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 5, 2002 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 000-05083 SAUCONY, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-1465840 (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) 13 Centennial Drive, Peabody, MA 01960 (Address of principal executive offices) 978-532-9000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate 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 12, 2002 ----- --------------------- Class A Common Stock-$.33 1/3 Par Value Per Share 2,566,747 Class B Common Stock-$.33 1/3 Par Value Per Share 3,535,859 ---- - - --------- 6,102,606 ========= SAUCONY, INC. AND SUBSIDIARIES INDEX Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements - Unaudited Condensed Consolidated Balance Sheets as of July 5, 2002 and January 4, 2002................................................3 Condensed Consolidated Statements of Income for the thirteen and twenty-six weeks ended July 5, 2002 and July 6, 2001...............4 Condensed Consolidated Statements of Cash Flows for the thirteen and twenty-six weeks ended July 5, 2002 and July 6, 2001...........5 Notes to Condensed Consolidated Financial Statements -- July 5, 2002....................................................6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................11-20 Item 3. Quantitative and Qualitative Disclosures about Market Risk........20 Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders...............21 Item 6. Exhibits and Reports on Form 8-K..................................21 Signature..................................................................22 Exhibit Index..............................................................23 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - UNAUDITED SAUCONY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Amounts in thousands) ASSETS July 5, January 4, 2002 2002 ---- ---- Current assets: Cash and cash equivalents....................................................$ 20,477 $ 22,227 Accounts receivable.......................................................... 26,559 14,742 Inventories.................................................................. 25,883 28,404 Prepaid expenses and other current assets.................................... 3,425 4,165 ----- ----- Total current assets....................................................... 76,344 69,538 ------ ------ Property, plant and equipment, net.............................................. 5,900 6,989 ----- ----- Other assets.................................................................... 1,423 1,573 ----- ----- Total assets....................................................................$ 83,667 $ 78,100 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 621 $ -- Current maturities of long-term debt......................................... 9 88 Accounts payable............................................................. 7,015 6,635 Accrued expenses and other current liabilities............................... 6,360 5,602 ----- ----- Total current liabilities.................................................. 14,005 12,325 ------ ------ Long-term obligations: Deferred income taxes........................................................ 1,992 1,949 Other long-term obligations.................................................. 213 204 --- --- Total long-term obligations................................................ 2,205 2,153 ===== ===== Minority interest in consolidated subsidiaries.................................. 606 460 --- --- Stockholders' equity: Preferred stock, $1.00 par; authorized 500,000 shares; none issued........... -- -- Common stock: Class A, $.333 par; authorized 20,000,000 shares (issued 2002, 2,711,127 and 2001, 2,711,127)............................. 904 904 Class B, $.333 par; authorized 20,000,000 shares (issued 2002, 4,057,455 and 2001, 4,037,399)............................. 1,352 1,346 Additional paid in capital................................................... 17,490 17,398 Retained earnings............................................................ 53,552 50,702 Accumulated other comprehensive loss......................................... (885) (1,301) Common stock held in treasury, at cost (2002, 665,976; 2001, 665,976)..................................... (5,417) (5,417) Notes receivable............................................................. -- (303) Unearned compensation........................................................ (145) (167) ---- ---- Total stockholders' equity............................................... 66,851 63,162 ------ ------ Total liabilities and stockholders' equity......................................$ 83,667 $ 78,100 ========= ========== The accompanying notes are an integral part of these condensed consolidated financial statements. SAUCONY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 5, 2002 AND JULY 6, 2001 (Unaudited) (In thousands, except per share amounts) Thirteen Thirteen Twenty-Six Twenty-Six Weeks Weeks Weeks Weeks Ended Ended Ended Ended July 5, 2002 July 6, 2001 July 5, 2002 July 6, 2001 ------------ ------------ ------------ ------------ Net sales....................................................$ 36,453 $ 35,491 $ 71,240 $ 79,184 Other revenue ............................................... 33 (36) 97 67 -- --- -- -- Total revenue ............................................... 36,486 35,455 71,337 79,251 ------ ------ ------ ------ Costs and expenses Cost of sales............................................. 24,046 23,638 46,934 53,632 Selling expenses.......................................... 5,106 6,587 10,067 13,008 General and administrative expenses....................... 4,661 4,803 9,393 9,777 Plant closing credit and other non-recurring charges...... (59) -- (59) -- --- --- Total costs and expenses................................ 33,754 35,028 66,335 76,417 ------ ------ ------ ------ Operating income............................................. 2,732 427 5,002 2,834 Non-operating income (expense) Interest, net............................................. 12 (44) 36 (104) Foreign currency.......................................... (19) 109 (44) 196 Other..................................................... 97 16 160 (18) -- -- --- --- Income before income taxes and minority interest............. 2,822 508 5,154 2,908 Provision for income taxes................................... 1,216 312 2,183 1,327 Minority interest in income of consolidated subsidiaries..... 57 20 121 59 -- -- --- -- Net income...................................................$ 1,549 $ 176 $ 2,850 $ 1,522 ========= ========= ========= ======== Per share amounts: Earnings per common share: Basic.....................................................$ 0.25 $ 0.03 $ 0.47 $ 0.25 ======== ========= ========= ======== Diluted...................................................