-----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, IJAAJ/nEkq7dgYcqo8yyQrN9/izqh3IRoHebkzvNYpQMT7I1PZNX+4oTQnX9FDUU 71aZXg5AeOnqjHaKblY8HA== 0000049401-04-000076.txt : 20040813 0000049401-04-000076.hdr.sgml : 20040813 20040813154704 ACCESSION NUMBER: 0000049401-04-000076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040702 FILED AS OF DATE: 20040813 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: 04974260 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 q2doc.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 July 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, including zip code) 978-532-9000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether 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 August 6, 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 4,008,528 --------- 6,529,175 ========= SAUCONY, INC. AND SUBSIDIARIES INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements - Unaudited......................................3 Condensed Consolidated Balance Sheets as of July 2, 2004 and January 2, 2004...................................................3 Condensed Consolidated Statements of Income for the thirteen and twenty-six weeks ended July 2, 2004 and July 4, 2003.....4 Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended July 2, 2004 and July 4, 2003..................5 Notes to Condensed Consolidated Financial Statements -- July 2, 2004.......................................................6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................13-24 Item 3. Quantitative and Qualitative Disclosures about Market Risk...........24 Item 4. Controls and Procedures...........................................24-25 Part II. OTHER INFORMATION Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities............................................25 Item 4. Submission of Matters to a Vote of Security Holders...............25-26 Item 5. Other Information...................................................26 Item 6. Exhibits and Reports on Form 8-K.....................................26 Signature.....................................................................27 Exhibit Index.................................................................28 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 July 2, 2004 January 2 (Unaudited) 2004 ----------- ---------- Current assets: Cash and cash equivalents.....................................$ 14,266 $ 41,781 Short-term investments........................................ 4,870 5,788 Accounts receivable........................................... 30,751 19,167 Inventories................................................... 27,565 22,421 Deferred income taxes......................................... 1,781 2,340 Prepaid expenses and other current assets..................... 1,141 1,329 ----------- ---------- Total current assets........................................ 80,374 92,826 ----------- ---------- Property, plant and equipment, net............................... 7,888 6,201 ----------- ---------- Other assets: Goodwill, net................................................. 912 912 Deferred charges, net......................................... 138 124 Other......................................................... 116 130 ----------- ---------- Total other assets.......................................... 1,166 1,166 ----------- ---------- Total assets.....................................................$ 89,428 $ 100,193 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capitalized lease obligations..............$ 70 $ -- Accounts payable.............................................. 11,977 9,259 Accrued expenses and other current liabilities................ 11,161 9,544 ----------- ---------- Total current liabilities................................... 23,208 18,803 ----------- ---------- Long-term obligations: Capitalized lease obligations, net of current portion......... 186 -- Deferred income taxes......................................... 2,059 2,016 ----------- ---------- Total long-term obligations................................. 2,245 2,016 ----------- ---------- Minority interest in consolidated subsidiary..................... 374 320 ----------- ---------- 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 July 2, 2004, 2,520,647 and January 2, 2004, 2,711,127) 840 904 Class B, $.333 par value per share, authorized 20,000,000 shares (issued July 2, 2004, 4,007,335 and January 2, 2004, 4,210,560) 1,336 1,403 Additional paid in capital.................................... 16,727 19,010 Retained earnings............................................. 44,249 63,655 Accumulated other comprehensive income........................ 449 505 Common stock held in treasury, at cost (January 2, 2004, Class A, 190,480, Class B, 582,326)...... -- (6,423) ----------- ---------- Total stockholders' equity.................................. 63,601 79,054 ----------- ---------- Total liabilities and stockholders' equity.......................$ 89,428 $ 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 and twenty-six weeks ended July 2, 2004 and July 4, 2003 (Unaudited) (in thousands, except per share amounts) Thirteen Thirteen Twenty-Six Twenty-Six Weeks Weeks Weeks Weeks Ended Ended Ended Ended July 2, July 4, July 2, July 4, 2004 2003 2004 2003 Net sales..................................................$ 43,979 $ 34,472 $ 90,948 $ 73,540 Other revenue ............................................. 103 68 282 163 ---------- ---------- ---------- ---------- Total revenue ............................................. 44,082 34,540 91,230 73,703 ---------- ---------- ---------- ---------- Costs and expenses Cost of sales........................................... 25,908 21,044 53,820 44,916 Selling expenses........................................ 6,311 4,938 12,369 9,870 General and administrative expenses..................... 6,512 4,967 12,590 10,955 ---------- ---------- ---------- ---------- Total costs and expenses.............................. 38,731 30,949 78,779 65,741 ---------- ---------- ---------- ---------- Operating income........................................... 5,351 3,591 12,451 7,962 Non-operating income (expense) Interest income......................................... 57 53 126 127 Interest expense........................................ (5) (3) (5) (5) Foreign currency........................................ (217) 73 (361) 58 Other................................................... 14 28 17 17 ---------- ---------- ----------- ----------- Income before income taxes and minority interest........... 5,200 3,742 12,228 8,159 Provision for income taxes................................. 2,129 1,468 4,888 3,218 Minority interest in income of consolidated subsidiaries... 26 42 64 106 ---------- ---------- ---------- ---------- Net income.................................................$ 3,045 $ 2,232 $ 7,276 $ 4,835 ========== ========== ========== ========== Per share amounts: Earnings per share: Basic: Class A common stock................................$ 0.44 $ 0.35 $ 1.07 $ 0.75 ========== ========== ========== ========== Class B common stock................................$ 0.49 $ 0.38 $ 1.18 $ 0.83 ========== ========== ========== ========== Diluted: Class A common stock................................$ 0.41 $ 0.33 $ 0.98 $ 0.73 ========== ========== ========== ========== Class B common stock................................$ 0.45 $ 0.37 $ 1.08 $ 0.80 ========== ========== ========== ========== Weighted average common shares and equivalents outstanding: Basic: Class A common stock................................ 