Deferred income tax expense ............................................... 659 56 Tax benefit on stock option exercises...................................... 1,036 4 Other...................................................................... 8 95 Changes in operating assets and liabilities, net of effect foreign currency adjustments: (Increase) decrease in assets: Accounts receivable.................................................... (15,645) (12,160) Inventories............................................................ 113 5,296 Prepaid expenses and other current assets.............................. (38) 97 Decrease in liabilities: Accounts payable....................................................... (2,012) (3,868) Accrued expenses....................................................... (1,349) (1,475) --------- --------- Total adjustments............................................................ (14,835) (10,004) --------- --------- Net cash used by operating activities........................................... (10,604) (7,401) --------- --------- Cash flows from investing activities: Purchases of property, plant and equipment................................... (437) (573) Sales of short-term investments.............................................. 5,769 -- Realized gains on short-term investments..................................... 5 -- Change in deposits and other................................................. (68) (1) --------- --------- Net cash provided (used) by investing activities............................. 5,269 (574) --------- --------- Cash flows from financing activities: Net short-term borrowings.................................................... -- 633 Dividends paid on common stock............................................... (26,251) -- Common stock repurchased..................................................... -- (103) Issuances of common stock, stock option exercises............................ 2,231 120 Issuances of common stock, stock purchase warrant exercises.................. 352 -- --------- --------- Net cash (used) provided by financing activities................................ (23,668) 650 Effect of exchange rate changes on cash and cash equivalents.................... (89) (81) --------- ---------- Net decrease in cash and cash equivalents....................................... (29,092) (7,406) Cash and equivalents at beginning of period..................................... 41,781 34,483 -------- --------- Cash and equivalents at end of period...........................................$ 12,689 $ 27,077 ======== ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes, net of refunds...............................................$ 975 $ 1,222 ======== ========= Interest...................................................................$ -- $ -- ======== ========= Non-cash investing and financing activities: Property purchased under capital leases......................................$ 279 $ -- ======== ========= 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 2, 2004 (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. The balance sheet amounts at January 2, 2004 in the accompanying financial statements are derived from the Company's audited financial statements for the fiscal year then ended, included in the Company's Annual Report on Form 10-K for such fiscal year. 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 2, 2004. Operating results for the thirteen weeks ended April 2, 2004 are not necessarily indicative of the results for the entire year. NOTE 2 - INVENTORIES Inventories at April 2, 2004 and January 2, 2004 consisted of the following: April 2, January 2, 2004 2004 ---- ---- Finished goods..............................$ 22,219 $ 22,322 Raw material and supplies................... 1 34 Work in progress............................ 19 65 ---------- ---------- Total.......................................$ 22,239 $ 22,421 ========== ========== NOTE 3 - EARNINGS PER COMMON SHARE 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 presented:
Thirteen Weeks Ended ------------------------------------- April 2, April 4, 2004 2003 ---- ---- Net income available to Class A and Class B common stockholders................................$ 4,231 $ 2,603 --------- --------- Allocation of net income: Basic: Class A common stock...........................................$ 1,591 $ 1,023 Class B common stock........................................... 2,640 1,580 --------- --------- Total..........................................................$ 4,231 $ 2,603 ========= ========= Diluted: Class A common stock...........................................$ 1,466 $ 994 Class B common stock........................................... 2,765 1,609 --------- --------- Total..........................................................$ 4,231 $ 2,603 ========= ========= Weighted average common shares and equivalents outstanding: Basic: Class A common stock........................................... 2,521 2,524 Class B common stock........................................... 3,801 3,543 --------- --------- Total.......................................................... 6,322 6,067 ========= ========= Diluted: Class A common stock........................................... 2,521 2,524 Class B common stock........................................... 4,323 3,717 --------- --------- Total......................................................... 6,844 6,241 ========= ========= Earnings per share: Basic: Class A common stock...........................................$ 0.63 $ 0.41 ========= ======== Class B common stock...........................................$ 0.69 $ 0.45 ========= ======== Diluted: Class A common stock...........................................$ 0.58 $ 0.39 ========= ======== Class B common stock...........................................$ 0.64 $ 0.43 ========= ========