$ 0.25 $ 0.03 $ 0.46 $ 0.25 ======== ========= ========= ======== Weighted average common shares outstanding and equivalents outstanding: Primary EPS............................................. 6,099 6,074 6,092 6,078 ===== ===== ===== ===== Diluted EPS............................................. 6,214 6,152 6,168 6,173 ===== ===== ===== ===== Cash dividends per share of common stock..................... -- -- -- -- The accompanying notes are an integral part of these condensed consolidated financial statements. SAUCONY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JULY 5, 2002 AND JULY 6, 2001 (Unaudited) (In thousands) July 5, July 6, 2002 2001 ---- ---- Cash flows from operating activities: Net income.................................................................$ 2,850 $ 1,522 -------- --------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization.............................................. 898 978 Provision for bad debts and discounts...................................... 2,662 3,795 Deferred income tax expense (benefit)...................................... 284 (648) Gain on sale of equipment.................................................. (73) -- Other...................................................................... 39 91 Changes in operating assets and liabilities, net of effect of acquisitions, dispositions and foreign currency adjustments: Decrease (increase) in assets: Accounts receivable.................................................... (14,272) (6,204) Inventories............................................................ 2,991 5,965 Prepaid expenses and other current assets.............................. 45 274 Increase (decrease) in liabilities: Accounts payable....................................................... 357 (780) Accrued expenses....................................................... 1,824 (678) ----- ---- Total adjustments............................................................ (5,245) 2,793 ------ ----- Net cash provided (used) by operating activities................................ (2,395) 4,315 ------ ----- Cash flows from investing activities: Purchases of property, plant and equipment................................... (215) (701) Proceeds from the sale of equipment.......................................... 80 -- Change in deferred charges, deposits and other............................... 17 24 Marketable securities - realized and unrealized losses....................... 34 18 -- -- Net cash used by investing activities........................................... (84) (659) --- ---- Cash flows from financing activities: Net short-term borrowings.................................................... 610 147 Repayment of long-term debt and capital lease obligations.................... (79) (185) Common stock repurchased..................................................... -- (133) Receipt of payment on notes receivable....................................... 312 -- Issuances of common stock, including options................................. 94 84 -- -- Net cash provided (used) by financing activities................................ 937 (87) Effect of exchange rate changes on cash and cash equivalents.................... (208) (21) ---- --- Net increase (decrease) in cash and cash equivalents............................ (1,750) 3,548 Cash and equivalents at beginning of period..................................... 22,227 4,738 ------ ----- Cash and equivalents at end of period...........................................$ 20,477 $ 8,286 ======== ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes, net of refunds...............................................$ 374 $ 664 ======== ========= Interest...................................................................$ 3 $ 146 ======== ========= Non-cash investing and financing activities: Property purchased under capital leases......................................$ -- $ 102 ======= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. SAUCONY, INC. AND SUBSIDIARIES (the "Company") NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 5, 2002 (Unaudited) (In thousands, except per share amounts) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation have been included. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes, thereto, included in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, for the year ended January 4, 2002. Operating results for the twenty-six weeks ended July 5, 2002, are not necessarily indicative of the results for the entire year. NOTE 2 - INVENTORIES Inventories at July 5, 2002 and January 4, 2002 consisted of the following: July 5, January 4, 2002 2002 ---- ---- Finished goods........................$ 23,614 $ 25,466 Work in progress...................... 372 1,501 Raw materials......................... 1,897 1,437 ----- ----- $ 25,883 $ 28,404 =========== =========== NOTE 3 - EARNINGS PER COMMON SHARE Earnings per Common Share ------------------------- Thirteen Weeks Ended Thirteen Weeks Ended July 5, 2002 July 6, 2001 ------------ ------------ Basic Diluted Basic Diluted ----- ------- ----- ------- Consolidated income Net income available for common shares and assumed conversions.....................$ 1,549 $ 1,549 $ 176 $ 176 ======== ======= ======== ======== Weighted-average common shares and equivalents outstanding: Weighted-average shares outstanding................ 6,099 6,099 6,074 6,074 Effect of dilutive securities: Employee stock options........................... -- 115 -- 78 ----- --- ----- -- 6,099 6,214 6,074 6,152 ===== ===== ===== ===== Earnings per share: Net income.........................................$ 0.25 $ 0.25 $ 0.03 $ 0.03 ======== ======= ======= ======== Twenty-Six Weeks Ended Twenty-Six Weeks Ended July 5, 2002 July 6, 2001 ------------ ------------ Basic Diluted Basic Diluted ----- ------- ----- ------- Consolidated income Net income available for common shares and assumed conversions.....................$ 2,850 $ 2,850 $ 1,522 $ 1,522 ======== ======= ======== ======== Weighted-average common shares and equivalents outstanding: Weighted-average shares outstanding................ 6,092 6,092 6,078 6,078 Effect of dilutive securities: Employee stock options........................... -- 76 -- 95 ------ ----- ----- ----- 6,092 6,168 6,078 6,173 ===== ===== ===== ===== Earnings per share: Net income.........................................$ 0.47 $ 0.46 $ 0.25 $ 0.25 ======== ======= ======= ======== Options to purchase 336 and 564 shares of common stock, outstanding at July 5, 2002 and July 6, 2001, respectively, were not included in the computations of diluted earnings per share, for the thirteen weeks ended July 5, 2002 and July 6, 2001, since the options were anti-dilutive. Options to purchase 493 and 480 shares of common stock, outstanding at July 5, 2002 and July 6, 2001, respectively, were not included in the computations of diluted earnings per share, for the twenty-six weeks ended July 5, 2002 and July 6, 2001, since the options were anti-dilutive. NOTE 4 - STATEMENT OF COMPREHENSIVE INCOME Thirteen Thirteen Twenty-Six Twenty-Six Weeks Weeks Weeks Weeks Ended Ended Ended Ended July 5, 2002 July 6, 2001 July 5, 2002 July 6, 2001 ------------ ------------ ------------ ------------ Net income................................................