2,521 2,521 2,521 2,522 Class B common stock................................ 3,992 3,564 3,896 3,553 ---------- ---------- ---------- ---------- 6,513 6,085 6,417 6,075 ========== ========== ========== ========== Diluted: Class A common stock................................ 2,521 2,521 2,521 2,522 Class B common stock................................ 4,527 3,778 4,430 3,756 ---------- ---------- ---------- ---------- 7,048 6,299 6,951 6,278 ========== ========== ========== ========== Cash dividends per share of common stock: Class A common stock................................$ 0.050 $ 0.040 $ 4.100 $ 0.040 Class B common stock................................$ 0.055 $ 0.044 $ 4.110 $ 0.044 The accompanying notes are an integral part of these consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the Twenty-Six Weeks Ended July 2, 2004 and July 4, 2003 (Unaudited) (In thousands) July 2, July 4, 2004 2003 ---- ---- Cash flows from operating activities: Net income.................................................................$ 7,276 $ 4,835 -------- --------- Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization.............................................. 736 664 Provision for bad debts and discounts...................................... 3,580 2,731 Deferred income tax expense ............................................... 598 543 Litigation settlement ..................................................... -- (566) Tax benefit on stock option exercises........................................... 1,107 76 Other...................................................................... 12 219 Changes in operating assets and liabilities, net of effect foreign currency adjustments: (Increase) decrease in assets: Accounts receivable.................................................... (15,111) (10,769) Inventories............................................................ (5,251) 8,468 Prepaid expenses and other current assets.............................. 181 354 Increase (decrease) in liabilities: Accounts payable....................................................... 2,722 (1,645) Accrued expenses....................................................... 1,602 (1,697) -------- --------- Total adjustments............................................................ (9,824) (1,622) -------- --------- Net cash (used) provided by operating activities................................ (2,548) 3,213 -------- --------- Cash flows from investing activities: Purchases of property, plant and equipment................................... (2,101) (825) Sales of short-term investments.............................................. 5,769 -- Purchases of short-term investments......................................... (4,863) -- Change in deposits and other................................................. (42) -- -------- --------- Net cash used by investing activities........................................ (1,237) (825) -------- --------- Cash flows from financing activities: Repayment of capitalized lease obligations................................... (23) -- Dividends paid on common stock............................................... (26,595) -- Common stock repurchased..................................................... -- (126) Issuances of common stock, stock option exercises............................ 2,550 341 Issuances of common stock, stock purchase warrant exercises.................. 352 -- -------- --------- Net cash (used) provided by financing activities................................ (23,716) 215 Effect of exchange rate changes on cash and cash equivalents.................... (14) (383) -------- --------- Net (decrease) increase in cash and cash equivalents............................ (27,515) 2,220 Cash and equivalents at beginning of period..................................... 41,781 34,483 -------- --------- Cash and equivalents at end of period...........................................$ 14,266 $ 36,703 ======== ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes, net of refunds...............................................$ 1,952 $ 3,598 ======== ========= Interest...................................................................$ 5 $ 5 ======== ========= 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 July 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 and twenty-six weeks ended July 2, 2004 are not necessarily indicative of the results for the entire year. NOTE 2 - INVENTORIES Inventories at July 2, 2004 and January 2, 2004 consisted of the following: July 2, January 2, 2004 2004 ---- ---- Finished goods.......................$ 27,487 $ 22,322 Raw material and supplies............ 46 34 Work in progress..................... 32 65 ----------- ----------- Total................................$ 27,565 $ 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 Twenty-Six Weeks Ended Ended -------------------------- -------------------------- July 2, 2004 July 4, 2003 July 2, 2004 July 4, 2003 ------------ ------------ ------------ ------------ Net income available to Class A and Class B common stockholders $ 3,045 $ 2,232 $ 7,276 $ 4,835 --------- --------- --------- --------- Allocation of undistributed net income: Basic: Class A common stock.............................$ 1,111 $ 874 $ 2,695 $ 1,896 Class B common stock............................. 1,934 1,358 4,581 2,939 --------- --------- --------- --------- $ 3,045 $ 2,232 $ 7,276 $ 4,835 ========= ========= ========= ========= Diluted: Class A common stock.............................$ 1,023 $ 843 $ 2,481 $ 1,833 Class B common stock............................. 2,022 1,389 4,795 3,002 --------- --------- --------- --------- $ 3,045 $ 2,232 $ 7,276 $ 4,835 ========= ========= ========= ========= Weighted average common shares and equivalents outstanding: Basic: Class A common stock 2,521 2,521 2,521 2,522 Class B common stock 3,992 3,564 3,896 3,553 --------- --------- -------- -------- 6,513 6,085 6,417 6,075 ========= ========= ======== ======== Diluted: Class A common stock 2,521 2,521 2,521 2,522 Class B common stock 4,527 3,778 4,430 3,756 --------- --------- -------- -------- 7,048 6,299 6,951 6,278 ========= ========= ======== ======== Earnings per share: Basic: Class A common stock $ 0.44 $ 0.35 $ 1.07 $ 0.75 ========= ========= ======== ========= Class B common stock $ 0.49 $ 0.38 $ 1.18 $ 0.83 ========= ========= ======== ========= Diluted: Class A common stock $ 0.41 $ 0.33 $ 0.98 $ 0.73 ========= ========= ======== ========= Class B common stock $ 0.45 $ 0.37 $ 1.08 $ 0.80 ========= ========= ======== =========
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 and twenty-six weeks ended July 2, 2004, compared to the thirteen and twenty-six weeks ended July 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 was due to the issuance of approximately 386,000 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 for the special dividend, were increased due to 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. 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 209,000 shares of common stock outstanding at July 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. Options to purchase 332,000 shares of common stock outstanding at July 4, 2003 were not included in the computations of diluted earnings per share, for the twenty-six week period then-ended, since the options were anti-dilutive. All of the options to purchase shares of common stock outstanding at July 2, 2004 were included in the computations of diluted earnings per share for the thirteen and twenty-six week periods then-ended. 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 twenty-six weeks ended July 2, 2004 and the twenty-six weeks ended July 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 $71 and $72 for the thirteen weeks ended July 2, 2004 and July 4, 2003, respectively, and $1,107 and $76 in the twenty-six weeks ended July 2, 2004 and July 4, 2003, respectively, that have been credited to additional paid-in capital. Had the Company determined the stock-based compensation expense for the Company's stock options based upon the fair value at the grant date for stock option awards for the thirteen weeks and twenty-six weeks ended July 2, 2004 and July 4, 2003, consistent with the fair value method provisions of SFAS 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