On February 17, 2004, the Company's Board of Directors declared a special cash dividend of $4.00 per share on each of the Company's Class A and Class B common stock. On March 17, 2004 the Company paid the special dividend to stockholders of record at the close of business on March 3, 2004. The increase in the weighted average common shares and equivalents in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003 was due to increased Class B common shares outstanding and the impact of our special dividend which increased the dilutive effect of outstanding options. The increase in Class B common shares outstanding is due to the issuance of approximately 356,000 Class B common shares due to the exercise of stock options and stock purchase warrants. Options outstanding at March 1, 2004, the ex-dividend date, were increased due to the customary dilutive adjustments in the number of outstanding options to purchase Class B common stock, and the exercise price of such options, in proportion to changes in the market price of our Class B common stock on that date for the special cash dividend on our common stock announced on February 17, 2004. As a consequence of the special dividend, the number of options to purchase our Class B common stock was increased by approximately 288,000 options, which increase was in proportion to changes in the market price of our Class B common stock as of March 1, 2004, the ex-dividend date. The aggregate dividend payout for the special dividend amounted to $25,990. Options to purchase 455,000 shares of common stock outstanding at April 4, 2003 were not included in the computations of diluted earnings per share, for the thirteen week period then-ended, since the options were anti-dilutive. All of the options to purchase shares of common stock outstanding at April 2, 2004 were included in the computations of diluted earnings per share. NOTE 4 - STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 148 ("SFAS 148") Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of Statement of Financial Accounting Standards No. 123 ("SFAS 123") encourages, but does not require, companies to record compensation expense for stock-based employee compensation plans at fair value. 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 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 2, 2004 and the thirteen weeks ended April 4, 2003 were at exercise prices equal to or greater than 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 $1,036 and $4 for the thirteen weeks ended April 2, 2004 and April 4, 2003, respectively, that have been credited to additional paid-in capital. Had the Company determined the stock-based compensation expense for the Company's stock options based upon the fair value at the grant date for stock option awards for the thirteen weeks ended April 2, 2004 and April 4, 2003, consistent with the fair value method provisions of SFAS 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
Thirteen Weeks Ended Thirteen Weeks Ended April 2, 2004 April, 4 2003 Basic Diluted Basic Diluted ----- ------- ----- ------- Net income: As reported........................................$ 4,231 $ 4,231 $ 2,603 $ 2,603 Add:Stock-based compensation expense included in reported net income, net of related tax benefit............................. -- -- 5 5 Less:Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax benefit................................ (338) (338) (147) (147) -------- --------- --------- --------- Pro forma net income ................................$ 3,893 $ 3,893 $ 2,461 $ 2,461 ======== ========= ========= ========= Pro forma net income allocated: Class A common stock.............................$ 1,464 $ 1,349 $ 967 $ 939 Class B common stock............................. 2,429 2,544 1,494 1,522 -------- --------- --------- --------- Total.....................................$ 3,893 $ 3,893 $ 2,461 $ 2,461 ======== ========= ========= ========= Thirteen Weeks Ended Thirteen Weeks Ended April 2, 2004 April 4, 2003 Basic Diluted Basic Diluted ----- ------- ----- ------- Pro forma earnings per share: Class A common stock As reported........................................$ 0.63 $ 0.58 $ 0.41 $ 0.39 Add:Stock-based compensation expense included in reported net income, net of related tax benefit............................. -- -- -- -- Less: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax benefit......................... (0.05) (0.04) (0.03) (0.02) -------- -------- --------- --------- Pro forma net income per share.......................$ 0.58 $ 0.54 $ 0.38 $ 0.37 ======== ======== ========= ========= Thirteen Weeks Ended Thirteen Weeks Ended April 2, 2004 April 4, 2003 Basic Diluted Basic Diluted ----- ------- ----- ------- Pro forma earnings per share: Class B common stock As reported........................................$ 0.69 $ 0.64 $ 0.45 $ 0.43 Add:Stock-based compensation expense included in reported net income (loss), net of related tax.............................. -- -- -- -- Less: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax benefit......................... (0.05) (0.05) (0.03) (0.02) -------- -------- --------- --------- Pro forma net income per share.......................$ 0.64 $ 0.59 $ 0.42 $ 0.41 ======== ======== ========= =========
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 2, 2004 April 4, 2003 ------------- ------------- Expected life (years)................ 5.0 5.0 Risk-free interest rate.............. 3.0% 3.1% Expected volatility.................. 57.5% 66.6% Expected dividend yield.............. 1.2% 0.0% NOTE 5 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Weeks Thirteen Weeks Ended Ended April 2, 2004 April 4, 2003 ------------- ------------- Net income...........................................$ 4,231 $ 2,603 Other comprehensive income: Foreign currency translation adjustments, net of tax....................................... (176) 254 --------- -------- Comprehensive income.................................$ 4,055 $ 2,857 ========= ========
NOTE 6 - GOODWILL AND DEFERRED CHARGES Goodwill and intangible assets as of April 2, 2004 and January 2, 2004 are as follows:
April 2, 2004 January 2, 2004 Accumulated Accumulated ------------------------------------- ----------------------------------- Cost Amortization Net Cost Amortization Net ---- ------------ --- ---- ------------ --- Goodwill...................$ 1,463 $ (551) $ 912 $ 1,463 $ (551) $ 912 ======== ========= ======= ======== ========= ======= Deferred charges: Software licenses........ 1,135 (1,010) 125 1,060 (992) 68 Capitalized debt financing costs........ 87 (83) 4 87 (76) 11 Other.................... 444 (407) 37 444 (399) 45 -------- --------- ------- -------- --------- ------- Total......................$ 1,666 $ (1,500) $ 166 $ 1,591 $ (1,467) $ 124 ======== ========= ======= ======== ========= =======
Amortization of intangible assets was $32 and $47, respectively, in the thirteen weeks ended April 2, 2004 and April 4, 2003. NOTE 7 - OPERATING SEGMENT DATA The Company's operating segments are organized based on the nature of products and consist of the Saucony segment and Other Products segment. The determination of the reportable segments for the thirteen weeks ended April 2, 2004 and April 4, 2003, as well as the basis of measurement of segment profit or loss, is consistent with the segment reporting disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2004.
