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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended November 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period ______________________ to _______________________
Commission File Number: 1-04404
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THE STRIDE RITE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-1399290
(State or Other (I.R.S. Employer
Jurisdiction of Identification Number)
Incorporation)
191 Spring Street, P.O. Box 9191, Lexington, Massachusetts 02420
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (617) 824-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- -------------------------
Common Stock, $.25 par
value New York Stock Exchange
Preferred Stock Purchase
Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of February 14, 2002, the aggregate market value of the 40,566,024 shares
of common stock held by non-affiliates of the Registrant was $294,103,674 based
upon the closing price of $7.25 on the New York Stock Exchange composite tape
on such date. (For this computation, the Registrant has excluded the market
value of all shares of common stock reported as beneficially owned by executive
officers and directors of the Registrant; such exclusion shall not be deemed to
constitute an admission that any such person is an affiliate of the
Registrant.) As of February 14, 2002, there were 41,932,470 shares of common
stock outstanding.
Documents Incorporated by Reference
Certain information contained in the Registrant's Proxy Statement relating
to its Annual Meeting of Stockholders to be held April 11, 2002 is incorporated
by reference in Part III, Items 10, 11,12 and 13.
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TABLE OF CONTENTS
Page
Description No.
- ----------- ----
PART I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 7
Item 3. Legal Proceedings.................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders.................................. 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 9
Item 6. Selected Financial Data.............................................................. 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 16
Item 8. Financial Statements and Supplementary Data.......................................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 17
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 17
Item 11. Executive Compensation............................................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 17
Item 13. Certain Relationships and Related Transactions....................................... 17
PART IV
Item 14. Exhibits, Financial Statements and Schedules, and Reports on Form 8-K................ 18
PART I
Item 1. Business.
General
The Stride Rite Corporation, a Massachusetts corporation founded in 1919, is
a leading marketer of high quality children's footwear in the United States and
is a major marketer of athletic and casual footwear for children and adults.
Our business was founded on the strength of the Stride Rite(R) children's
brand, but today includes a portfolio of great American brands addressing
different market segments within the footwear industry. In addition to the
Stride Rite(R) brand, we market footwear under the following owned or licensed
brands: Keds(R), Grasshoppers(R), Sperry(R) and Tommy Hilfiger(R).
We are predominantly a wholesaler of footwear, selling our products
nationally in a wide variety of retail formats including premier department
stores, independent shoe stores, value retailers and specialty stores. We
market products in countries outside the United States and Canada through
independent distributors and licensees. We import substantially all of our
products from independent resources in the Far East, which manufacture footwear
according to each brand's specifications and quality standards.
We also market our products directly to consumers by selling children's
footwear through our concept stores and leased operations within leading
department stores. We also market products for all our brands through Stride
Rite Family Footwear stores which are located in selected factory outlet
centers.
Unless the context otherwise requires, all references to "we", "us", "our",
the "Company", "Stride Rite" or "The Stride Rite Corporation" in this report
refer to The Stride Rite Corporation and all of its wholly owned subsidiaries.
Products
Our wholly-owned subsidiary, Stride Rite Children's Group, Inc., designs and
markets children's footwear, primarily for consumers between the ages of six
months and ten years, including dress and recreational shoes, boots, sandals
and sneakers, in traditional and contemporary styles. Those products are
marketed under our STRIDE RITE(R), MUNCHKIN(R), SPERRY(R), SPERRY TOP-SIDER(R),
STREET HOT(R) and TODDLER UNIVERSITY(R) trademarks in medium to high price
ranges and under our Kid Smart(TM) and Baby Smart(TM) trademarks in medium to
lower price ranges.
The Keds Corporation designs and markets sneakers and casual footwear for
adults and children under the KEDS(R) and PRO-KEDS(R) trademarks and casual
footwear for women under the GRASSHOPPERS(R) label.
Sperry Top-Sider, Inc. designs and markets marine footwear and outdoor
recreational, hand-sewn, dress and casual footwear for adults and children
under our SPERRY TOP-SIDER(R) and SPERRY(R) trademarks. Products sold under the
SPERRY TOP-SIDER(R) label also include sneakers and sandals for men and women.
In 1997, we began marketing a line of dress casual, sport casual and
athletic footwear for men and boys using the TOMMY HILFIGER(R) brand name under
a license agreement with Tommy Hilfiger Licensing, Inc. A women's footwear
product line was launched in August, 1998, and a girls' footwear line was
introduced in July, 2000 using the TOMMY HILFIGER(R) brand name.
Sales and Distribution
We sell our products nationwide to customers operating retail outlets,
including premier department stores, value retailers and specialty stores, as
well as to Stride Rite children's shoe stores and other shoe stores operated by
independent retailers. We maintain an in-stock inventory of certain styles of
our various branded footwear in a wide range of sizes and widths for shipment
to our wholesale customers. In addition, we sell footwear products to
consumers through Stride Rite-owned stores, including children's shoe stores,
manufacturers' outlet stores, Keds concept stores, and, until April 30, 2002,
in the children's leased footwear departments of certain department stores. We
also sell products directly to consumers through our e-commerce site,
www.keds.com. Our largest single customer accounted for approximately 9% of
consolidated net sales for the fiscal year ended November 30, 2001.