Thirteen Weeks Ended Thirteen Weeks Ended July 2, 2004 July 4, 2003 ----------------------- ----------------------- Basic Diluted Basic Diluted -------- --------- --------- ---------- Net income: As reported........................................$ 3,045 $ 3,045 $ 2,232 $ 2,232 Add:Stock-based compensation expense included in reported net income, net of related tax benefit............................. -- -- 6 6 Less:Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax benefit................................ (349) (349) (248) (248) -------- --------- --------- --------- Pro forma net income ................................$ 2,696 $ 2,696 $ 1,990 $ 1,990 ======== ========= ========= ========= Pro forma net income allocated: Class A common stock.............................$ 983 $ 906 $ 782 $ 760 Class B common stock............................. 1,713 1,790 1,208 1,230 -------- --------- --------- --------- Total.....................................$ 2,696 $ 2,696 $ 1,990 $ 1,990 ======== ========= ========= ========= Thirteen Weeks Ended Thirteen Weeks Ended July 2, 2004 July 4, 2003 ---------------------- ---------------------- Basic Diluted Basic Diluted -------- --------- --------- --------- Pro forma earnings per share: Class A common stock As reported........................................$ 0.44 $ 0.41 $ 0.35 $ 0.33 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) (0.05) (0.04) (0.03) -------- -------- --------- --------- Pro forma net income per share.......................$ 0.39 $ 0.36 $ 0.31 $ 0.30 ======== ======== ========= ========= Thirteen Weeks Ended Thirteen Weeks Ended July 2, 2004 July 4, 2003 ---------------------- --------------------- Basic Diluted Basic Diluted -------- --------- --------- --------- Pro forma earnings per share: Class B common stock As reported........................................$ 0.49 $ 0.45 $ 0.38 $ 0.37 Add:Stock-based compensation expense included in reported net income, 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......................... (0.06) (0.05) (0.04) (0.04) -------- -------- --------- ---------- Pro forma net income per share.......................$ 0.43 $ 0.40 $ 0.34 $ 0.33 ======== ======== ========= ========== Twenty-Six Weeks Ended Twenty-Six Weeks Ended July 2, 2004 July 4, 2003 ----------------------- ---------------------- Basic Diluted Basic Diluted --------- --------- --------- --------- Net income: As reported........................................$ 7,276 $ 7,276 $ 4,835 $ 4,835 Add:Stock-based compensation expense included in reported net income, net of related tax benefit............................. -- -- 11 11 Less:Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax benefit................................ (687) (687) (395) (395) -------- --------- --------- --------- Pro forma net income ................................$ 6,589 $ 6,589 $ 4,451 $ 4,451 ======== ========= ========= ========= Pro forma net income allocated: Class A common stock.............................$ 2,440 $ 2,247 $ 1,746 $ 1,690 Class B common stock............................. 4,149 4,342 2,705 2,761 -------- --------- --------- --------- Total.....................................$ 6,589 $ 6,589 $ 4,451 $ 4,451 ======== ========= ========= ========= Twenty-Six Weeks Ended Twenty-Six Weeks Ended July 2, 2004 July 4, 2003 ----------------------- ---------------------- Basic Diluted Basic Diluted ----- ------- ----- ------- Pro forma earnings per share: Class A common stock As reported........................................$ 1.07 $ 0.98 $ 0.75 $ 0.73 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......................... (0.10) (0.09) (0.06) (0.06) -------- -------- --------- --------- Pro forma net income per share.......................$ 0.97 $ 0.89 $ 0.69 $ 0.67 ======== ======== ========= ========= Twenty-Six Weeks Ended Twenty-Six Weeks Ended July 2, 2004 July 4, 2003 ---------------------- ---------------------- Basic Diluted Basic Diluted ----- ------- ----- ------- Pro forma earnings per share: Class B common stock As reported........................................$ 1.18 $ 1.08 $ 0.83 $ 0.80 Add:Stock-based compensation expense included in reported net income, 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......................... (0.11) (0.10) (0.07) (0.06) -------- -------- --------- ---------- Pro forma net income per share.......................$ 1.07 $ 0.98 $ 0.76 $ 0.74 ======== ======== ========= ==========
The fair value of options at date of grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: Twenty-Six Weeks Twenty-Six Weeks Ended Ended July 2, 2004 July 4, 2003 ------------ ------------ Expected life (years).................. 5.0 5.0 Risk-free interest rate................ 3.0% 2.8% Expected volatility.................... 55.1% 66.6% Expected dividend yield................ 1.2% 1.4% NOTE 5 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Thirteen Twenty-Six Twenty-Six Weeks Weeks Weeks Weeks Ended Ended Ended Ended July 2, 2004 July 4, 2003 July 2, 2004 July 4, 2003 ------------ ------------ ------------ ------------ Net income................................................$ 3,045 $ 2,232 $ 7,276 $ 4,835 Other comprehensive income: Foreign currency translation adjustments, net of tax........................................... 120 578 (56) 832 ------- -------- -------- ------- Comprehensive income......................................$ 3,165 $ 2,810 $ 7,220 $ 5,667 ======= ======== ======== =======
NOTE 6 - GOODWILL AND DEFERRED CHARGES Goodwill and intangible assets as of July 2, 2004 and January 2, 2004 are as follows:
July 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 (1,026) 109 1,060 (992) 68 Capitalized debt financing costs........ 87 (87) -- 87 (76) 11 Other.................... 444 (415) 29 444 (399) 45 -------- --------- ------- -------- --------- ------- Total......................$ 1,666 $ (1,528) $ 138 $ 1,591 $ (1,467) $ 124 ======== ========= ======= ======== ========= =======
Amortization of intangible assets was $28 and $56, respectively, in the thirteen weeks ended July 2, 2004 and July 4, 2003. For the twenty-six weeks ended July 2, 2004 and July 4, 2003, amortization expense was $60 and $103, respectively. NOTE 7 - OPERATING SEGMENT DATA The Company's operating segments are organized based on the nature of products and consist of the Saucony segment and Other Products segment. The determination of the reportable segments for the thirteen and twenty-six weeks ended July 2, 2004 and July 4, 2003, as well as the basis of measurement of segment profit or loss, is consistent with the segment reporting disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2004.