Thirteen Weeks Thirteen Weeks Ended Ended April 2, 2004 April 4, 2003 ------------- ------------- Revenues: Saucony....................................................$ 41,240 $ 32,551 Other Products............................................. 5,908 6,612 --------- --------- Total revenue.........................................$ 47,148 $ 39,163 ========= ========= Income before income taxes and minority interest: Saucony....................................................$ 6,372 $ 3,982 Other Products............................................. 656 435 --------- --------- Total.................................................$ 7,028 $ 4,417 ========= =========
NOTE 8 - SUPPLEMENTAL CASH FLOW DISCLOSURE In February 2004, two officers who are also directors and principal shareholders of the Company's Class A common stock, each delivered 3,609 share of Class B common stock in payment of their respective option exercises to purchase 9,999 shares each of the Company's Class B common stock. 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 2, 2004 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 1, 2004, 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. Critical Accounting Policies and Estimates - ------------------------------------------ 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 and hedge accounting for derivatives. For a more detailed explanation of our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended January 2, 2004, as filed with the Securities and Exchange Commission on April 1, 2004. Dollar amounts throughout this Item 2 are in thousands, except per share amounts. Highlights Increase Thirteen Weeks Ended April 2, 2004 vs. April 4, 2003 ------------------------------- Net sales........................................$7,901 20.2% Gross profit..................................... 3,861 25.4% Selling, general and administrative expenses....................................... 1,216 11.1% Dollar Change Thirteen Weeks Ended April 2, 2004 vs. April 4, 2003 ------------------------------- Operating income................................. $2,729 Income before income taxes....................... 2,611 Net income....................................... 1,628 Percent of Net Sales Thirteen Weeks Ended April 2, 2004 April 4, 2003 ------------- ------------- Gross profit.................................... 40.6% 38.9% Selling, general and administrative expenses.... 25.8 28.0 Operating income................................ 15.1 11.2 Income before income taxes...................... 15.0 11.3 Net income...................................... 9.0 6.7 The following table sets forth the approximate contribution to net sales (in dollars and as a percentage of consolidated net sales) attributable to our Saucony segment and our Other Products segment for the thirteen weeks ended April 2, 2004 and April 4, 2003: Thirteen Weeks Ended April 2, 2004 April 4, 2003 ------------- ------------- Saucony.................$ 41,099 87.5% $ 32,485 83.1% Other Products.......... 5,870 12.5% 6,583 16.9% -------- ------ -------- ------ Total...................$ 46,969 100.0% $ 39,068 100.0% ======== ===== ======== ===== Thirteen Weeks Ended April 2, 2004 Compared to Thirteen Weeks Ended April 4, 2003 Consolidated Net Sales - ---------------------- Net sales increased $7,901, or 20%, to $46,969 in the thirteen weeks ended April 2, 2004 from $39,068 in the thirteen weeks ended April 4, 2003. On a geographic basis, domestic net sales increased $6,392, or 22%, to $35,968 in the thirteen weeks ended April 2, 2004 from $29,576 in the thirteen weeks ended April 4, 2003. International net sales increased $1,509, or 16%, to $11,001 in the thirteen weeks ended April 2, 2004 from $9,492 in the thirteen weeks ended April 4, 2003. Favorable changes in foreign exchange rates accounted for $1,231 of the international sales increase in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003. Saucony Brand Segment - --------------------- Worldwide net sales of Saucony branded footwear and Saucony branded apparel increased $8,614, or 27%, to $41,099 in the thirteen weeks ended April 2, 2004 from $32,485 in the thirteen weeks ended April 4, 2003, due primarily to an increase in domestic footwear unit volume and, to a lesser extent, favorable currency exchange resulting from a weaker U.S. dollar against European and Canadian currencies and increased technical footwear unit volume at our international subsidiaries, partially offset by lower domestic wholesale per pair average selling prices. The volume of footwear sold in the thirteen weeks ended April 2, 2004 increased 27% to 1,347 pair from 1,062 pair in the thirteen weeks ended April 4, 2003. Domestic net sales increased $6,887, or 29%, to $30,543 in the thirteen weeks ended April 2, 2004 from $23,656 in the thirteen weeks ended April 4, 2003, due primarily to a 37% increase in footwear unit volumes, partially offset by lower wholesale per pair average selling prices. The volume of domestic footwear sold in the thirteen weeks ended April 2, 2004, increased to 1,098 pair from 800 pair in the thirteen weeks ended April 4, 2003. The footwear unit volume increase in the thirteen weeks ended April 2, 2004 was due primarily to a 99% footwear unit volume increase in our mid-priced cross-over footwear, due primarily to increased cross-over unit volume sold into the athletic mall, sporting goods and value distribution channels, an 18% increase in technical footwear unit volumes and a 45% increase in Originals footwear unit volumes. Our cross-over footwear category consists primarily of mid-priced running shoes incorporating our proprietary Grid technology, previously included in our technical footwear category. These increases were partially offset by an 11% decrease in special make up footwear unit volumes. Our Originals footwear accounted for 27% of domestic footwear unit volume in the thirteen weeks ended April 2, 2004, compared to 24% in the thirteen weeks ended April 4, 2003. The unit volume increase in Originals footwear was primarily due to increased unit volume of our Jazz and Shadow Originals sold into the athletic mall channel and, to a lesser extent, the introduction of new products in the thirteen weeks ended April 2, 2004. The average wholesale per pair selling prices for domestic footwear decreased in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003, due to a change in the product mix to increased cross-over and Original footwear unit volumes, both of which sell at wholesale per pair selling prices below our first quality technical footwear, a change in the special make up footwear product mix to lower priced product, increased rebates provided to certain domestic customers and a higher level of discounts. International net sales increased $1,727, or 20%, to $10,556 in the thirteen weeks ended April 2, 2004 from $8,829 in the thirteen weeks ended April 4, 2003, due primarily to favorable currency exchange resulting from a weaker U.S. dollar against European and Canadian currencies and, to a lesser extent, higher average wholesale per pair selling prices and increased sales of Saucony brand apparel. These factors were offset in part by a 5% decrease in footwear unit volumes. The footwear average wholesale per pair selling price increased primarily due to increased international distributor average wholesale per pair selling prices, due to a change in the product mix to higher priced technical footwear, increased cross-over footwear unit volumes and lower Originals footwear unit volumes in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003. The volume of international footwear sold in the thirteen weeks ended April 2, 2004 decreased to 249 pair from 262 pair in the thirteen weeks ended April 4, 2003. Footwear unit volumes at our Canadian subsidiary increased 12% in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003, due primarily to