We provide assistance to a limited number of qualified specialty retailers
to enable them to operate independent Stride Rite children's shoe stores. Such
assistance sometimes includes the sublease of a desirable retail site by us to
an independent dealer. There are approximately ten independent dealers who
currently sublease store locations from us.
We own two distribution centers, one located in Louisville, Kentucky with
520,000 square feet of space and the other in Huntington, Indiana with 409,000
square feet of space. During the fourth quarter of fiscal 2000, we completed an
addition to our Huntington, Indiana facility. This expansion added 146,000
square feet to the original building, and allowed us to discontinue a
higher-cost outsourcing arrangement for the distribution function for one of
our brands.
Generally, we use independent distributors and licensees to market our
various product lines outside of North America. International revenues,
including sales of our Canadian subsidiary, represented approximately 4% of
consolidated net sales for the fiscal year ended November 30, 2001.
We are also a party to foreign license agreements in which independent
companies operate Stride Rite retail stores outside the United States. An
aggregate of 15 stores are currently operating in Canada, Costa Rica, Dubai,
Guatemala, Haiti, Honduras, Kuwait, Nicaragua, Peru and Saudi Arabia pursuant
to such agreements.
We also distribute SPERRY TOP-SIDER(R), STRIDE RITE(R), KEDS(R),
GRASSHOPPERS(R) and TOMMY HILFIGER(R) products in Canada through our Canadian
subsidiary.
International Sourcing
We purchase substantially all of our products from foreign sources. We
maintain a staff of approximately 88 professional and technical personnel in
Taiwan and China to supervise a substantial portion of our canvas and leather
footwear production. We anticipate that overseas resources will continue to be
utilized in the future. We are a party to a joint venture agreement with a
foreign footwear manufacturer which operates a manufacturing facility in
Thailand. We have a 49.5% interest in the Thai corporation operating this
facility, which manufactures vulcanized canvas and leather footwear for several
branded companies. During fiscal 2001, none of our footwear production
requirements were fulfilled by the Thai facility. In addition, we use the
services of buying agents to source merchandise.
Approximately 91% of our footwear products are manufactured by independently
owned footwear manufacturers in China. Historically, instability in China's
political and economic environment has not had a material adverse effect on our
financial condition or results of operations. We cannot predict, however, the
effect that future changes in economic or political conditions in China could
have on the economics of doing business with our Chinese manufacturers.
Retail Operations
As of November 30, 2001, we operated 128 Stride Rite children's shoe stores,
46 leased children's shoe departments in leading department stores, and 46
manufacturers' outlet stores under the name STRIDE RITE FAMILY FOOTWEAR which
sell primarily prior season goods for all of our owned and licensed brands, and
5 Keds concept stores which sell a full range of Keds products. The product and
merchandising formats of the Stride Rite children's shoe stores are utilized in
the 46 leased children's shoe departments that we operate in certain divisions
of Federated Department Stores, including Macy's, Rich's and Lazarus department
stores. These leased children's shoe departments are scheduled to close by
April 30, 2002. The Stride Rite children's
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shoe stores carry a significant portion of the lines of our STRIDE RITE(R) and
SPERRY TOP-SIDER(R) children's footwear and a portion of the KEDS(R) children's
product line and the TOMMY HILFIGER(R) boys' and girls' lines. Our stores are
located primarily in larger regional shopping centers, clustered generally in
the major marketing areas of the United States. Most of our manufacturers'
outlet stores are located in shopping centers consisting only of outlet stores.
During fiscal 2001, we opened 20 Stride Rite concept stores, 9
manufacturers' outlet stores and 5 Keds concept stores. During fiscal 2001, we
closed 9 retail stores and 1 manufacturers' outlet store. We currently plan to
open approximately 50 retail stores in fiscal 2002. We will also continue our
efforts to close or sell underperforming retail locations in fiscal 2002, and
expect to cease operations of approximately 50 stores during the year. The
majority of these expected store closings are the 46 leased department store
locations discussed above.
Sales through our retail operations accounted for approximately 22% of
consolidated net sales for the fiscal year ended November 30, 2001.
Apparel and Accessory Licensing Activities
License royalties accounted for approximately 1% of our sales in fiscal
2001. We have license agreements with a number of third parties pursuant to
which apparel and accessories are designed, manufactured and sold under the
KEDS(R), STRIDE RITE (R) and SPERRY TOP-SIDER(R) trademarks. We are actively
evaluating our current license structure and are continually pursuing new
licensees.
Backlog
As of November 30, 2001 and December 1, 2000, we had a backlog of orders
amounting to approximately $127,800,000 and $141,700,000, respectively. To a
significant extent, the backlog at the end of each fiscal year represents
orders for our Spring footwear styles. Substantially all of these orders are
delivered or canceled during the first two quarters of the next fiscal year.