Thirteen Thirteen Twenty-Six Twenty-Six Weeks Weeks Weeks Weeks Ended Ended Ended Ended July 2, 2004 July 4, 2003 July 2, 2004 July 4, 2003 ------------ ------------ ------------ ------------ Revenues: Saucony...........................................$ 38,438 $ 29,874 $ 79,677 $ 62,425 Other Products.................................... 5,644 4,666 11,553 11,278 --------- --------- --------- -------- Total revenue..................................$ 44,082 $ 34,540 $ 91,230 $ 73,703 ========= ========= ========= ======== Income (loss) before income taxes and minority interest: Saucony...........................................$ 5,193 $ 3,794 $ 11,565 $ 7,776 Other Products.................................... 7 (52) 663 383 --------- --------- --------- -------- Total ...............................................$ 5,200 $ 3,742 $ 12,228 $ 8,159 ========= ========= ========= ========
NOTE 8 - STOCKHOLDERS' EQUITY Effective July 1, 2004, companies incorporated in Massachusetts became subject to the Massachusetts Business Corporation Act, Chapter 156D. Chapter 156D provides that shares that are reacquired by a company become authorized but unissued shares under Section 6.31. As a result, Chapter 156D eliminates the concept of "treasury shares" and provides that shares reacquired by a company become "authorized but unissued" shares. Accordingly, at July 2, 2004, we have redesignated the Company's existing treasury shares, at an aggregate cost of $6,565, as authorized but unissued and allocated this amount to the common stock's par value and additional paid in capital. NOTE 9 - SUPPLEMENTAL CASH FLOW DISCLOSURE In February 2004, two officers who are also directors and principal holders of the Company's Class A common stock, each delivered 3,609 shares 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. NOTE 10 - SUBSEQUENT EVENT On August 2, 2004, Saucony announced that it has retained the services of Chestnut Securities, Inc., Boston, Massachusetts, to assist it in its analysis and consideration of various strategic alternatives that may be available to it, including a possible sale of Saucony. Saucony has not determined whether to pursue any particular strategic alternative. There can be no assurance that, if any transaction is commenced, it will be completed or as to the value that any such transaction might have for Saucony's stockholders. 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 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 Thirteen Weeks and Twenty-Six Weeks Ended July 2, 2004 Compared to Thirteen Weeks and Twenty-Six Weeks Ended July 4, 2003 -------------------------------------------- Increase (Decrease) ------------------- Thirteen Weeks Twenty-Six Weeks -------------- ---------------- Net sales.............................................$ 9,507 27.6% $ 17,408 23.7% Gross profit......................................... 4,643 34.6% 8,504 29.7% Selling, general and administrative expenses......... 2,918 29.5% 4,134 19.9%
Increase (Decrease) ------------------- Thirteen Weeks Twenty-Six Weeks -------------- ---------------- Operating income......................................... $1,760 $4,489 Income before income taxes and minority interest......... 1,458 4,069 Net income............................................... 813 2,441
Percent of Net Sales -------------------- Thirteen Weeks Twenty-Six Weeks Ended Ended ------------------ ------------------- July 2, July 4, July 2, July 4, 2004 2003 2004 2003 ---- ---- ---- ---- Gross profit......................................... 41.1% 39.0% 40.8% 38.9% Selling, general and administrative expenses......... 29.2 28.7 27.4 28.3 Operating income..................................... 12.2 10.4 13.7 10.8 Income before income taxes and minority interest..... 11.8 10.9 13.4 11.1 Net income........................................... 6.9 6.5 8.0 6.6
The following table sets forth the approximate contribution to net sales (in dollars and as a percentage of consolidated net sales) attributable to our Saucony segment and our Other Products segment for the thirteen and twenty-six weeks ended July 2, 2004 and July 4, 2003:
Thirteen Weeks Ended -------------------- July 2, 2004 July 4, 2003 ------------ ------------ Saucony..........................$ 38,361 87.2% $ 29,828 86.5% Other Products................... 5,618 12.8% 4,644 13.5% --------- ----- --------- ----- Total............................$ 43,979 100.0% $ 34,472 100.0% ========= ===== ========= ===== Twenty-Six Weeks Ended ---------------------- July 2, 2004 July 4, 2003 ------------ ------------ Saucony..........................$ 79,460 87.4% $ 62,313 84.7% Other Products................... 11,488 12.6% 11,227 15.3% --------- ----- --------- ----- Total............................$ 90,948 100.0% $ 73,540 100.0% ========= ===== ========= =====
Thirteen Weeks Ended July 2, 2004 Compared to Thirteen Weeks Ended July 4, 2003 - ------------------------------------------------------------------------------- Consolidated Net Sales Net sales increased $9,507, or 28%, to $43,979 in the thirteen weeks ended July 2, 2004 from $34,472 in the thirteen weeks ended July 4, 2003. On a geographic basis, domestic net sales increased $8,320, or 31%, to $35,459 in the thirteen weeks ended July 2, 2004 from $27,139 in the thirteen weeks ended July 4, 2003. International net sales increased $1,187, or 16%, to $8,520 in the thirteen weeks ended July 2, 2004 from $7,333 in the thirteen weeks ended July 4, 2003. Favorable changes in foreign exchange rates accounted for $338 of the international sales increase in the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003. Saucony Brand Segment Worldwide net sales of Saucony branded footwear and Saucony branded apparel increased $8,533, or 29%, to $38,361 in the thirteen weeks ended July 2, 2004 from $29,828 in the thirteen weeks ended July 4, 2003, due primarily to an increase in domestic footwear unit volume and, to a lesser extent, increased technical footwear unit volumes at our international subsidiaries and favorable currency exchange resulting from a weaker U.S. dollar against European and Canadian currencies, partially offset by lower domestic selling prices. The volume of footwear sold in the thirteen weeks ended July 2, 2004 increased 30% to 1,319 pair from 1,014 pair in the thirteen weeks ended July 4, 2003. Domestic net sales increased $7,462, or 33%, to $30,146 in the thirteen weeks ended July 2, 2004 from $22,684 in the thirteen weeks ended July 4, 2003, due primarily to a 36% 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 July 2, 2004, increased to 1,096 pair from 805 pair in the thirteen weeks ended July 4, 2003. The footwear unit volume increase in the thirteen weeks ended July 2, 2004 was due primarily to a 90% 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 channels, a 27% increase in technical footwear unit volumes and a 63% 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 a 9% decrease in special make up footwear unit volumes. Our Originals footwear accounted for 26% of domestic footwear unit volume in the thirteen weeks ended July 2, 2004, compared to 21% in the thirteen weeks ended July 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, sporting goods and value channels and, to a lesser extent, the sales of new products in the thirteen weeks ended July 