increased technical footwear unit volumes. Footwear unit volumes at our European subsidiaries were flat. International distributor footwear unit volumes decreased 33%, due primarily to a 56% decrease in Originals footwear unit volumes sold in the Japanese footwear market and, to a lesser extent, a 14% decrease in footwear unit volumes sold, due primarily to decreased technical footwear unit volume sold to our distributors in the Pacific Rim. Distributor sales into the Japanese footwear market accounted for 3% of international sales in the thirteen weeks ended April 2, 2004, compared to 6% in the thirteen weeks ended April 4, 2003. Other Products Segment - ---------------------- Worldwide sales of Other Products decreased $713, or 11%, to $5,870 in the thirteen weeks ended April 2, 2004 from $6,583 in the thirteen weeks ended April 4, 2003, due primarily to a 26% decrease in domestic sales of our Hind brand apparel, partially offset by a 44% increase in sales at our factory outlet stores. Domestic net sales of Other Products decreased $495, or 8%, to $5,425 in the thirteen weeks ended April 2, 2004 from $5,920 in the thirteen weeks ended April 4, 2003, due primarily to decreased sales of our Hind brand apparel. Hind apparel sales decreased 26% due primarily to a 29% decrease in Hind apparel unit volume, partially offset by a 5% increase in the average wholesale per item selling price of our Hind apparel. Both the decrease in Hind apparel unit volume and the increase in average wholesale per item selling price of our Hind apparel were due to lower closeout unit volumes sold in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003. Sales of closeout apparel accounted for approximately 7% of domestic Hind apparel net sales in the thirteen week ended April 2, 2004, compared to 23% of domestic Hind apparel net sales in the thirteen weeks ended April 4, 2003. During the thirteen weeks ended April 2, 2004, our closeout sales volume decreased, compared to the thirteen weeks ended April 4, 2003, due to the production and sale during the 2003 period of surplus special makeup closeout apparel from remaining raw materials in connection with the change in our product sourcing. Sales at our factory outlet division increased in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003, due primarily to sales derived from additional factory outlet stores opened after April 4, 2003, increased sales at our factory outlet stores open for more than one year and, to a lesser extent, the addition of two factory outlet stores which were opened in March 2004. International net sales of Other Products decreased $218, or 33%, to $445 in the thirteen weeks ended April 2, 2004 from $663 in the thirteen weeks ended April 4, 2003, due primarily to discontinuing Hind apparel distribution at our Dutch subsidiary and decreased Hind apparel sales in Canada and the United Kingdom. Partially offsetting these decreases were sales at our recently opened factory outlet stores in Canada. Costs and Expenses - ------------------ The Company's gross margin in the thirteen weeks ended April 2, 2004 increased to 40.6% compared to 38.9% in the thirteen weeks ended April 4, 2003, due primarily to favorable currency exchange due to the impact of a weaker U.S. dollar against European and Canadian currencies, improved margins on Hind brand apparel and improved margins at our factory outlet division. The improved margins on our Hind brand apparel during the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003, were due primarily to our decision to increase our gross margin targets and wholesale price increases, both of which increased our first quality gross margins, lower inventory provisions and lower closeout sales. Offsetting these margin increases in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003, were increased footwear unit volume of our mid-priced cross-over footwear sold into the athletic mall, sporting goods and value channels at lower gross margins that included increased rebates provided to certain Saucony domestic customers. Selling, general and administrative expenses as a percentage of net sales decreased to 25.8% in the thirteen weeks ended April 2, 2004, compared to 28.0% in the thirteen weeks ended April 4, 2003. In absolute dollars, selling, general and administrative expenses increased 11%, due primarily to increased administrative and selling payroll, operating expenses associated with the factory outlet division expansion, account specific advertising and promotion, print media advertising, variable selling expenses and professional fees. Foreign exchange rate changes increased selling and administrative expenses by $214 in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003. Non-Operating Income (Expense) - ------------------------------ Non-operating income (expense) decreased in the thirteen weeks ended April 2, 2004 to an expense of $72, compared to income of $46 in the thirteen week ended April 4, 2003. The decrease was due primarily to an increase in foreign currency losses to $144 in the thirteen weeks ended April 2, 2004, compared to foreign currency losses of $15 in the thirteen weeks ended April 4, 2003, reflecting losses on forward foreign currency contracts. Interest income decreased to $69 in the thirteen weeks ended April 2, 2004 from $74 in the thirteen weeks ended April 4, 2003. due to lower levels of invested cash balances and lower interest rates in the thirteen weeks ended April 4, 2003. Income Before Tax and Minority Interest - --------------------------------------- Thirteen Weeks Ended April 2, April 4, 2004 2003 --------- -------- Segment Saucony..........................$ 6,372 $ 3,982 Other Products................... 656 435 --------- -------- Total............................$ 7,028 $ 4,417 ========= ======== Income before tax and minority interest increased $2,611 in the thirteen weeks ended April 2, 2004 to $7,028, compared to $4,417 in the thirteen weeks ended April 4, 2003, due primarily to increased pre-tax income realized by both our domestic and international Saucony businesses, due to higher sales and improved gross margins. The improvement in our Other Products segment income before tax and minority interest in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003, was due primarily to improved profitability at our Hind apparel brand due to improved gross margins and lower operating expenses. Income Taxes - ------------ The provision for income taxes increased to $2,759 in the thirteen weeks ended April 2, 2004 from $1,750 in the thirteen weeks ended April 4, 2003, due primarily to higher pre-tax income realized by our domestic and international Saucony businesses and higher pre-tax income realized by our Hind apparel brand. The effective tax rate decreased 0.3% to 39.3% in the thirteen weeks ended April 2, 2004 from 39.6% in the thirteen weeks ended April 4, 2003, due to a shift in the composition of domestic and foreign pre-tax earnings. We credited to additional paid-in capital income tax benefits of options exercised of $1,036 during the thirteen weeks ended April 2, 2004 and of $4 during the thirteen weeks ended April 4, 2003. The income tax benefits of options exercised did not impact our provision for income taxes or the effective tax rate in either period. 