In all of our wholesale businesses, reorders from retail customers are an
important source of revenue to supplement the orders taken in advance of the
season. Over the years, the importance of reorder activity to a season's
success has grown as customers, especially larger retailers, have placed
increased reliance on orders during the season which are transmitted via
electronic data interchange (EDI) programs.
Competition
We compete with a number of suppliers of children's footwear, a few of which
are divisions of companies that have substantially greater net worth or sales
revenue than us. Management believes, however, that on the basis of sales, we
are the largest supplier of nationally branded children's footwear in the
United States.
In the highly fragmented sneaker, casual and recreational footwear industry,
numerous domestic and foreign competitors, some of which have substantially
greater net worth or sales revenue than us, produce or market goods that are
comparable to and compete with our products in terms of price and general level
of quality.
Management believes that the creation of attractive styles, together with
specialized engineering for fit, durability, quality and high service standards
are significant factors in competing successfully in the marketing of all types
of footwear. Management believes that we are competitive in all such respects.
In operating our own retail outlets, we compete in the children's retail
shoe industry with numerous businesses, ranging from large retail chains to
single store operators.
Employees
As of November 30, 2001, we employed approximately 2,400 full-time and
part-time employees. One collective bargaining unit represents a small number
of these employees. Management believes that its relations with employees are
good.
3
Environmental Matters
Compliance with federal, state, local and foreign regulations with respect
to the environment have had, and are expected to have, no material effect on
our capital expenditures, earnings or competitive position.
Patents, Trademarks and Licenses
We have an existing trademark license agreement with Tommy Hilfiger
Licensing, Inc., pursuant to which we design, market and sell footwear to men,
women and children.
We believe that our patents and trademarks are important to our business and
are generally sufficient to permit us to carry on our business as presently
conducted.
Research and Development
We depend principally upon our design, engineering and marketing skills and
the quality of our products for our ability to compete successfully. We conduct
research and development for footwear products. However, the level of
expenditures with respect to such activity is not material and is expensed as
incurred.
Certain Risk Factors Which May Affect Future Operating Results
This Form 10-K 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. We caution investors that any forward-looking statements
presented in this report and presented elsewhere by management from time to
time are based on management's beliefs and assumptions made by and information
currently available to management. When used, the words "believe",
"anticipate", "estimate", "project", "should", "expect" and similar expressions
which do not relate solely to historical matters identify forward-looking
statements. Such statements are subject to risks, uncertainties and assumptions
and are not guarantees of future events or performance, which may be affected
by known and unknown risks, trends and uncertainties. Should one or more of
these risks or uncertainties materialize, or should our assumptions prove
incorrect, actual results may vary materially from those anticipated, projected
or implied. Accordingly, past results and trends should not be used by
investors to anticipate future results or trends. Factors that may cause such a
variance include, among others, the following:
Mature Markets; Competition; Consumer Trends
Our strategy for growth depends upon increasing the acceptance of our
current brands in our major markets, expanding into new markets and increasing
the number of footwear products and brands that we sell. There can be no
assurance that we will be able to successfully develop new branded products or
acquire existing brands from third parties. The bulk of our sales are in the
United States and Canada where the market is mature for many of our products.
To grow our business, we must increase our market share at the expense of our
competitors, and there can be no assurance we will be successful. Our efforts
to expand sales outside the United States and Canada may not succeed.
Both the footwear industry specifically, and the fashion industry in
general, are subject to rapid and substantial shifts in consumer tastes and
preferences. There are many competitors in our markets with substantially
greater financial resources, production, marketing and product development
capabilities. Our performance may be hurt by our competitors' product
development, sourcing, pricing, innovation and marketing strategies. In
addition, we expect the footwear industry in the United States to continue to
experience substantial foreign competition.
The fashion and retail industries are subject to sudden shifts in consumer
trends and consumer spending, on which our results are, in part, dependent.
Consumer acceptance of our new products may fall below expectations and the
launch of new product lines may be delayed. The results of our wholesale
businesses are affected by the
4
buying plans of our customers, which include large department stores, as well
as smaller retailers. Our wholesale customers may not inform us of changes in
their buying plans until it is too late for us to make the necessary
adjustments to our product lines and marketing strategies. While we believe
that purchasing decisions in many cases are made independently by individual
stores or store chains, we are exposed to decisions by the controlling owner of
a store chain, to decrease the amount of footwear products purchased from us.
Moreover, the retail industry periodically experiences consolidation. We face a
risk that our wholesale customers may consolidate, restructure, reorganize or
realign in ways that could decrease the number of stores or the amount of shelf
space that carry our products. The impact that electronic commerce will have in
the future on the retail industry is uncertain and may adversely affect our
business.
Inventory Obsolescence
The fashion-oriented nature of our industry, the rapid changes in customer
preferences and the extended product development and sourcing lead times also
leave us vulnerable to an increased risk of inventory obsolescence. While we
have successfully managed this risk in the past, and believe we can
successfully manage it in the future, our revenue and operating margins will
suffer if we are unable to do so.