2, 2004. The average wholesale per pair selling prices for domestic footwear decreased in the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 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 products and increased rebates provided to certain domestic customers. International net sales increased $1,071, or 15%, to $8,215 in the thirteen weeks ended July 2, 2004 from $7,144 in the thirteen weeks ended July 4, 2003, due primarily to increased footwear unit volume and, to a lesser extent, higher wholesale per pair average selling prices and favorable changes in foreign exchange rates, compared to the thirteen weeks ended July 4, 2003. Footwear unit volumes increased 6% in the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003. The volume of international footwear sold in the thirteen weeks ended July 2, 2004 increased 6% to 223 pair from 210 pair in the thirteen weeks ended July 4, 2003. Footwear unit volumes at our Dutch and Canadian subsidiaries increased 18% and 7%, respectively, in the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003, due primarily to increased technical footwear unit volumes. Footwear unit volumes at our British subsidiary were flat. International distributor footwear unit volumes increased 4% in the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003, due primarily to increased technical footwear unit volumes sold throughout our international distributor base, partially offset by a decrease in Originals footwear unit volumes sold in the Japanese footwear market. Cross-over footwear typically sells at higher wholesale per pair selling prices than Originals footwear. The international 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 July 2, 2004, compared to the thirteen weeks ended July 4, 2003. Other Products Segment Worldwide sales of Other Products increased $974, or 21%, to $5,618 in the thirteen weeks ended July 2, 2004 from $4,644 in the thirteen weeks ended July 4, 2003, due primarily to a 29% increase in sales at our factory outlet stores and, to a lesser extent, a 14% increase in domestic sales of our Hind brand apparel. Domestic net sales of Other Products increased $858, or 19%, to $5,313 in the thirteen weeks ended July 2, 2004 from $4,455 in the thirteen weeks ended July 4, 2003, due primarily to increased sales at our factory outlet stores and, to a lesser extent, increased sales of Hind brand apparel. Sales at our factory outlet stores increased 29% in the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003, due primarily to sales derived from additional factory outlet stores opened after April 4, 2003 and the addition of two factory outlet stores which were opened in March 2004 and, to a lesser extent, increased sales at our factory outlet stores open for more than one year. Hind apparel sales increased 14% due primarily to an 18% increase in the average wholesale per item selling price of our Hind apparel, partially offset by a 3% decrease in Hind apparel unit volume. The increase in average wholesale per item selling price of our Hind apparel was due primarily to new product introductions in the thirteen weeks ended July 2, 2004, carrying higher wholesale per item sell prices and lower sales of closeout apparel in the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003. Sales of closeout apparel accounted for approximately 16% of domestic Hind apparel net sales in the thirteen weeks ended July 2, 2004, compared to 32% of domestic Hind apparel net sales in the thirteen weeks ended July 4, 2003. During the thirteen weeks ended July 2, 2004, our closeout sales volume decreased, compared to the thirteen weeks ended July 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 a change in our product sourcing. International net sales of Other Products increased $116, or 61%, to $305 in the thirteen weeks ended July 2, 2004 from $189 in the thirteen weeks ended July 4, 2003, due primarily to sales at our factory outlet stores in Canada, which opened in the first quarter of 2004, and increased Hind apparel unit volume sold to international distributors. Costs and Expenses The Company's gross margin in the thirteen weeks ended July 2, 2004 increased to 41.1% compared to 39.0% in the thirteen weeks ended July 4, 2003, due primarily to favorable currency exchange due to the impact of a weaker U.S. dollar against European and Canadian currencies, higher levels of domestic at once shipments, which shipments carry lower discounts, and improved margins at our factory outlet division. Partially offsetting these margin increases in the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003 were increased footwear unit volume of our mid-priced cross-over footwear sold into the athletic mall, sporting goods and value channel at lower gross margins that include rebates provided to certain Saucony domestic customers. Selling, general and administrative expenses as a percentage of net sales increased to 29.2% in the thirteen weeks ended July 2, 2004, compared to 28.7% in the thirteen weeks ended July 4, 2003. In absolute dollars, selling, general and administrative expenses increased 29%, due primarily to increased administrative and selling payroll, print media advertising, operating expenses associated with the factory outlet division expansion, variable selling expenses, professional fees and account specific advertising and promotion. General and administrative expenses in the second quarter of 2003 included a favorable litigation settlement which reduced bad debt expense by $566. Foreign exchange rate changes increased selling and administrative expenses by $279 in the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003. Non-Operating Income (Expense) Non-operating income (expense) decreased in the thirteen weeks ended July 2, 2004 to an expense of $151, compared to income of $151 in the thirteen weeks ended July 4, 2003. The decrease was due primarily to an increase in foreign currency losses to $217 in the thirteen weeks ended July 2, 2004, compared to foreign currency gains of $73 in the thirteen weeks ended July 4, 2003, due primarily to recognizing $146 of accumulated other comprehensive losses from the closing and relocation of our Saucony International administrative office and, to a lesser extent, losses on forward foreign exchange contracts. Interest income increased to $57 in the thirteen weeks ended July 2, 2004 from $53 in the thirteen weeks ended July 4, 2003, due to higher interest rates in the thirteen weeks ended July 2, 2004. Income Before Income Taxes and Minority Interest Thirteen Weeks Ended July 2, July 4, 2004 2003 ---- ---- Segment Saucony...........................$ 5,193 $ 3,794 Other Products.................... 7 (52) --------- -------- Total.............................