$ 1,549 $ 176 $ 2,850 $ 1,522 Other comprehensive income: Foreign currency translation adjustments, net of tax........................................... 393 (125) 417 (553) --- ---- --- ---- Comprehensive income......................................$ 1,942 $ 51 $ 3,267 $ 969 ======= ======== ======== ======= NOTE 5 - OPERATING SEGMENT DATA The Company's operating segments are organized based on the nature of products and consist of the Saucony segment and Other Products segment. The determination of the reportable segments for the thirteen and twenty-six weeks ended July 5, 2002 and July 6, 2001, as well as the basis of measurement of segment profit or loss, is consistent with the segment reporting disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended January 4, 2002. Thirteen Thirteen Twenty-Six Twenty-Six Weeks Weeks Weeks Weeks Ended Ended Ended Ended July 5, 2002 July 6, 2001 July 5, 2002 July 6, 2001 ------------ ------------ ------------ ------------ Revenues: Saucony...........................................$ 32,095 $ 30,834 $ 61,050 $ 69,885 Other Products.................................... 4,391 4,621 10,287 9,366 ----- ----- ------ ----- Total revenue..................................$ 36,486 $ 35,455 $ 71,337 $ 79,251 ========= ========= ========= ======== Income (loss) before income taxes and minority interest: Saucony...........................................$ 3,619 $ 661 $ 5,847 $ 3,187 Other Products.................................... (797) (153) (693) (279) ---- ---- ---- ---- Total ........................................$ 2,822 $ 508 $ 5,154 $ 2,908 ========= ========= ========= ======== NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS SFAS 142 In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", (SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets acquired individually or with a group of other assets (excluding those acquired in a business combination) at acquisition. The statement also addresses financial accounting and reporting for goodwill and other intangibles subsequent to their acquisition. SFAS 142 supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" (APB 17). The Company adopted SFAS 142 on January 5, 2002. In applying SFAS 142 the Company performed the transitional reassessment and impairment test required as of January 4, 2002 and determined that there was no impairment of goodwill. The Company discontinued amortizing goodwill on January 4, 2002. At January 4, 2002 and July 5, 2002 the carrying value of goodwill was $912, and is included in "Other Assets" on the balance sheet. The transitional disclosure of reported net earnings for the thirteen and twenty-six weeks ended July 6, 2001, as adjusted, is presented below: Thirteen Thirteen Twenty-Six Twenty-Six Weeks Weeks Weeks Weeks Ended Ended Ended Ended July 5, 2002 July 6, 2001 July 5, 2002 July 6, 2001 ------------ ------------ ------------ ------------ Reported net income $ 1,549 $ 176 $ 2,850 $ 1,522 Addback amortization of goodwill, net of tax benefit -- 21 -- 43 --------- -------- --------- --------- Adjusted net income $ 1,549 $ 197 $ 2,850 $ 1,565 ========= ======== ========= ========= Basic earnings per share: As reported $ 0.25 $ 0.03 $ 0.47 $ 0.25 Addback goodwill -- -- -- .01 --------- -------- -------- --------- Adjusted net income $ 0.25 $ 0.03 $ 0.47 $ 0.26 ========= ======== ======== ========= Diluted earnings per share: As reported $ 0.25 $ 0.03 $ 0.46 $ 0.25 Addback goodwill -- -- -- -- --------- -------- -------- --------- Adjusted net income $ 0.25 $ 0.03 $ 0.46 $ 0.25 ========= ======== ======== ========= SFAS 143 In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations", (SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. SFAS 143 applies to all companies that incur legal obligations to retire tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company has not determined the impact of adopting SFAS 143 on its results of operations or financial position. SFAS 144 In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, and supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of', (SFAS 121), and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", (APB 30) for the disposal of a segment of a business as previously defined in APB 30. SFAS 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements", (ARB 51) to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of SFAS 144 are to be applied to all long-lived assets, with the exception of goodwill. SFAS 144 retains the requirements of SFAS 121 to recognize an impairment loss only if the carry amount of the long-lived asset is not recoverable from its undiscounted cash flows and measure an impairment loss as the difference the carrying amount and the fair value of the asset. SFAS 144 expands upon the criteria, beyond that previously specified in SFAS 121 to determine when a long-lived asset is held for sale and provides guidance on the accounting for long-lived assets classified as held for sale if the asset is being reclassified as held and used. The provisions of SFAS 144 are effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. The provisions of SFAS 144 generally are to be applied prospectively. The Company adopted SFAS 144 in the first quarter of fiscal 2002 and the adoption did not have a material impact on the Company's earnings or financial position. SFAS 146 In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Cost Associated with Exit or Disposal Activities", (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes that the adoption of SFAS No. 146 will not have a material impact on earnings or on the Company's financial position. NOTE 7 - PLANT CLOSING AND OTHER NON-RECURRING CHARGE ACCRUALS Included in accrued expenses at July 5, 2002 are $270 of costs primarily associated with the Bangor, Maine plant closing recorded in the fourth quarter of fiscal 2001. The Company expects that a majority of these costs will be paid by the end of fiscal 2002. The following table summarizes the activity in the plant closing and other non-recurring charge accruals for the twenty-six weeks ended July 5, 2002. Balance at January 4, 2002..................$ 1,461 Payments.................................... (990) Expenses reversed........................... (201) ---- Balance at July 5, 2002.....................$ 270 ========= NOTE 8 - ASSETS HELD FOR SALE The Company has commenced marketing its Bangor, Maine real property, which had been previously used for the assembly of our domestic Saucony footwear, in February 2002. The property is available for immediate sale in its current condition and the Company expects that the property will be sold during fiscal 2002. The property is being actively marketed for sale at a price that management believes is reasonable in relation to its current fair value. As of July 5, 2002, the fair value of the property, based upon an independent appraisal, exceeds the net book value of the property, which was $357 as of July 5, 2002. As a result of the Company's decision to sell the property, the Bangor, Maine real property has been reclassified to current assets as "Held For Sale" and is included on the balance sheet at July 5, 2002 under the caption "Prepaid Expenses and Other Current Assets". ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This Item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. When used in this report, the words "will", "believes", "anticipates", "intends", "estimates", "expects", "projects" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual results may differ materially from those included in such forward-looking statements. Important factors which could cause actual results to differ materially include those set forth in our Annual Report on Form 10-K for the fiscal year ended January 4, 2002 under "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Other Factors That May Affect Future Results" ("Certain Factors") filed by us with the Securities and Exchange Commission on April 3, 2002, which Certain Factors discussion is filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q and incorporated herein by this reference. The forward-looking statements provided by us in this Quarterly Report on Form 10-Q represent our estimates as of the date this report is filed with the Securities and Exchange Commission. We anticipate that subsequent events and developments will cause these estimates to change. However, while we may elect to update our forward-looking statements in the future, we specifically disclaim any obligation to do so. The forward-looking statements contained in this report should not be relied upon as representing our estimates as of any date subsequent to the date this report is filed with the Securities and Exchange Commission. Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Areas where significant judgments are made include, but are not limited to: revenue recognition - defective products returns and other allowances, accounts receivable - allowances for doubtful accounts, inventories and income taxes. Actual results could differ materially from these estimates. For a more detailed explanation of the judgments made in these areas, refer to our Annual Report on Form 10-K for the year ended January 4, 2002, as filed with the Securities and Exchange Commission on April 3, 2002. Highlights Dollar amounts throughout this Item 2 are in thousands, except per share amounts. Thirteen Weeks and Twenty-Six Weeks Ended July 5, 2002 Compared to Thirteen Weeks and Twenty-Six Weeks Ended July 6, 2001 ----------------------------------- Increase (Decrease) Thirteen Weeks Twenty-Six Weeks -------------- ---------------- Net sales............................................ $962 2.7% ($7,944) (10.0%) Gross profit......................................... 554 4.7% (1,246) (4.9%) Selling, general and administrative expenses......... (1,623) (14.2%) (3,325) (14.6%) $ Change -------- Thirteen Weeks Twenty-Six Weeks -------------- ---------------- Operating income......................................... $2,305 $2,168 Income before income taxes and minority interest......... 2,314 2,246 Net income............................................... 1,373 1,328 Percent of Net Sales -------------------- Thirteen Weeks Twenty-Six Weeks 2002 2001 2002 2001 ---- ---- ---- ---- Gross profit......................................... 34.0% 33.4% 34.1% 32.3% Selling, general and administrative expenses......... 26.8 32.1 27.3 28.8 Operating income..................................... 7.5 1.2 7.0 3.6 Income before income taxes........................... 7.7 1.4 7.2 3.7 Net income........................................... 4.2 0.5 4.0 1.9 The following table sets forth the approximate contribution to net sales (in dollars and as a percentage of consolidated net sales) attributable to our Saucony segment and our Other Products segment for the thirteen and twenty-six weeks ended July 5, 2002 and July 6, 2001: Thirteen Weeks Ended -------------------- July 5, 2002 July 6, 2001 ------------ ------------ Saucony................$ 32,075 88.0% $ 30,871 87.0% Other Products......... 4,378 12.0% 4,620 13.0% Total..................$ 36,453 100.0% $ 35,491 100.0% Twenty-Six Weeks Ended ---------------------- July 5, 2002 July 6, 2001 ------------ ------------ Saucony................$ 60,982 85.6% $ 69,823 88.2% Other Products......... 10,258 14.4% 9,361 11.8% Total..................$ 71,240 100.0% $ 79,184 100.0% Thirteen Weeks Ended July 5, 2002 Compared to Thirteen Weeks Ended July 6, 2001 - ------------------------------------------------------------------------------- Consolidated Net Sales - ---------------------- Net sales increased $962, or 3%, to $36,453 in the thirteen weeks ended July 5, 2002 from $35,491 in the thirteen weeks ended July 6, 2001. On a geographic basis, domestic sales increased $18, to $29,120 in the thirteen weeks ended July 5, 2002 from $29,102 in the thirteen weeks ended July 6, 2001. International sales increased $944, or 15%, to $7,333 in the thirteen weeks ended July 5, 2002 from $6,389 in the thirteen weeks ended July 6, 2001. Saucony Brand Segment - --------------------- Worldwide net sales of Saucony branded footwear and apparel increased $1,204, or 4%, to $32,075 in the thirteen weeks ended July 5, 2002 from $30,871 in the thirteen weeks ended July 6, 2001, due primarily to higher international footwear unit volumes and higher average domestic wholesale per pair selling prices, partially offset by lower domestic footwear unit volumes. The overall average domestic wholesale selling price per pair of domestic footwear increased 6% in the thirteen weeks ended July 5, 2002 compared to the thirteen weeks ended July 6, 2001, due to an increase in first quality technical unit volumes and decreased Originals footwear, closeout footwear and special makeup footwear unit volumes, all of which are sold at prices below our first quality technical footwear. Domestic net sales increased $269, or 1%, to $25,003 in the thirteen weeks ended July 5, 2002 from $24,734 in the thirteen weeks ended July 6, 2001, due primarily to higher average wholesale per pair selling prices, partially offset by a 5% decrease in footwear unit volumes. The footwear unit volume decrease in the thirteen weeks ended July 5, 2002 was due primarily to a 10% decrease in Original footwear unit volumes and, to a lesser extent, a 25% decrease in closeout footwear unit volumes and a 9% decrease in special makeup footwear unit volumes. These decreases were partially offset by a 7% increase in first quality technical footwear unit volumes. The average wholesale per pair selling prices for domestic footwear increased due to a change in the product mix to increased technical footwear unit volumes and decreased Originals, closeout footwear and special makeup footwear unit volumes. Sales of closeout