Retention of Major Brand License
We have derived significant revenues and earnings in the past from our
exclusive licensing arrangement with Tommy Hilfiger Licensing, Inc. to produce
and sell Tommy Hilfiger branded footwear. Our original Tommy Hilfiger license
was amended and renewed for a three-year term expiring March 31, 2004. Whether
our license with Tommy Hilfiger will remain in effect depends on our achieving
certain minimum sales levels for the licensed products. The loss of the Tommy
Hilfiger license, could have a material adverse effect on our business.
Overseas Production and Raw Material Procurement
We purchase substantially all of our product lines and raw materials
overseas and expect to do so for the foreseeable future. Our international
sourcing subjects us to the risks of doing business abroad. Such risks include
expropriation, acts of war or terrorism, political disturbances, political
instability and similar events, including trade sanctions, loss of normalized
trade relations status, export duties, import controls, quotas, and other
trading restrictions, as well as fluctuations in currency values. Moreover, we
rely heavily on independent third-party manufacturing facilities, primarily
located in China, to produce our products. If trade relations between the
United States and China or other countries in which we manufacture our products
deteriorate or are threatened by instability, our business may be adversely
affected. We cannot predict the effect that changes in the economic and
political conditions in China could have on the economics of doing business
with Chinese manufacturers. Although we believe that we could find alternative
manufacturing sources for our products with independent third-party
manufacturing facilities in other countries, the loss of a substantial portion
of our Chinese manufacturing capacity could have a material adverse effect on
our business. Also, if we were required to relocate a substantial portion of
our manufacturing outside of China, there can be no assurance that we could
obtain as favorable economic terms, which could adversely affect our
performance.
Dependence on Logistical Systems
Our business operations are dependent on our logistical systems, which
include our order management system and our computerized warehouse network. The
logistical systems enable us to procure our footwear products from overseas
manufacturers, transport it to our distribution facilities, store it and
deliver it to our customers on time, in the correct sizes and styles. A
disruption to the logistical systems could have a material adverse impact on
our business.
Intellectual Property Risk
We believe that our patents and trademarks are important to our business and
are generally sufficient to permit us to carry on our business as presently
conducted. We cannot, however, know whether we will be able to secure patents
or trademark protection for our intellectual property in the future or whether
that protection will be adequate for future products. Further, we face the risk
of ineffective protection of intellectual property rights in the countries
where we source and distribute our products. Finally, we cannot be sure that
our activities will not infringe on the proprietary rights of others. If we are
compelled to prosecute infringing parties, defend our
5
intellectual property or defend ourselves from intellectual property claims
made by others, we may face significant expenses and liabilities.
Retail Stores
Stride Rite-owned retail stores are increasingly significant to our
business, especially with respect to the Stride Rite brand. We are currently
testing a Keds retail store concept in five locations. In the future, we may
also evaluate new retail concepts to market the other footwear brands owned by
us. The management of our Stride Rite Children's Group does extensive research
on potential sites for new concept stores, including demographic studies and an
evaluation of the impact that potential locations would have on the results of
our existing Stride Rite-owned stores and our network of locations operated by
independent licensed dealers. Despite this careful evaluation, new Stride Rite
concept stores may not meet sales expectations and new retail concepts may not
achieve the expected financial results. The opening of new stores may also be
delayed for a variety of reasons. We recently announced the planned exit from
our leased department store business, resulting in the closing of 46 locations.
We plan to open approximately 50 new stores during fiscal 2002. The new stores
are expected to largely offset the lost revenue from the leased department
stores. Despite our plans, there can be no assurance that the sales from the
closed locations can be offset by revenues from the new stores.
Executive Officers of the Registrant
The information with respect to our executive officers listed below is as of
February 14, 2002.
Name Position with Stride Rite Age
- ---- ------------------------- ---
David M. Chamberlain Chairman of the Board of Directors and Chief Executive Officer of Stride 58
Rite since joining Stride Rite in November 1999. Prior to joining Stride
Rite, Mr. Chamberlain was Chairman of the Board of Genesco, Inc., a
footwear company, from 1994 to 1999 and President and Chief Executive
Officer of Genesco, Inc. from 1994 to 1996.
Yusef Akyuz Senior Vice President and Chief Information Officer of Stride Rite since 51
November 2000. Previously, Mr. Akyuz was Vice President and Chief
Information Officer at The Timberland Company, a footwear and apparel
company, from June 1996 to November 2000. Prior to that, Mr. Akyuz
was Director of M.I.S. at The Rockport Company, Inc., a footwear
company wholly owned by Reebok International Ltd., from November
1991 to May 1996.
Frank A. Caruso Chief Financial Officer of Stride Rite since May 2001. Previously, Mr. 49
Caruso was Vice President--Finance and Operations from January 2001
until May 2001. Mr. Caruso was Vice President and Corporate Controller
from January 1998 until June 2001. Prior to that, Mr. Caruso was Vice
President and Controller of Parametric Technology Corporation, a
software company, from June 1997 to December 1997 and Senior Vice
President, Finance and Operations, of The Keds Corporation from June
1990 to June 1997.