$ 5,200 $ 3,742 ========= ======== Income before tax and minority interest increased $1,458 in the thirteen weeks ended July 2, 2004 to $5,200, compared to $3,742 in the thirteen weeks ended July 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 July 2, 2004, compared to the thirteen weeks ended July 4, 2003, was due primarily to improved profitability at our factory outlet stores due to higher sales and improved gross margins. Income Taxes The provision for income taxes increased to $2,129 in the thirteen weeks ended July 2, 2004 from $1,468 in the thirteen weeks ended July 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 factory outlet stores. The effective tax rate increased 1.6% to 40.9% in the thirteen weeks ended July 2, 2004 from 39.3% in the thirteen weeks ended July 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 $71 during the thirteen weeks ended July 2, 2004 and of $72 during the thirteen weeks ended July 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 $26 in the thirteen weeks ended July 2, 2004, compared to $42 in the thirteen weeks ended July 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 July 2, 2004 increased to $3,045, or $0.41 per Class A share and $0.45 per Class B share on a diluted basis, compared to $2,232, or $0.33 per Class A share and $0.37 per Class B share on a diluted basis, in the thirteen weeks ended July 4, 2003. Weighted average common shares and common stock equivalents used to calculate diluted earnings per share in the thirteen weeks ended July 2, 2004 consisted of 2,521,000 Class A and 4,527,000 Class B shares, compared to 2,521,000 Class A and 3,778,000 Class B shares in the thirteen weeks ended July 4, 2003. The increase in the weighted average common shares and equivalents in the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003, was due to increased Class B common shares outstanding and the impact of our special dividend declared on February 17, 2004 which increased the dilutive effect of outstanding options. The increase in Class B common shares outstanding was due to the issuance of approximately 386,000 Class B common shares due to the exercise of stock options and stock purchase warrants, of which 356,000 Class B common shares were issued in the thirteen weeks ended April 2, 2004. Options outstanding at March 1, 2004, the ex-dividend date for the special dividend, were increased due to 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. Twenty-six weeks Ended July 2, 2004 Compared to Twenty-six weeks Ended July 4, 2003 - ---- Consolidated Net Sales Net sales increased $17,408, or 24%, to $90,948 in the twenty-six weeks ended July 2, 2004 from $73,540 in the twenty-six weeks ended July 4, 2003. On a geographic basis, domestic net sales increased $14,712, or 26%, to $71,427 in the twenty-six weeks ended July 2, 2004 from $56,715 in the twenty-six weeks ended July 4, 2003. International net sales increased $2,696, or 16%, to $19,521 in the twenty-six weeks ended July 2, 2004 from $16,825 in the twenty-six weeks ended July 4, 2003. Favorable changes in foreign exchange rates accounted for $1,606 of the international sales increase in the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003. Saucony Brand Segment Worldwide net sales of Saucony branded footwear and Saucony branded apparel increased $17,417, or 28%, to $79,460 in the twenty-six weeks ended July 2, 2004 from $62,313 in the twenty-six weeks ended July 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 twenty-six weeks ended July 2, 2004 increased 28% to 2,665 pair from 2,076 pair in the twenty-six weeks ended July 4, 2003. Domestic net sales increased $14,349, or 31%, to $60,689 in the twenty-six weeks ended July 2, 2004 from $46,340 in the twenty-six weeks ended July 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 twenty-six weeks ended July 2, 2004, increased to 2,194 pair from 1,604 pair in the twenty-six weeks ended July 4, 2003. The footwear unit volume increase in the twenty-six weeks ended July 2, 2004 was due primarily to a 94% 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, a 22% increase in technical footwear unit volumes and a 59% 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 a 10% decrease in special make up footwear unit volumes. Our Originals footwear accounted for 26% of domestic footwear unit volume in the twenty-six weeks ended July 2, 2004, compared to 22% of domestic footwear unit volume in the twenty-six weeks ended July 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 twenty-six weeks ended July 2, 2004. The average wholesale per pair selling price for domestic footwear decreased in the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 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 $2,798, or 18%, to $18,771 in the twenty-six weeks ended July 2, 2004 from $15,973 in the twenty-six weeks ended July 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. The international 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 twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003. Cross-over footwear typically sells at higher wholesale per pair selling prices than Originals footwear. The volume of international footwear sold in the twenty-six weeks ended July 2, 2004 decreased to 471 pair from 472 pair in the twenty-six weeks ended July 4, 2003. Footwear unit volumes at our foreign subsidiaries increased 7% in the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003, due primarily to increased technical footwear unit volumes sold at our Canadian and European subsidiaries. International distributor footwear unit volumes decreased 14% in the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003, due primarily to a 71% decrease in Originals footwear unit volumes sold in the Japanese footwear market, partially offset by a 21% increase in footwear unit volumes sold, due primarily to increased technical footwear unit volume sold to our distributors in Australia and in Europe. Other Products Segment Worldwide sales of Other Products increased $261, or 2%, to $11,488 in the twenty-six weeks ended July 2, 2004 from $11,227 in the twenty-six weeks ended July 4, 2003, due primarily to a 35% increase in sales at our factory outlet stores, partially offset by a 13% decrease in domestic sales of our Hind brand apparel. Domestic net sales of Other Products increased $363, or 4%, to $10,738 in the twenty-six weeks ended July 2, 2004 from $10,375 in the twenty-six weeks ended July 4, 2003, due primarily to increased sales at our factory outlet stores, partially offset by decreased sales of our Hind brand apparel. Sales at our factory outlet division increased 35% in the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003, due primarily to sales derived from additional factory outlet stores opened since April 4, 2003 and, to a lesser extent, a 12% sales increase at our factory outlet stores open for more than one year. Hind apparel sales decreased 13% due primarily to a 20% decrease in Hind apparel unit volume, partially offset by a 9% increase in the average wholesale per item selling price of our Hind brand apparel. Both the decrease in Hind apparel unit volume and the increase in the average wholesale per item selling price of our Hind apparel were due to lower closeout unit volumes sold in the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003. Sales of closeout apparel accounted for approximately 11% of domestic Hind apparel net sales in the twenty-six weeks ended July 2, 2004, compared to 26% of domestic Hind apparel net sales in the twenty-six weeks ended July 4, 2003. During the twenty-six weeks ended July 2, 2004, our closeout sales volume decreased, compared to the twenty-six weeks ended July 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 a change in our product sourcing. International net sales of Other Products decreased $102, or 12%, to $750 in the twenty-six weeks ended July 2, 2004 from $852 in the