footwear accounted for approximately 5% of domestic Saucony net sales in the thirteen weeks ended July 5, 2002 compared to 8% in the thirteen weeks ended July 6, 2001. The Originals footwear accounted for 24% of domestic footwear unit volume in the thirteen weeks ended July 5, 2002 compared to 26% in the thirteen weeks ended July 6, 2001. International net sales increased $935, or 15%, to $7,072 in the thirteen weeks ended July 5, 2002 from $6,137 in the thirteen weeks ended July 6, 2001, due primarily to a 12% increase in footwear unit volumes, partially offset by lower average wholesale per pair selling prices. The footwear average wholesale per pair selling price decreased primarily due to a change in product mix to lower priced technical footwear sold at our international subsidiaries, offset partially by higher international distributor average wholesale per pair selling prices, due to a change in the product mix to increased sales of technical footwear unit volumes. Footwear unit volumes at our European and Canadian subsidiaries, increased 60% in the thirteen weeks ended July 5, 2002 compared to the thirteen weeks ended July 6, 2001. International distributor footwear unit volumes decreased 19%, due to decreased European distributor unit volumes and a 33% decrease in Originals footwear unit volumes sold in Japan. Distributor sales into the Japanese footwear market accounted for 12% of international sales in the thirteen weeks ended July 5, 2002, compared to 19% in the thirteen weeks ended July 6, 2001. Other Products Segment - ---------------------- Worldwide sales of Other Products decreased $242, or 5%, to $4,378 in the thirteen weeks ended July 5, 2002 from $4,620 in the thirteen weeks ended July 6, 2001 due primarily to a decrease in sales of our Hyde Authentics footwear products, which line is being phased out, and a decrease in sales at our factory outlet stores. Domestic net sales of Other Products decreased $251, or 6%, to $4,117 in the thirteen weeks ended July 5, 2002 from $4,368 in the thirteen weeks ended July 6, 2001, due primarily to an 83% decrease in sales of our Hyde Authentics footwear products, due to lower unit volumes and lower average wholesale per pair selling prices and an 18% decrease in sales at our factory outlet stores due to the closing of one store, the closing and relocation of a second store and the absence of tent sale closeout volume in the thirteen weeks ended July 5, 2002. Tent sale closeout volume accounted for approximately 13% of factory outlet sales in the thirteen weeks ended July 6, 2001. These decreases were partially offset by a 32% increase in Hind apparel sales due primarily to a 50% increase in the average wholesale unit selling prices for our Hind apparel brand due to new product introductions, which carry higher selling prices, partially offset by a 12% decrease in Hind apparel unit volumes. International net sales of Other Products increased $9, or 4%, to $261 in the thirteen weeks ended July 5, 2002 from $252 in the thirteen weeks ended July 6, 2001, due primarily to increased Hind apparel sales in Europe. Costs and Expenses - ------------------ Our gross margin in the thirteen weeks ended July 5, 2002 increased 0.6% to 34.0% from 33.4% in the thirteen weeks ended July 6, 2001, due primarily to increased Saucony domestic sales of first quality footwear products at full margin. Other factors contributing to the margin increase were proportionately lower sales of closeout footwear, reduced expenses resulting from the closure of our Bangor, Maine production facility, decreased sales of special makeup footwear, which carry lower gross margins, partially offset by increased inventory provisions for Hind apparel obsolete raw material and increased footwear mold cost due to commitments to our footwear suppliers for under-utilized molds. Selling, general and administrative expenses expressed as a percentage of net sales decreased 5.3% to 26.8% of net sales in the thirteen weeks ended July 5, 2002 from 32.1% in the thirteen weeks ended July 6, 2001. In absolute dollars, selling, general and administrative expenses decreased $1,623, or 14%, to $9,767 in the thirteen weeks ended July 5, 2002 from $11,390 in the thirteen weeks ended July 6, 2001. Decreased spending in the thirteen weeks ended July 5, 2002 was due primarily to decreased print advertising and, to a lesser extent, lower provisions for bad debts decreased account-specific advertising and promotion and reduced variable selling expenses, partially offset by increased administrative payroll, increased incentive compensation and increased business insurance costs. In the thirteen weeks ended July 5, 2002 we recorded a pre-tax non-recurring benefit of $59, $28 after-tax, or $0.00 per fully diluted share. The non-recurring benefit consists of a pre-tax benefit of $201, $121 after-tax, or $0.02 per fully diluted share, to reduce expenses accrued in the fourth quarter of fiscal 2001 associated with the closing of our Bangor, Maine manufacturing facility, primarily facility and lease exit costs and employee termination benefits, partially offset by a non-recurring pre-tax charge of $142, $93 after tax, or $0.02 per fully diluted share, incurred to close an underperforming retail store and to close and relocate a second retail store. Expenses associated with the store closings included lease termination and other contractual costs of $47 and $95 to writeoff leasehold improvements. Net interest expense decreased $56, to interest income of $12 in the thirteen weeks ended July 5, 2002 from interest expense of $44 in the thirteen weeks ended July 5, 2001, due primarily to the absence of borrowings against our domestic and foreign credit facilities and, to a lesser extent, increased interest income. Income Before Tax and Minority Interest - --------------------------------------- Thirteen Weeks Ended July 5, July 6, 2002 2001 ---- ---- Segment Saucony.......................$ 3,619 $ 661 Other Products................ (797) (153) ---- ---- Total.........................