Peter J. Charles Senior Vice President and General Manager, Stride Rite Sourcing 37
International, Inc. since August 1999. Previously, Mr. Charles was Senior
Vice President, Sourcing, since he joined Stride Rite in December 1996.
Prior to joining Stride Rite, Mr. Charles was employed by Clarks
International, an international footwear manufacturer, from 1986 to 1996,
as General Manager, Resourced Production, Regional Resourcing
Manager, South East Asia and served in various other management level
positions.
6
Name Position with Stride Rite Age
- ---- ------------------------- ---
Janet M. DePiero Vice President of Human Resources of Stride Rite since March 1997. 40
Previously, Ms. DePiero was Director of Compensation and Benefits of
Stride Rite from October 1995 to February 1997 and Manager of
Compensation and Benefits of Stride Rite from December 1991 to
September 1995.
Gordon W. Johnson, Jr. Treasurer of Stride Rite since February 2001. Previously, Mr. Johnson 47
was Assistant Treasurer of Stride Rite from May 1989 to February 2001.
Charles W. Redepenning, Jr. General Counsel, Clerk and Secretary of Stride Rite since March 1998 45
and President of Stride Rite International Corp. since December 1999.
Prior to joining Stride Rite, Mr. Redepenning was Senior Vice President,
General Counsel and Secretary of Daka International, Inc., a multi-
national food service and restaurant corporation, from 1989 to 1998.
Craig L. Reingold President, Sperry Top-Sider, Inc., since August 2001. Prior to joining 46
Stride Rite, Mr. Reingold worked for Arroyo & Coates, a commercial real
estate service company, from September 2000 to August 2001. Previous
to that position, Mr. Reingold was Vice President of Sales for Ariat
International, a footwear company, from July 1994 to September 2000.
Gerrald B. Silverman President, Stride Rite Children's Group, Inc., since September 1999. 43
Previous to this position, Mr. Silverman was Senior Vice President of The
Keds Corporation from January 1996 to September 1999 and President of
Stride Rite International Corp. since joining Stride Rite in April 1994.
Richard T. Thornton President, Tommy Hilfiger Footwear, Inc., since January 2001. 48
Previously, Mr. Thornton was Vice President--Operations of Stride Rite
from August 1999 to December 2000, and was Senior Vice President--
Finance, Operations and Merchandising of Tommy Hilfiger Footwear,
Inc. from September 1998 to August 1999. Prior to joining Stride Rite,
Mr. Thornton was Vice President, Finance, at the Greg Norman division
of Reebok International, Ltd. from December 1997 to August 1998, Vice
President of Operations of BMB Associates, a computer company, from
March 1997 to December 1997, and General Manager of Boston Whaler
from September 1984 to March 1997.
These executive officers are generally elected at the Board of Directors'
meeting held in conjunction with our Annual Meeting of Stockholders and serve
at the pleasure of the Board.
Item 2. Properties.
We own an automated distribution center located in Louisville, Kentucky with
520,000 square feet of space and a distribution center located in Huntington,
Indiana with 409,000 square feet of space. We lease approximately 18,000 square
feet of space in Wilmington, Massachusetts for product sample distribution and
customer returns processing. The Wilmington, Massachusetts facility will be
closed during the first quarter of fiscal 2002 as part of our previously
announced restructuring. The product sample distribution and customer returns
processing functions will be transferred to other facilities. Our Canadian
subsidiary leases approximately 30,000 square feet for administrative offices
and warehousing in Mississauga, Ontario.
We lease approximately 163,000 square feet for our headquarters and
administrative offices in Lexington, Massachusetts in a single tenant office
building. We also lease 24,000 square feet of space in Richmond, Indiana for
our customer service, order processing and telemarketing functions, and 25,000
square feet of space for our liaison offices in Mainland China and Taiwan. In
addition, we lease smaller facilities for local sales offices and showrooms in
various locations in the United States.
7
As of November 30, 2001, we operated 179 retail stores throughout the
country on leased premises that, in the aggregate, covered approximately
306,000 square feet of space. We also operate 46 children's footwear
departments in certain divisions of Federated Department Stores, which we plan
to close in April 2002. In addition, we are the lessee of 10 retail locations
with a total of approximately 13,000 square feet that are subleased to
independent Stride Rite dealers and other tenants.
For further information concerning our lease obligations, see Note 8 to our
consolidated financial statements, which are contained in Item 8 to this
report. Management believes that all of our properties and facilities are
suitable, adequate and fit for their intended purposes.
Item 3. Legal Proceedings.
We are a party to various litigation arising in the normal course of
business. Management does not believe the ultimate resolution of any such
litigation will have a material adverse effect on our financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is listed on the New York Stock Exchange under the symbol
"SRR". The following table sets forth the high and low closing sales prices on
the New York Stock Exchange--Composite Tape. As of February 14, 2002, we had
approximately 4,000 shareholders of record. We have paid a quarterly dividend
of $.05 per share of common stock during our two most recent fiscal years.