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. Minority interest expense decreased to $38 in the thirteen weeks ended April 2, 2004, compared to $64 in the thirteen weeks ended April 4, 2003, due to the increase in our ownership percentage in Saucony Canada, Inc. to 95% from 85% in July 2003. Net Income - ---------- Net income for the thirteen weeks ended April 2, 2004 increased to $4,231, or $0.58 per Class A share and $0.64 per Class B share on a diluted basis, compared to $2,631, or $0.39 per Class A share and $0.43 per Class B share on a diluted basis, in the thirteen weeks ended April 4, 2003. Weighted average common shares and common stock equivalents used to calculate diluted earnings per share in the thirteen weeks ended April 2, 2004 consisted of 2,521,000 Class A and 4,323,000 Class B shares, compared to 2,524,000 Class A and 3,717,000 Class B shares in the thirteen weeks ended April 4, 2003. The increase in the weighted average common shares and equivalents in the thirteen weeks ended April 2, 2004, compared to the thirteen weeks ended April 4, 2003 was due to increased Class B common shares outstanding and the impact of our special dividend which increased the dilutive effect of outstanding options. The increase in Class B common shares outstanding is due to the issuance of approximately 356,000 Class B common shares due to the exercise of stock options and stock purchase warrants. Options outstanding at March 1, 2004, the ex-dividend date, were increased due to the customary dilutive adjustments in the number of outstanding options to purchase Class B common stock, and the exercise price of such options, in proportion to changes in the market price of our Class B common stock on that date for the special cash dividend on our common stock announced on February 17, 2004. Liquidity and Capital Resources - ------------------------------- As of April 4, 2003, our cash and cash equivalents totaled $12,689, a decrease of $29,092 from January 2, 2004. The decrease is due primarily to the payment of a special cash dividend of $25,990 in March 2004 and regular quarterly cash dividends of $261, the use of cash from operations of $10,604 and cash outlays for capital assets of $437. This decrease in cash was offset in part by sales of short-term investments of $5,769 and the receipt of $2,583 from the issuance of shares of our common stock as a result of option and common stock purchase warrant exercises. Our accounts receivable, net of the provision for bad debts and discounts, at April 4, 2004 increased $13,613 compared to at January 2, 2004 due to increased sales of our Saucony footwear products we experienced in the thirteen weeks ended April 2, 2004. Our days' sales outstanding for accounts receivable increased to 62 days in the thirteen weeks ended April 2, 2004 from 61 days in the thirteen weeks ended April 4, 2003, due to the timing of our shipments in the thirteen weeks ended April 2, 2004, much of which shipped in March 2004. 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. The provision for bad debts and discounts increased to $2,032 in the thirteen weeks ended April 2, 2004 from $1,621 in the thirteen weeks ended April 4, 2003 due to an increase in sales discounts on higher sales volumes in the thirteen weeks ended April 2, 2004. Inventories decreased $113 in the thirteen weeks ended April 2, 2004, compared to at January 2, 2004. Our inventory turns increased to 5.0 turns in the thirteen weeks ended April 2, 2004 from 3.9 turns in the thirteen weeks ended April 4, 2003. The number of days' sales in inventory decreased to 73 days in the thirteen weeks ended April 2, 2004 from 84 days in the thirteen weeks ended April 4, 2003. The inventory turns ratio represents our cost of sales for a period divided by the average of our beginning and ending 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. The improvements in our inventory turns and days' sales in inventory are due to improvements in our management of our supply chain. 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 2, 2004 included a $2,012 decrease in accounts payable, due to payments made for inventory received in the fourth quarter of fiscal 2003, and a $1,349 decrease in accrued expenses, due primarily to lower employee compensation accruals which decreased due primarily to the payment of fiscal 2003 incentive compensation and the timing of payrolls and were partially offset by increased income tax accruals. 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 any debt service payments. During the thirteen weeks ended April 2, 2004, we used $10,604 in cash to fund operations, due primarily to an increase in accounts receivable. In the thirteen weeks ended April 4, 2003, we used $7,401 in cash to fund operations also due primarily to an increase in accounts receivable. At April 2, 2004, we had no borrowings outstanding under our credit facilities, compared to $635 in borrowings outstanding under our credit facilities at April 4, 2003. 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. During the thirteen weeks ended April 2, 2004, we experienced $144 in foreign currency losses on forward foreign exchange contracts, compared to foreign currency losses of $15 on forward foreign currency exchange contracts in the thirteen weeks ended April 4, 2003. Unfavorable movements in exchange rates between the U.S. dollar and the Canadian dollar, the British Pound Sterling or the Euro against our hedged positions, since these forward foreign currency contracts were executed, would expose us to hedge losses for the balance of fiscal 2004. However, these losses will be partially offset by gains on the exposures being hedged and the offsetting positive translation impact. 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. 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-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of April 2, 2004. Based on this evaluation, our chief executive officer and chief financial officer have concluded that as of April 2, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to Saucony, including its consolidated subsidiaries, is make 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 Saucony 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. (b) Changes in internal controls. 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 April 2, 2004 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The following table provides information with respect to purchases made by Saucony of its equity securities registered pursuant to Section 12 of the Exchange Act during the thirteen weeks ended April 2, 2004:
Issuer Purchases of Equity Securities ------------------------------------------------------------ Total Number Average Price of Shares Purchased Paid Per Share --------------------- -------------------- Class A Class B Class A Class B Common Common Common Common Period Stock Stock Stock Stock ------ ----- ----- ----- ----- January 3, 2004 through February 2, 2004................................ -- -- $ -- $ -- February 3, 2004 through March 2, 2004................................... -- 7,218 -- 19.67 March 3, 2004 through April 2, 2004................................... -- -- -- -- Total.............................................. -- 7,218 $ -- $ 19.67
Issuer Purchases of Equity Securities ---------------------------------------------------------------- Total Number of Shares Maximum Number of Purchased as Part of Shares that May Yet Be Publicly Announced Plans Purchased Under the Plans or Programs(1) or Programs --------------------------------- ------------------------- Class A Class B Common Common Class A and Class B Period Stock Stock Total Common Stock, Combined ------ ----- ----- ----- ---------------------- January 3, 2004 through February 2, 2004......................... -- -- -- 175,594 February 3, 2004 through March 2, 2004............................ -- 7,218 7,218 168,376 March 3, 2004 through April 2, 2004............................ -- -- -- 168,376 Total....................................... -- 7,218 7,218 (1) In May 1998, our Board of Directors approved a stock repurchase plan authorizing the repurchase of up to an aggregate of 750,000 shares of our outstanding common stock, either Class A or Class B or a combination thereof. Unless terminated earlier by a resolution of our Board of Directors, the plan will expire when we have repurchased all shares authorized for repurchase thereunder. We announced this plan publicly on June 4, 1998.