$ 2,822 $ 508 ========= ======== Income before tax increased $2,314 in the thirteen weeks ended July 5, 2002 to $2,822 compared to $508 in the thirteen weeks ended July 6, 2001, due primarily to higher pre-tax income realized by the domestic Saucony segment due to improved gross margins and lower operating spending and improved profitability in our Saucony international business, due primarily to increased sales at our Canadian subsidiary. Income before tax in our Other Products segment decreased due to lower gross margins realized by our Hind apparel brand due to increased provisions for obsolete raw material inventory and increased operating expenses and reduced profitability at our factory outlets due to lower sales and the charge taken in the thirteen weeks ended July 5, 2002 to close two underperforming retail stores, one of which was subsequently relocated. Income Taxes - ------------ The provision for income taxes increased to $1,216 in the thirteen weeks ended July 5, 2002 from $312 in the thirteen weeks ended July 6, 2001, due primarily to higher pre-tax income realized by the domestic Saucony segment and increased pre-tax income realized by our Canadian subsidiary. The effective tax rate decreased 18.3% to 43.1% in the thirteen weeks ended July 5, 2002 from 61.4% in the thirteen weeks ended July 6, 2001 due to a shift in the composition of domestic and foreign pre-tax earnings and the impact of increased deferred tax valuation allowances in the thirteen weeks ended July 5, 2001. Net Income - ---------- Net income for thirteen weeks ended July 5, 2002 increased to $1,549, or $0.25 per fully diluted share, compared to $176 or $0.03 per fully diluted share, in the thirteen weeks ended July 5, 2001. Weighted average common shares and equivalent shares used to calculate fully diluted earnings per share were 6,214 and 6,152, respectively, in the thirteen weeks ended July 5, 2002 and July 6, 2001. Twenty-Six Weeks Ended July 5, 2002 Compared to Twenty-Six Weeks Ended July 6, 2001 - ------------------ Consolidated Net Sales - ---------------------- Net sales decreased $7,944, or 10%, to $71,240 in the twenty-six weeks ended July 5, 2002 from $79,184 in the twenty-six weeks ended July 6, 2001. Domestic sales decreased $9,880, or 15%, to $55,360 in the twenty-six weeks ended July 5, 2002 from $65,240 in the twenty-six weeks ended July 6, 2001. International sales increased $1,936, or 14%, to $15,880 in the twenty-six weeks ended July 5, 2002 from $13,944 in the twenty-six weeks ended July 6, 2001. Saucony Brand Segment - --------------------- Worldwide net sales of Saucony branded footwear and apparel decreased $8,841 or 13%, to $60,982 in the twenty-six weeks ended July 5, 2002 from $69,823 in the twenty-six weeks ended July 6, 2001, due primarily to a decrease in domestic footwear unit volume, partially offset by higher international footwear unit volumes and higher average domestic wholesale per pair selling prices. The overall average domestic wholesale selling price per pair of domestic footwear increased 15% in the twenty-six weeks ended July 5, 2002 compared to twenty-six weeks ended July 6, 2001, due to an increase in first quality technical unit volumes and decreased Originals footwear, closeout footwear and special makeup footwear unit volumes, all of which are sold at prices below our first quality technical footwear. Domestic net sales decreased $10,690, or 19%, to $45,961 in the twenty-six weeks ended July 5, 2002 from $56,651 in the twenty-six weeks ended July 6, 2001, due primarily to a 29% decrease in footwear unit volumes, partially offset by higher average wholesale per pair selling prices. The footwear unit volume decrease in the twenty-six weeks ended July 5, 2002 was due primarily to a 52% decrease in Original footwear unit volumes and, to a lesser extent, a 46% decrease in closeout footwear unit volumes and a 26% decrease in special makeup footwear unit volumes. The average wholesale per pair selling prices for domestic footwear increased due to a change in the product mix to increased technical footwear unit volumes and decreased Originals, closeout footwear and special makeup footwear unit volumes. Sales of closeout footwear accounted for approximately 7% of domestic Saucony net sales in the twenty-six weeks ended July 5, 2002 compared to 11% in the twenty-six weeks ended July 6, 2001. The Originals footwear accounted for 22% of domestic footwear unit volume in the twenty-six weeks ended July 5, 2002 compared to 33% in the twenty-six weeks ended July 6, 2001. The unit volume decrease in Originals footwear was primarily due to a shift in consumer preference to other product categories, primarily basketball footwear, which we do not sell. International net sales increased $1,849, or 14%, to $15,021 in the twenty-six weeks ended July 5, 2002 from $13,172 in the twenty-six weeks ended July 6, 2001, due primarily to an 11% increase in footwear unit volumes, partially offset by lower average wholesale per pair selling prices and the negative impact of the stronger U.S. dollar against the Canadian and European currencies. The footwear average wholesale per pair selling price decreased primarily due to a change in product mix to lower priced technical footwear sold at our international subsidiaries, offset partially by higher international distributor average wholesale per pair selling prices, due to a change in the product mix to increased sales of technical footwear unit volumes. Footwear unit volumes at our European and Canadian subsidiaries, increased 39% in the twenty-six weeks ended July 5, 2002 versus the twenty-six weeks ended July 6, 2001. International distributor footwear unit volumes decreased 16%, due to decreased European distributor unit volumes and a 23% decrease in Originals footwear unit volumes sold in Japan. Distributor sales into the Japanese footwear market accounted for 11% of international sales in the twenty-six weeks ended July 5, 2002, compared to 20% in the twenty-six weeks ended July 6, 2001. Other Products Segment - ---------------------- Worldwide sales of Other Products increased $897, or 10%, to $10,258 in the twenty-six weeks ended July 5, 2002 from $9,361 in the twenty-six weeks ended July 6, 2001 due primarily to a 29% increase in domestic sales of our Hind brand apparel, offset partially by lower sales of Hyde Authentics footwear products, which line is being phased out, and lower sales at our factory outlet stores. Domestic net sales of Other Products increased $810, or 9%, to $9,399 in the twenty-six weeks ended July 5, 2002 from $8,589 in the twenty-six weeks ended July 6, 2001, due primarily to a 29% increase in domestic sales of our Hind brand apparel, due primarily to a 22% increase in the average wholesale unit selling prices for our Hind apparel brand and, to a lesser extent, a 6% increase in Hind apparel unit volume, offset partially due to a 54% decrease in sales of our Hyde Authentics footwear products, due to lower unit volume and lower average wholesale per pair selling prices and a 3% decrease in sales at our factory outlet stores due to the closing of one store, the relocation of a second store and the absence of tent sale closeout volume in the twenty-six weeks ended July 5, 2002. Tent sale closeout volume accounted for approximately 8% of factory outlet sales in the twenty-six weeks ended July 6, 2001. International net sales of Other Products increased $87, or 11%, to $859 in the twenty-six weeks ended July 5, 2002 from $772 in the twenty-six weeks ended July 6, 2001, due primarily to increased Hind apparel sales in Europe and Canada. Costs and Expenses - ------------------ Our gross margin in the twenty-six weeks ended July 5, 2002 increased 1.8% to 34.1% from 32.3% in the twenty-six weeks ended July 6, 2001, due primarily to increased Saucony domestic sales of first quality footwear products at full margin. Other factors contributing to the margin increase were proportionately lower sales of closeout