COMMON STOCK PRICES
2001 2000
----------- -----------
Fiscal Quarter High Low High Low
-------------- ----- ----- ----- -----
1st...... $8.01 $6.06 $6.63 $5.00
2nd...... $8.40 $6.90 $8.56 $5.38
3rd...... $9.89 $8.03 $6.75 $5.81
4th...... $8.54 $5.98 $6.06 $4.94
Item 6. Selected Financial Data.
The selected financial data for Stride Rite, for the years ended November
28, 1997 through November 30, 2001, set forth below, should be read in
conjunction with our consolidated financial statements and the notes thereto
and the other information contained elsewhere in this report.
2001(2) 2000(3) 1999(4) 1998 1997
-------- -------- -------- -------- --------
OPERATING RESULTS(1)
Net sales............................... $529,147 $548,334 $572,696 $539,413 $515,728
Net income.............................. 18,997 25,193 26,424 21,052 19,780
Dividends on common stock............... 8,358 8,530 9,209 9,401 9,630
Per common share:
Net income........................... .45 .58 .57 .44 .40
Cash dividends....................... .20 .20 .20 .20 .20
FINANCIAL POSITION(1)
Working capital......................... 185,245 158,175 166,551 173,502 176,263
Total assets............................ 349,820 352,473 346,192 335,496 343,918
Stockholders' equity.................... 262,239 249,592 250,495 244,727 242,026
Book value per common share............. 6.26 6.00 5.61 5.28 5.12
STATISTICS(1)
Return on average equity................ 7.3% 10.0% 10.4% 8.5% 7.8%
Return on sales......................... 3.6% 4.6% 4.6% 3.9% 3.8%
Common shares outstanding at end of year 41,859 41,591 44,634 46,381 47,316
Number of employees at end of year...... 2,400 2,200 2,300 2,400 2,900
Number of shareholders.................. 4,000 4,200 4,600 4,800 5,100
- --------
1. Financial data is in thousands, except for per share information.
2. 2001 amounts include nonrecurring charges of $3,059,000 ($2,168,000 net of
income taxes or $.05 per share).
3. 2000 amounts include income of $396,000 related to the reversal of prior
year accruals for nonrecurring charges ($249,000 net of income taxes or less
than $.01 per share).
4. 1999 amounts include nonrecurring charges of $3,254,000 ($2,017,000 net of
income taxes or $.04 per share).
9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
The table below and the paragraphs which follow summarize our performance in
the last three fiscal years. We operate within a very competitive industry.
Portions of the information presented in this report include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This announcement includes forward-looking statements which reflect
our current views with respect to the future events or financial performance
discussed in this report, based on management's beliefs and assumptions and
information currently available. Such statements are subject to risks,
uncertainties and assumptions and are not guarantees of future events or
performance, which may be affected by known and unknown risks, trends and
uncertainties. Should one or more of these risks or uncertainties materialize,
or should our assumptions prove incorrect, actual results may vary materially
from those anticipated, projected or implied. Factors that may cause such a
variance include, among others: the opening of new stores may be delayed; the
volume of sales to department stores, including Federated Department Stores,
and specialty retailers may decline; revenues from new product lines may fall
below expectations; the launch of new product lines may be delayed; new retail
concepts may not achieve expected results; general retail sales trends may be
below expected growth rates; current license agreements may be terminated;
consumer fashion trends may shift to footwear styling not currently included in
our products lines; our retail customers, including large department stores,
may consolidate or restructure operations resulting in unexpected store
closings; and additional factors discussed from time to time in our filings
with the Securities and Exchange Commission. We expressly disclaim any
responsibility to update forward-looking statements.