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 January 14, 2004, we filed a Current Report on Form 8-K dated the same date. The report furnished under Item 12 (Results of Operations and Financial Condition), a copy of our press release announcing our presentation at the 6th Annual ICR XChange, Leisure and Lifestyle Conference on January 15, 2004 and provided updated net sales and earnings per share guidance for the fourth quarter of fiscal 2003 and updated earnings per share guidance for the 2003 fiscal year. On February 17, 2004, we filed a Current Report on Form 8-K dated the same date. The report disclosed under Item 5 (Other Events) our declaration of a special cash dividend and our declaration of our regular quarterly cash dividend, reflecting an increase in the amount of our regular quarterly cash dividend. The report, also furnished under Item 12 (Results of Operations and Financial Condition), a copy of our press release announcing our financial results for the fiscal quarter and fiscal year ended January 2, 2004. 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 14, 2004 By: /s/ Michael Umana ------------------------------------- Michael Umana Executive Vice President, Finance Chief Operating and Financial Officer (Duly authorized officer and principal financial officer) EXHIBIT INDEX Exhibit No. Description --- ----------- 10.1 Form of Incentive Stock Option Agreement Granted Under 2003 Stock Option Plan, dated December 22, 2003, by and between Registrant and Michael Umana, Michael Jeppesen, Samuel Ward and Brian Enge. 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 Sarbannes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbannes-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 2, 2004 filed with the Securities and Exchange Commission on April 1, 2004. EX-10 2 ex101.txt EXHIBIT 10.1 EXHIBIT 10.1 SAUCONY, INC. Incentive Stock Option Agreement Granted Under 2003 Stock Incentive Plan 1. Grant of Option. This agreement evidences the grant by Saucony, Inc., a Massachusetts corporation (the "Company"), on December 22, 2003 (the "Grant Date") to ____________, an employee of the Company (the "Participant"), of an option to purchase, in whole or in part, on the terms provided herein and in the Company's 2003 Stock Incentive Plan (the "Plan"), a total of 100,000 shares (the "Shares") of Class B Common Stock, $.331/3 par value per share ("Common Stock"), of the Company at $16.25 per Share. Unless earlier terminated, this option shall expire at 5:00 p.m., Eastern time, on December 21, 2013 (the "Final Exercise Date"). It is intended that the option evidenced by this agreement shall be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). Except as otherwise indicated by the context, the term "Participant", as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms. 2. Vesting Schedule. This option will become exercisable ("vest") as to 20% of the original number of Shares on the first anniversary of the Grant Date and as to an additional 20% of the original number of Shares at the end of each successive one year period following the first anniversary of the Grant Date until the fifth anniversary of the Grant Date. The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all Shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan. Notwithstanding the foregoing, upon the occurrence of a Change in Control (as defined below), this option will automatically vest as to all previously unvested Shares. As used herein, "Change in Control" means an event or occurrence set forth in any one or more of subsections (a) through (c) below (including an event or occurrence that constitutes a Change in Control under one of such subsections but is specifically exempted from another such subsection). (a) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) 50% or more of either (i) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this Section 2, or (v) any acquisition of common stock of the Company by John H. Fisher, Charles A. Gottesman or Merrill F. Gottesman (each, a "Significant Stockholder") or any ancestor, descendent, spouse, sibling or spouse of a sibling of a Significant Stockholder or any entity affiliated with any Significant Stockholder (each such individual or entity is referred to hereunder as an "Exempt Person"); or (b) such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term "Continuing Director" means at any date a member of the Board (i) who was a member of the Board on the date of the execution of this Agreement or (ii) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (ii) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or (c) the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company's assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the "Acquiring Corporation") in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively; and (ii) no Person (excluding the Acquiring Corporation, any Exempt Person, or any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Corporation) beneficially owns, directly or indirectly, 50% or more of the then outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then-outstanding securities of such corporation entitled to vote generally in the election of directors (except to the extent that such ownership existed prior to the Business Combination). 3. Exercise of Option. (a) Form of Exercise. Each election to exercise this option shall be in writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement, payment in full in the manner provided in the Plan and a fully completed and executed notice of exercise substantially in the form appended hereto as Annex A. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share or for fewer than ten whole shares. (b) Continuous Relationship with the Company Required. Except as otherwise provided in this Section 3, this option may not be exercised unless the Participant, at the time he or she exercises this option, is, and has been at all times since the Grant Date, an employee or officer of, or consultant or advisor to, the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an "Eligible Participant"). (c) Termination of Relationship with the Company. If the Participant ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall be exercisable only to the extent that the Participant was entitled to exercise this option on the date of such cessation. Notwithstanding the foregoing, if the Participant, prior to the Final Exercise Date, violates the non-competition or confidentiality provisions of any employment contract, confidentiality and nondisclosure agreement or other agreement between the Participant and the Company, the right to exercise this option shall terminate immediately upon such violation. (d) Exercise Period Upon Death or Disability. If the Participant dies or becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise Date while he or she is an Eligible Participant and the Company has not terminated such relationship for "cause" as specified in paragraph (e) below, this option shall be exercisable, within the period of one year following the date of death or disability of the Participant, by the Participant (or in the case of death by an authorized transferee), provided that this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date. (e) Discharge for Cause. If the Participant, prior to the Final Exercise Date, ceases his or her employment with the Company because he or she is discharged for "cause" (as defined below), the right to exercise this option shall terminate immediately upon such cessation of employment. "Cause" shall mean willful misconduct by the Participant in connection with the Participant's employment or willful failure by the Participant to perform his or her employment responsibilities in the best interests of the Company (including, without limitation, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Participant and the Company), as determined by the Company, which determination shall be conclusive. If the Participant resigns and within 30 days thereafter the Company determines that the Participant's conduct prior to his or her resignation warranted a discharge for "cause", such resignation shall be deemed a discharge for "cause". 