twenty-six weeks ended July 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 twenty-six weeks ended July 2, 2004 increased to 40.8%, compared to 38.9% in the twenty-six weeks ended July 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, higher levels of domestic at once footwear shipments, which shipments carry lower discounts, and improved margins at our factory outlet division. The improved margins on our Hind brand apparel during the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003, were due primarily to changes in product sourcing, which lowered our product cost and increased our first quality gross margins, lower closeout sales and lower inventory provisions. Offsetting these margin increases in the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 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 27.4% in the twenty-six weeks ended July 2, 2004, compared to 28.3% in the twenty-six weeks ended July 4, 2003. In absolute dollars, selling, general and administrative expenses increased 20%, due primarily to increased administrative and selling payroll, print media advertising, operating expenses associated with a factory outlet division expansion, professional fees, variable selling expenses and account specific advertising and promotion. General and administrative expenses in the twenty-six weeks ended July 4, 2003 included a favorable litigation settlement which reduced bad debt expense by $566. Foreign exchange rate changes increased selling and administrative expenses by $493 in the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003. Non-Operating Income (Expense) Non-operating income (expense) decreased in the twenty-six weeks ended July 2, 2004 to an expense of $223, compared to income of $197 in the twenty-six weeks ended July 4, 2003. The decrease was due primarily to an increase in foreign currency losses to $361 in the twenty-six weeks ended July 2, 2004, compared to foreign currency gains of $58 in the twenty-six weeks ended July 4, 2003, due primarily to losses on forward foreign exchange contracts and, to a lesser extent, recognizing $146 of accumulated other comprehensive losses from the closing and relocation of our Saucony International administrative office. Income Before Income Taxes and Minority Interest Twenty-Six weeks Ended July 2, July 4, 2004 2003 ---- ---- Segment Saucony.........................$ 11,565 $ 7,776 Other Products.................. 663 383 --------- -------- Total...........................$ 12,228 $ 8,159 ========= ======== Income before tax and minority interest increased $4,069 in the twenty-six weeks ended July 2, 2004 to $12,228, compared to $8,159 in the twenty-six weeks ended July 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 twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003, was due primarily to improved profitability at our factory outlet stores due to higher sales and improved gross margins and 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 $4,888 in the twenty-six weeks ended July 2, 2004 from $3,218 in the twenty-six weeks ended July 4, 2003, due primarily to higher pre-tax income realized by our domestic and international Saucony businesses and, to a lesser extent, higher pre-tax income realized by our factory outlet stores and Hind apparel brand. The effective tax rate increased 0.6% to 40.0% in the twenty-six weeks ended July 2, 2004 from 39.4% in the twenty-six weeks ended July 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 $1,107 during the twenty-six weeks ended July 2, 2004 and of $76 during the twenty-six weeks ended July 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 $64 in the twenty-six weeks ended July 2, 2004, compared to $106 in the twenty-six weeks ended July 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 twenty-six weeks ended July 2, 2004 increased to $7,276, or $0.98 per Class A share and $1.08 per Class B share on a diluted basis, compared to $4,835, or $0.73 per Class A share and $0.80 per Class B share on a diluted basis, in the twenty-six weeks ended July 4, 2003. Weighted average common shares and common stock equivalents used to calculate diluted earnings per share in the twenty-six weeks ended July 2, 2004 consisted of 2,521,000 Class A and 4,430,000 Class B shares, compared to 2,522,000 Class A and 3,756,000 Class B shares in the twenty-six weeks ended July 4, 2003. The increase in the weighted average common shares and equivalents in the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003, was due to increased Class B common shares outstanding and the impact of our special dividend declared on February 17, 2004, which increased the dilutive effect of outstanding options. The increase in Class B common shares outstanding was due to the issuance of approximately 386,000 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 for the special dividend, were increased due to 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. Liquidity and Capital Resources As of July 4, 2003, our cash and cash equivalents totaled $14,266, a decrease of $27,515 from January 2, 2004. The decrease was due primarily to the payment of a special cash dividend of $25,990 in March 2004 and regular quarterly cash dividends of $605, the use of cash from operations of $2,548 and cash outlays for capital assets of $2,101, due to an expansion of our corporate offices. This decrease in cash was offset in part by the receipt of $2,902 from the issuance of shares of our common stock as a result of option and common stock purchase warrant exercises and a reduction in short-term investments of $908. Our accounts receivable, net of the provision for bad debts and discounts, at July 4, 2004 increased $11,531, compared to at January 2, 2004, due primarily to increased sales of our Saucony footwear products we experienced in the twenty-six weeks ended July 2, 2004. Our days' sales outstanding for accounts receivable increased to 62 days in the twenty-six weeks ended July 2, 2004 from 61 days in the twenty-six weeks ended July 4, 2003, due to the timing of our shipments in the twenty-six weeks ended July 2, 2004, much of which shipped in June 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, which does not include our second quarter 2003 litigation settlement, increased to $3,580 in the twenty-six weeks ended July 2, 2004 from $2,731 in the twenty-six weeks ended July 4, 2003 due primarily to increased sales discounts on higher sales volumes in the thirteen weeks ended July 2, 2004 and, to a lesser extent, an increase in the provision for bad debts. Inventories increased $5,251 in the twenty-six weeks ended July 2, 2004, compared to at January 2, 2004. Our inventory turns increased to 4.3 turns in the twenty-six weeks ended July 2, 2004 from 3.8 turns in the twenty-six weeks ended July 4, 2003. The number of days' sales in inventory increased to 93 days in the twenty-six weeks ended July 2, 2004 from 79 days in the twenty-six weeks ended July 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 inventory by the average daily cost of sales for the period. The increases in our inventory and in our days' sales in inventory were due primarily to higher levels of domestic Saucony technical and cross-over footwear inventory which we expect to ship at customary margin levels in the second half of fiscal 2004. Principal factors, other