Percent Change
-------------------------
Increase (decrease) 2001 vs. 2000 2000 vs. 1999
------------------- ------------- -------------
Net sales.......................... (3.5)% (4.3)%
Gross profit....................... (4.1)% (5.8)%
Selling and administrative expenses 0.1% (3.5)%
Operating income................... (30.8)% (6.5)%
Income before income taxes......... (33.2)% (6.0)%
Net income......................... (24.6)% (4.7)%
Percent to Net Sales
- -------------------
2001 2000 1999
---- ---- ----
Gross profit....................... 36.0% 36.2% 36.8%
Selling and administrative expenses 30.4% 29.3% 29.1%
Nonrecurring charges (income)...... 0.6% (0.1)% 0.6%
Operating income................... 5.0% 6.9% 7.1%
Income before income taxes......... 5.1% 7.3% 7.4%
Net income......................... 3.6% 4.6% 4.6%
We operate in a difficult business environment and through the normal course
of business are subject to a variety of risks and uncertainties. The footwear
industry is subject to rapid and substantial shifts in consumer tastes and
preferences. The principal markets for our product, the United States and
Canada, are mature. In order to increase our business, we must increase our
market share relative to our competitors, and there can be no assurance that we
will succeed in doing so. We predominantly sell our products to large
retailers. Historically, we have not experienced significant losses related to
trade receivables. However, there is a risk that some of these retail customers
could experience financial difficulties, particularly in a weak economy, that
may cause them to extend payment times or to default on their obligations to
us. If a large customer were to default on its financial obligations to us, we
could experience a decrease in liquidity. We believe, however, that we have
sufficient financial resources to mitigate the affect that a large default
would have on our ability to continue to operate our business. In addition to
the impact on liquidity, we could also experience a decrease in future revenue
and
10
operating margins related to this loss of business. The fashion oriented nature
of our business, along with the potential for changes in customer preferences
and the extended product development lead times leave us vulnerable to the risk
of inventory obsolescence. We are also exposed to the risk of inventory
markdowns for excess or obsolete product, both at Stride Rite-owned retail
stores and from independent retailers. We monitor retail sell-through data and
make provisions for markdowns as they become known. Our provisions have been
adequate in the past and have not fluctuated significantly. We regularly review
our provisions for obsolescence for inventory on hand or committed. We have
continually managed these risks in the past and believe we can successfully
manage them in the future. However, our revenue and operating margins would
suffer if we are unable to effectively do so. During fiscal 2002, we plan to
open approximately 50 additional Stride Rite-owned retail stores. Historically,
it has taken twelve to fifteen months for new stores to achieve their normal
financial operating performance. Prior to that time, we are likely to incur a
use of cash related to both the capital investment required and the
disproportionate build up of operating costs compared to revenue. The licensing
arrangement with Tommy Hilfiger Licensing, Inc. to produce and sell Hilfiger
branded footwear is a significant portion of our business. During fiscal 2001,
we renewed the agreement for an additional three-year term which expires in
March 2004. Whether our license with Tommy Hilfiger will remain in effect
depends on the economics of that business including our achieving certain
minimum sales levels for the licensed product. If we lose the Tommy Hilfiger
license, our business could be materially and adversely affected. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
most significant estimates included in these financial statements include
valuation allowances and reserves for accounts receivable, inventory and income
taxes. These areas are subject to the risks and uncertainties described above.
Actual results, therefore, could differ from those estimates.
Net Sales
During fiscal 2001, consolidated net sales decreased $19.2 million to $529.1
million, or 3.5% below the sales level achieved in fiscal 2000. A significant
portion of this shortfall from fiscal 2000 occurred in the second half of the
year, as the economy weakened. Many retail customers, concerned over the health
of the economy, responded by tightly managing their inventory levels resulting
in an adverse effect on reorders. This change in our wholesale customers'
buying plans is expected to continue into fiscal 2002. If this trend continues
and the economy remains weak, it may negatively affect net sales in fiscal
2002. Sales of Stride Rite's branded wholesale operations decreased 7.1% in
fiscal 2001. Unit shipments of current line merchandise during fiscal 2001 for
Stride Rite's wholesale brands were 6.1% below the prior year, while average
selling prices declined 2.7% from fiscal 2000. Sales of discontinued products
were 3.3% higher than last year.
Sales of the Stride Rite Children's Group were 6% higher than fiscal 2000,
with a 12% sales increase at Stride Rite Children's retail stores somewhat
offset by a 1% decrease in sales to independent dealers, family shoe stores and
department stores. Sales at comparable (stores open for 52 weeks in each fiscal
year) Stride Rite stores increased 1.8% during fiscal 2001, following a 3.2%
comparable store sales increase in fiscal 2000. Stride Rite Children's Group
opened 29 retail stores in fiscal 2001 and closed 10 underperforming stores
during the year to leave the year-end store count at 220 stores, up 9% from the
201 stores that were open as of December 1, 2000. In fiscal 2001, Stride Rite
concept stores and manufacturers' outlets represented approximately 55% of the
Stride Rite Children's Group sales with the remaining revenues related to sales
of Stride Rite brand products to independent specialty and department stores.
The Stride Rite Children's Group retail concept stores are expected to take on
increased importance in future years. Current plans call for the opening of
approximately 50 new Stride Rite stores during fiscal 2002. These new stores
are expected to offset much of the sales decline that will occur after the exit
of the leased department store business scheduled for the second quarter of
fiscal 2002. During fiscal 2001, Stride Rite Children's Group began a
sub-branding strategy to leverage its expertise in children's footwear.
Munchkin's products were introduced into the mid-tier channel and added
approximately $8 million to sales for the fiscal year. Kids Smart and Baby
Smart products will be introduced into Target stores during the Spring 2002
season. We will receive both a design and a sourcing fee on these products.
11
The overall decrease in our sales in fiscal 2001 was driven principally by
the Keds footwear brand, which recorded an 11% sales decline for the year.
Sales of the reinvented women's Champion(R), although 32% ahead of last year,
were not sufficient to offset the declines in the other women's and children's
products, down 28% and 21%, respectively. The decline in other women's products
was due to a decline in the Keds Stretch(TM) product line and the lower overall
sales performance of the Keds Fall seasonal products. The Keds Children's line
of business was down due to lower retailer acceptance of Fall seasonal items.