footwear, reduced expenses resulting from the closure of our Bangor, Maine production facility and decreased sales of special makeup footwear, which carry lower gross margins, partially offset by increased inventory provisions for Hind apparel for obsolete raw material and increased footwear mold cost due to commitments to our footwear suppliers for under-utilized molds. Selling, general and administrative expenses expressed as a percentage of net sales decreased 1.5% to 27.3% of net sales in the twenty-six weeks ended July 5, 2002 from 28.8% in the twenty-six weeks ended July 6, 2001. In absolute dollars, selling, general and administrative expenses decreased $3,325, or 15%, to $19,460 in the twenty-six weeks ended July 5, 2002 from $22,785 in the twenty-six weeks ended July 6, 2001. Decreased spending in the twenty-six weeks ended July 5, 2002 was due primarily to decreased print advertising and, to a lesser extent, lower provisions for bad debts, decreased account-specific advertising and promotion and reduced variable selling expenses, partially offset by increased administrative payroll, increased incentive compensation and increased business insurance costs. In the twenty-six weeks ended July 5, 2002 we recorded a pre-tax non-recurring benefit of $59, $28 after-tax, or $0.00 per fully diluted share. The non-recurring benefit consists of a pre-tax benefit of $201, $121 after-tax, or $0.02 per fully diluted share, to reduce expenses accrued in the fourth quarter of fiscal 2001 associated with the closing of our Bangor, Maine manufacturing facility, primarily facility and lease exit costs and employee termination benefits, partially offset by a non-recurring pre-tax charge of $142, $93 after tax, or $0.02 per fully diluted share, incurred to close an underperforming retail store and to close and relocate a second retail store. Expenses associated with the store closings included lease termination and other contractual costs of $47 and $95 to writeoff leasehold improvements. Net interest expense decreased $140, to interest income of $36 in the twenty-six weeks ended July 5, 2002 from interest expense of $104 in the twenty-six weeks ended July 5, 2001, due primarily to the absence of borrowings against our domestic and foreign credit facilities and, to a lesser extent, increased interest income. Income Before Tax and Minority Interest Twenty-Six Weeks Ended July 5, July 6, 2002 2001 ---- ---- Segment Saucony......................$ 5,847 $ 3,187 Other Products............... (693) (279) ---- ---- Total........................$ 5,154 $ 2,908 ========= ======== Income before tax increased to $5,154 in the twenty-six weeks ended July 5, 2002 compared to $2,908 in the twenty-six weeks ended July 6, 2001, due primarily to higher pre-tax income realized by the domestic Saucony segment, due to improved gross margins and lower operating expenses and improved profitability in our Saucony international business, due to increased sales at our Canadian subsidiary. The decrease in our Other Products segment income before tax is due primarily to lower gross margins realized by our Hind apparel brand due to increased provisions for obsolete raw material inventory and increased operating expenses and reduced profitability at our factory outlets due to the charge taken in the twenty-six weeks ended July 5, 2002 to close two underperforming retail stores, one of which was subsequently relocated. Income Taxes - ------------ The provision for income taxes increased to $2,183 in the twenty-six weeks ended July 5, 2002 from $1,327 in the twenty-six weeks ended July 6, 2001, due primarily to higher pre-tax income realized by the domestic Saucony segment and increased pre-tax income realized by our Canadian subsidiary. The effective tax rate decreased 3.2% to 42.4% in the twenty-six weeks ended July 5, 2002 from 45.6% in the twenty-six weeks ended July 6, 2001 due to a shift in the composition of domestic and foreign pre-tax earnings and the impact of increased deferred tax valuation allowances in the twenty-six weeks ended July 6, 2001. Net Income - ---------- Net income for twenty-six weeks ended July 5, 2002 increased to $2,850, or $0.46 per fully diluted share, compared to $1,522 or $0.25 per fully diluted share, in the twenty-six weeks ended July 6, 2001. Weighted average common shares and equivalent shares used to calculate fully diluted earnings per share were 6,168 and 6,173, respectively, in the twenty-six weeks ended July 5, 2002 and July 6, 2001. Liquidity and Capital Resources - ------------------------------- As of July 5, 2002, our cash and cash equivalents totaled $20,477, a decrease of $1,750 from January 4, 2002. The decrease is due primarily to a use of cash from operations of $2,395, cash outlays for capital assets of $215 and the repayment of long-term debt of $79. This decrease in cash was offset partially by the receipt of payment on notes receivable of $312, the receipt of $94 from the issuance of shares of our common stock and the receipt of $80 from the sale of capital assets. Our accounts receivable increased $11,610 net of the provision for bad debts and discounts, due to increased sales of our Saucony footwear products in the twenty-six weeks ended July 5, 2002, compared to our sales for the twenty-six weeks ended January 4, 2002. Our days sales outstanding for accounts receivable increased to 68 days in the twenty-six weeks ended July 5, 2002 from 67 days in the twenty-six weeks ended July 6, 2001. Days sales outstanding is defined as the number of average daily sales in our accounts receivables as of the period end date. The provision for bad debts and discounts decreased to $2,662 in the twenty-six weeks ended July 5, 2002 from $3,795 in the twenty-six weeks ended July 6, 2001, due to a decrease in the provision for doubtful accounts. Inventories decreased $2,991 in the twenty-six weeks ended July 5, 2002 from January 4, 2002, due to seasonal inventory requirements. The number of day's sales in inventory decreased to 100 days in the twenty-six weeks ended July 5, 2002 from 108 days in the twenty-six weeks ended July 6, 2001. 