than net income, accounts receivable, provision for bad debts and discounts and inventory, affecting our operating cash flows in the twenty-six weeks ended July 2, 2004 included a $2,722 increase in accounts payable, due primarily to increased inventory received in the second quarter of fiscal 2004, and a $1,602 increase in accrued expenses, due primarily to increased income tax accruals on higher pre-tax income, increased freight and inventory importation accruals and increased accruals due to higher levels of operating expenses. Our liquidity is contingent upon a number of factors, principally our future operating results. Management believes that our current cash and cash equivalents 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 twenty-six weeks ended July 2, 2004, we used $2,548 in cash to fund operations, due primarily to an increase in accounts receivable and increased inventories. In the twenty-six weeks ended July 4, 2003, we generated $3,213 in cash from operations due primarily to a decrease in inventories. The term of our primary credit facility will expire on August 30, 2004. We are in discussions with the lender under our primary credit facility to extend the term of that facility, however, that term may not be extended, or if extended, it may not be extended on the same terms. At July 2, 2004 and July 4, 2003, we had no borrowings outstanding under our credit facilities. Off-Balance Sheet Arrangements We had letters of credit outstanding of $474 at July 2, 2004. All of the letters of credit were issued for the purchase of inventory. We had forward foreign exchange contracts of $7,580 at July 2, 2004, all of which are due to settle within the next 12 months. Amounts Committed July 2, 2004 ------------ Letters of credit...............................$ 474 Forward foreign exchange contracts.............. 7,580 --------- Total...........................................$ 8,054 ========= We use letters of credit to facilitate a limited number of supplier arrangements for our Hind apparel inventory. We do not believe our use of letters of credit materially affects our liquidity. If we did not use letters of credit we would make alternative arrangements with these Hind apparel inventory suppliers. Our primary market risk is the risk of exposure to unfavorable movements in exchange rates between the U.S. dollar and the Canadian dollar, the British Pound Sterling and the Euro. We use forward exchange contracts to hedge firm and anticipated purchase and sale commitments denominated in currencies other than our subsidiaries' local currencies. The purpose of our currency hedging activities is to protect our local subsidiaries' cash flows related to these commitments from fluctuations in currency exchange rates, the loss of which would expose us to increased market risk and fluctuations in our liquidity. 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 July 2, 2004, we experienced $217 in foreign currency losses, due primarily to recognizing $146 of accumulated other comprehensive losses and, to a lesser extent, losses on forward foreign exchange contracts, compared to foreign currency gains of $73 in the thirteen weeks ended July 4, 2003. During the twenty-six weeks ended July 2, 2004, we experienced $361 in foreign currency losses, due primarily to losses on forward foreign exchange contracts and, to a lesser extent, recognizing $146 of accumulated other comprehensive losses, compared to foreign currency gains of $58 in the twenty-six weeks ended July 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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of July 2, 2004. Based on this evaluation, our chief executive officer and chief financial officer have concluded that as of July 2, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to Saucony, including its consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by 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 July 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 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. We did not make any repurchases under this plan during the quarter ended July 2, 2004, and as of July 2, 2004 a maximum of 168,376 shares of our outstanding common stock, either Class A or Class B or a combination thereof, may be purchased under the plan. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our 2004 Annual Meeting of Stockholders held on May 19, 2004, the following matters were acted upon by our stockholders: 1. The election of John H. Fisher, Charles A. Gottesman, Robert J. LeFort, Jr., Jonathan O. Lee and John J. Neuhauser as directors. 2. The ratification of the appointment by the Audit Committee of our Board of Directors of the registered public accounting firm of Deloitte & Touche LLP as our independent auditors for the 2004 fiscal year. The results of the voting on these matters presented to stockholders at the meeting is set forth below: Votes Votes For Withheld --- -------- 1. Election of Directors John H. Fisher 2,433,105 5,590 Charles A. Gottesman 2,433,105 5,590 Robert J. LeFort, Jr. 2,351,085 87,610 Jonathan O. Lee 2,433,105 5,590 John J. Neuhauser 2,433,105 5,590 Votes Votes For Against Abstain --- ------- ------- 2. Ratification of appointment of Deloitte & Touche LLP 2,428,545 9,585 565 ITEM 5. OTHER INFORMATION On August 2, 2004, Saucony announced that it has retained the services of Chestnut Securities, Inc., Boston, Massachusetts, to assist it in its analysis and consideration of various strategic alternatives that may be available to it, including the possible sale of Saucony. Saucony has not determined whether to pursue any particular strategic alternative. There can be no assurance that, if any transaction is commenced, it will be completed or as to the value that any such transaction might have for Saucony's stockholders. 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 April 28, 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 financial results for the fiscal quarter ended April 2, 2004. On May 19, 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 our regular quarterly cash dividend. SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Saucony, Inc. Date: August 13, 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 - ----------- ----------- 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-31 2 q2x311.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: August 13, 2004 /s/ John H. Fisher - ---------------------- ------------------ Name: John H. Fisher Title: President and Chief Executive Officer EX-31 3 q2x312.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: August 13, 2004 /s/ Michael Umana - ---------------------- ----------------- Name: Michael Umana Title: Executive Vice President, Finance Chief Financial Officer EX-32 4 q2x321.txt 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 July 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: August 13, 2004 /s/ John H. Fisher - ------ --------------- ------------------ John H. Fisher Chief Executive Officer EX-32 5 q2ex322.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 July 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: August 13, 2004 /s/ Michael Umana - ------ --------------- ----------------- Michael Umana Chief Financial Officer EX-99 6 q2x991.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-----