4. Tax Matters. (a) Withholding. No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option. (b) Disqualifying Disposition. If the Participant disposes of Shares acquired upon exercise of this option within two years from the Grant Date or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition. 5. Nontransferability of Option. This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant. 6. Provisions of the Plan. This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option. IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. SAUCONY, INC. Dated: _________ By: Name: Title: PARTICIPANT'S ACCEPTANCE The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company's 2003 Stock Incentive Plan. PARTICIPANT: ____________________________ Address: ___________________ ___________________ Annex A NOTICE OF STOCK OPTION EXERCISE Date: ____________1 Saucony, Inc. 13 Centennial Drive Peabody, MA 01960 Attention: Treasurer Dear Sir or Madam: I am the holder of an Incentive Stock Option granted to me under the Saucony, Inc. (the "Company") 2003 Stock Incentive Plan on December 22, 2003 for the purchase of __________2 shares of Class B Common Stock of the Company at a purchase price of $__________3 per share. I hereby exercise my option to purchase _________4 shares of Common Stock (the "Shares"), for which I have enclosed __________5 in the amount of ________6. Please register my stock certificate as follows: Name(s): _______________________7 _______________________ Address: _______________________ Tax I.D. #: _______________________8 Very truly yours, (Signature) - -------- 1 Enter the date of exercise. 2 Enter the total number of shares for which the option was granted. 3 Enter the option exercise price per share. 4 Enter the number of shares to be purchased upon exercise of all or part of the option. 5 Enter "cash" or "personal check". 6 Enter the dollar amount (price per share times the number of shares to be purchased). 7 Enter name(s) to appear on stock certificate: (a) your name only or (b) your name and other name (i.e., John Doe and Jane Doe, Joint Tenants With Right of Survivorship). 8 Social Security Number(s) of person(s) listed in response to note 8 above. EX-31 3 exh311.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, John H. Fisher, certify that: 1. I have reviewed this report on Form 10-Q of Saucony, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: May 14, 2004 /s/ John H. Fisher -------------------------------------------- Name: John H. Fisher Title: President and Chief Executive Officer EX-31 4 ex312.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Michael Umana, certify that: 1. I have reviewed this report on Form 10-Q of Saucony, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: May 14, 2004 /s/ Michael Umana -------------------------------------------- Name: Michael Umana Title: Executive Vice President, Finance Chief Financial Officer EX-32 5 exh321.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Saucony, Inc. (the "Company") for the period ended April 2, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned John H. Fisher, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company. Dated: May 14, 2004 /s/ John H. Fisher ------------------------------- John H. Fisher Chief Executive Officer EX-32 6 exh322.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Saucony, Inc. (the "Company") for the period ended April 2, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Michael Umana, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the Company. Dated: May 14, 2004 /s/ Michael Umana -------------------------- Michael Umana Chief Financial Officer EX-99.A 7 exh991.txt EXHIBIT 99.1 EXHIBIT 99.1 Certain Factors That May Affect Future Results We face intense competition - --------------------------- Competition is intense in the markets in which we sell our products. We compete with a large number of other companies, both domestic and foreign, several of which are large organizations with diversified product lines, well-known brands and financial, distribution and marketing resources substantially greater than ours. The principal competitors for our Saucony products are Nike, New Balance and Asics. The principal competitors of our Hind products are Nike, Pearl Izumi and Sugoi. We compete based on a variety of factors, including price, product style, durability and quality, product design and technical performance, brand image and awareness, marketing and promotion and the ability to meet delivery commitments to retailers. A technological breakthrough or marketing or promotional success by one of our competitors could adversely affect our competitive position and harm our business. We depend on foreign suppliers - ------------------------------ A number of manufacturers located in Asia, primarily in China, supply products to us. During fiscal 2003, one of our suppliers, located in China, accounted for approximately 32% of our total footwear purchases by dollar volume. We are subject to the usual risks of a business involving foreign suppliers, such as currency fluctuations, government regulation of fund transfers, export and import duties, import quotas, administrative trade cases, trade limitations imposed by the United States or foreign governments and political and labor instability, as well as potential disruptions in our supply chain due to transportation, geographic and other factors. There are a number of trade-related and other issues creating significant friction between the governments of the United States and China, and the imposition of punitive import duties on certain categories of Chinese products has been threatened in the past and may be implemented in the future. In addition, we have no long-term manufacturing agreements with our foreign suppliers and compete with other athletic shoe and apparel companies, including companies that are much larger than us, for access to production facilities. We need to anticipate and respond to consumer preferences and merchandise trends - -------------------------------------------------------------------------------- The footwear and apparel industries are subject to rapid changes in consumer preferences. Demand for our products, particularly our Originals line has been and may continue to be affected adversely by changing fashion trends and consumer style preferences. We believe that our success depends in substantial part on our ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner. In addition, our decisions concerning new product designs often need to be made several months before we can determine consumer