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 5, 2002 included an increase of $357 in accounts payable (due to the lengthening of payment terms with key inventory suppliers), an increase of $1,824 in accrued expenses (due primarily to increased accruals for sales commissions, incentive compensation and inventory procurement costs and the receipt of $653 in income tax refunds) and a decrease in prepaid expenses of $45 (due to the timing of business insurance prepayments). Our liquidity is contingent upon a number of factors, principally our future operating results. Management believes that our current cash and cash equivalents, credit facilities and internally generated funds are adequate to meet our working capital requirements and to fund our capital investment needs and debt service payments. During the twenty-six weeks ended July 5, 2002, we used $2,395 in cash to fund operations, due primarily to an increase in accounts receivable. In the twenty-six weeks ended July 6, 2001, we generated $4,315 in cash from operations due primarily to a decrease in inventories. At July 5, 2002, we had $621 in borrowings outstanding under our credit facilities, compared to $2,533 at July 6, 2001. INFLATION AND CURRENCY RISK The effect of inflation on our results of operations over the past three years has been minimal. The impact of currency fluctuation on our purchase of inventory from foreign suppliers has been minimal as the transactions were denominated in U.S. dollars. We are, however, subject to currency fluctuation risk with respect to the operating results of our foreign subsidiaries and certain foreign currency denominated payables. We have entered into forward foreign exchange contracts to minimize certain transaction currency risks. We believe that our forward foreign currency contracts function as economic hedges of our cash flows and that our foreign exchange management program effectively minimizes certain transaction currency risks. RECENT ACCOUNTING PRONOUNCEMENTS SFAS 142 In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", (SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets acquired individually or with a group of other assets (excluding those acquired in a business combination) at acquisition. The statement also addresses financial accounting and reporting for goodwill and other intangibles subsequent to their acquisition. SFAS 142 supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" (APB 17). We adopted SFAS 142 on January 5, 2002. In applying SFAS 142 we performed the transitional reassessment and impairment test required as of January 4, 2002 and determined that there was no impairment of goodwill. We discontinued amortizing goodwill on January 4, 2002. At January 4, 2002 and July 5, 2002, the carrying value of goodwill was $912. SFAS 143 In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations", (SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. SFAS 143 applies to all companies that incur legal obligations to retire tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We have not determined the impact of our adoption of SFAS 143 on our results of operations or financial position. SFAS 144 In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, and supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of', (SFAS 121), and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", (APB 30) for the disposal of a segment of a business as previously defined in APB 30. SFAS 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements", (ARB 51) to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of SFAS 144 are to be applied to all long-lived assets, with the exception of goodwill. SFAS 144 retains the requirements of SFAS 121 to recognize an impairment loss only if the carry amount of the long-lived asset is not recoverable from its undiscounted cash flows and measure an impairment loss as the difference between the carrying amount and the fair value of the asset. SFAS 144 expands upon the criteria, beyond that previously specified in SFAS 121 to determine when a long-lived asset is held for sale and provides guidance on the accounting for long-lived assets classified as held for sale if the asset is being reclassified as held and used. The provisions of SFAS 144 are effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. The provisions of SFAS 144 generally are to be applied prospectively. We adopted SFAS 144 in the first quarter of fiscal 2002 and the adoption did not have a material impact on our earnings or on our financial position. SFAS 146 In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Cost Associated with Exit or Disposal Activities", (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. We believe that the adoption of SFAS No. 146 will not have a material impact on our earnings or on our financial position. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have performed an analysis to assess the potential effect of reasonably possible near-term changes in inflation and foreign currency exchange rates. The effect of inflation on our results of operations over the past three years has been minimal. The impact of currency fluctuation on the purchase of inventory by us from foreign suppliers has been non-existent as all the transactions were denominated in U.S. dollars. However, we are subject to currency fluctuation risk with respect to the operating results of our foreign subsidiaries and certain foreign currency denominated payables. We have entered into certain forward foreign exchange contracts to minimize the transaction currency risk. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the 2002 Annual Meeting of Stockholders of the Company (the "Annual Meeting") held on May 23, 2002, the following matter was acted upon by the stockholders of the Company: 1. The election of John H. Fisher, Phyllis H. Fisher, Charles A. Gottesman, Robert J. LeFort, Jr., Jonathan O. Lee and John J. Neuhauser as directors of the Company. The results of the voting on this matter presented to stockholders at the Annual Meeting is set forth below: Votes Votes Broker For Withheld Abstentions Non-votes --- -------- ----------- --------- 1. Election of Directors John H. Fisher 2,071,954 57,765 -- N.A. Phyllis H. Fisher 2,071,954 57,765 -- N.A. Charles A. Gottesman 2,071,954 57,765 -- N.A. Jonathan O. Lee 2,071,954 57,765 -- N.A. Robert J. LeFort, Jr. 2,071,954 57,765 -- N.A. John J. Neuhauser 2,071,954 57,765 -- N.A. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference. b. Reports on Form 8-K On July 1, 2002, the Company filed a Current Report on Form 8-K reporting under Item 4 (Changes in Registrant's Certifying Accountants) its dismissal of Arthur Andersen LLP as its principal accountants. On July 10, 2002, the Company filed a Current Report on Form 8-K reporting under Item 4 (Changes in Registrant's Certifying Accountants) its engagement of Deloitte & Touche LLP as its principal accountants. 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 16, 2002 By: /s/ Michael Umana - ----- --------------- --------------------- Michael Umana Senior Vice President, Finance Chief Financial Officer (Duly authorized officer and principal financial officer) EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 10.1 Letter Amendment dated June 28, 2002 to the Credit Agreement, dated August 31, 1998, between Saucony, Inc. and State Street Bank and Trust Company. 10.2 Letter Amendment dated July 31, 2002 to the Credit Agreement dated August 31, 1998, between Saucony, Inc. and State Street Bank and Trust Company. 99.1 "Certain Factors That May Affect Future Results", as set forth within "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation" of the Registrant's Annual Report on Form 10-K for the fiscal year ended January 4, 2002 filed with the Securities and Exchange Commission on April 3, 2002. 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.