acceptance. As a result, our failure to anticipate, identify or react appropriately to changes in styles or features could lead to problems such as excess inventories and higher markdowns, lower gross margins due to the necessity of providing discounts to retailers and the inability to sell such products through our own factory outlet stores. Our quarterly results may fluctuate - ----------------------------------- Our revenues and quarterly operating results may vary significantly depending on a number of factors, including: o the timing and shipment of individual orders; o market acceptance of footwear and other products offered by us; o changes in our operating expenses; o personnel changes; o mix of products sold; o changes in product pricing; o general economic conditions; and, o weather. In addition, a substantial portion of our revenue is realized during the last few weeks of each quarter. As a result, any delays in orders or shipments are more likely to result in revenue not being recognized until the following quarter, which could adversely impact our results of operations for a particular quarter. Our current expense levels are based in part on our expectations of future revenue. As a result, net income for a given period could be disproportionately affected by any reduction in revenue. It is possible that in some future quarter our revenue or operating results will be below the expectations of stock market securities analysts and investors. If that were to occur, the market price of our common stock could be materially adversely affected. Our revenues are subject to foreign currency exchange fluctuations - ------------------------------------------------------------------ We conduct operations in various international countries, and a portion of our sales is transacted in local currencies. As a result, our revenues are subject to foreign exchange rate fluctuations. From time to time, our financial results have been affected by fluctuations in foreign currency exchange rates. We enter into forward currency exchange contracts to protect us from the effect of changes in foreign exchange rates. However, our efforts to reduce currency exchange losses may not be successful, and currency exchange rates may have an adverse impact on our future operating results and financial condition. Our business is affected by seasonal consumer buying patterns - ------------------------------------------------------------- The athletic and casual footwear and athletic apparel industries in which we compete are generally characterized by significant seasonality of sales and results of operations. Sales of our Saucony brand and Hind brand products have historically been seasonal in nature, with the strongest sales generally occurring in the first and second quarters for our Saucony brand and the first and third quarters for our Hind brand. We believe that sales of our products will continue to follow this seasonal cycle. Therefore, our results of operations for any one quarter may not necessarily be indicative of the results that we may achieve for a full fiscal year or any future quarter. Our operating results may be affected by order cancellations - ------------------------------------------------------------ Customers may cancel orders of our products at any time without financial penalty. As a result, our backlog does not necessarily represent actual future shipments. The rate of customer cancellations can vary quarter to quarter and year to year. If the retail market continues to be weak or weakens again in the future, our customers could cancel further orders of our products, which could have a material adverse effect on our operating results. We are susceptible to financial difficulties of retailers - --------------------------------------------------------- We sell our products primarily to major retailers, some of whom have experienced financial difficulties, including bankruptcy. We cannot predict what effect the future financial condition of such retailers will have on our business. In particular, we cannot guarantee that our bad debt expenses will not be material in future periods. We need effective marketing and advertising programs - ---------------------------------------------------- Because consumer demand for our products is heavily influenced by brand image, our business requires substantial investments in marketing and advertising. Failure of such investments to achieve the desired effect in terms of increased retailer acceptance or consumer purchase of our products could adversely affect our financial results. In addition, we believe that our success depends in part upon our ability to periodically launch new marketing and advertising programs. If we are unable to successfully design or execute new marketing and advertising, or if such programs are ineffective, we may not be able to increase or maintain our sales and our brand image. We depend on key customers - -------------------------- Approximately 44% of our gross trade receivables balance was represented by 15 customers at January 2, 2004. We anticipate that our results of operations in any given period will depend to a significant extent upon sales to major customers. The loss of or a reduction in the level of sales to one or more major customers or the failure of a major customer to proceed with a large order or to timely pay us for a large order could materially reduce our sales. Declines in revenue in our retail stores could adversely affect profitability - ----------------------------------------------------------------------------- We have made significant capital investments in opening retail stores and incur significant expenditures in operating these stores. The higher level of fixed costs related to our retail organization can adversely affect profitability, particularly in the first half of the year, as our revenue historically has been more heavily weighted to the second half of the year. Our ability to recover the investment in and expenditures of our retail organization can be adversely affected if sales at our retail stores are lower than anticipated. Our gross margin could be adversely affected if off-price sales increase as a percentage of revenue. We depend on the strength of our intellectual property protection of our products - ------------------------------------------------------------------------- We use trademarks on nearly all of our products and believe that having distinctive marks is an important factor in marketing our products. We have registered our marks in the United States and in a number of foreign countries. We may not be able to register or use our marks in each foreign country in which we seek to register them. Moreover, the registrations we seek and secure may be inadequate. We may incur significant expense in any legal proceedings to protect our trademarks. Changes in general economic conditions may adversely affect our business - ------------------------------------------------------------------------ Our business is sensitive to consumers' spending patterns, which in turn are subject to prevailing regional and national economic conditions, such as interest and taxation rates, employment levels and consumer confidence. Adverse changes in these economic factors may restrict consumer spending, thereby negatively affecting our growth and profitability. -----END PRIVACY-ENHANCED MESSAGE-----