Net sales for the Grasshoppers(TM) product line, fueled by new distribution and
higher sales in existing stores, continued to grow, up 39% from fiscal 2000. We
opened five Keds retail stores in fiscal 2001 to evaluate the direct to
consumer distribution alternative for existing and new Keds products. Four of
these Keds stores are located in the southeastern part of the United States and
one store is located in the Midwest. These Keds retail stores are designed to
provide a controlled presentation and selection of Keds products to the
consumer. These stores are not expected to add significant sales volume to Keds
during fiscal 2002.
The general weakness in the department store sector had a significantly
negative impact on the sales of both Tommy Hilfiger and Sperry products, due to
their reliance on this channel for a significant portion of their sales. Sales
of Tommy Hilfiger footwear products decreased 5% as compared to the same period
in fiscal 2000. Sales of the Tommy Hilfiger women's and men's products declined
10% and 20%, respectively, from fiscal 2000. Sales of Tommy Hilfiger children's
products decreased 16% from the prior year, primarily the result of a large
customer narrowing the brand's product selection in their stores. Closeout
sales for the Tommy Hilfiger footwear brand increased 24% above the amounts
recorded in fiscal 2000 due to more aggressive product markdowns and tighter
inventory controls. Sales of the Sperry Top-Sider brand decreased 13% from
fiscal 2000. Sales of men's and women's boat shoes increased 7% from fiscal
2000 and were the only categories that recorded increased sales. Overall, sales
of Sperry Top-Sider men's products decreased 17% from the prior year while
sales of the women's products were lower by 8%. International division revenues
in fiscal 2001 were 2% higher than fiscal 2000, due to a launch of the Keds
brand in Mexico, a 20% increase in Tommy Hilfiger sales in South America and
increased royalty income from Israel, all of which were somewhat offset by weak
Canadian sales compared to the prior year.
In fiscal 2000, consolidated net sales decreased $24.4 million to $548.3
million or 4.3% from the sales level achieved in fiscal 1999 with sales of
Stride Rite's wholesale brands down 6.5% and sales of company-owned stores
above fiscal 1999 by 6.5%. Unit shipments of current line merchandise were 2%
lower than the prior year, while the average selling price declined 3% from
fiscal 1999. Sales of discontinued products in fiscal 2000 were 8% above fiscal
1999. Sales of the Stride Rite Children's Group increased 3% during fiscal 2000
with all of the growth produced by our retail stores. We opened 24 retail
stores in fiscal 2000 and closed 15 underperforming stores, ending the year
with a store count at 201 stores, up 5% from fiscal 1999 year-end. Sales at
comparable Stride Rite-owned retail stores increased 3.2% during fiscal 2000.
Sales of the Keds brand decreased 5% in fiscal 2000 with children's sales down
9% and women's sales below the prior year by 7%. During fiscal 2000, the Keds
brand exited several basic women's product lines, the largest being Keds Ready
to Wear (TM), resulting in a $13 million sales decrease. Sales of Keds Champion
(R) Oxford also declined by 21%. These sales decreases were partially offset by
increased sales of Keds Stretch(TM) products and higher sales of discontinued
styles. Tommy Hilfiger brand sales were down 12% from fiscal 1999 due to a 9%
reduction in the average selling price and increased sales allowances. Unit
shipments of Tommy Hilfiger products in fiscal 2000 were slightly higher than
in fiscal 1999. In fiscal 2000, sales of Sperry declined 4%, while
International division sales declined 10% due to lower royalties from sales in
Japan and the conversion of certain distributors in South America to license
arrangements.
Gross Profit
In fiscal 2001, our gross profit of $190.4 million decreased $8.0 million or
4.1% below fiscal 2000. Our gross profit rate declined 0.2 percentage points to
36.0% comparable to the 36.2% rate achieved in fiscal 2000. Included in the
fiscal 2001 cost of sales was a $1.8 million charge associated with the
write-down of inventory caused by the exit of the leased department store
business by the retail division of the Stride Rite Children's
12
Group. Excluding this charge, the gross profit rate for fiscal 2001 would have
been 36.3%, 0.1 percentage points higher than fiscal 2000. First quality gross
profit declined 0.6 percentage points from the level achieved in fiscal 2000,
principally the result of an unfavorable product mix within the Keds product
lines. Obsolescence costs also contributed to a decline in gross profit of 0.2
percentage points as compared to fiscal 2000. This decline was offset by an
increase in the gross profit percent on closeout sales and the impact of the
sales increase at Stride Rite-owned retail stores, which produce a higher gross
profit percentage than Stride Rite's wholesale brands. Our retail operations
represented 22.0% of consolidated net sales in fiscal 2001 as compared to 18.9%
of total sales in fiscal 2000. Our last-in, first-out ("LIFO") provision had
little impact on gross profit comparisons with LIFO decreasing gross profit by
$0.3 million (less than 0.1% of net sales) in fiscal 2001, compared to a
decrease of $0.6 million (0.1% of net sales) in fiscal 2000.
In fiscal 2000, our gross profit of $198.4 million decreased $12.1 million
or 5.8% below fiscal 1999. Our 2000 gross profit rate declined 0.6 percentage
points to 36.2% compared to the 36.8% rate achieved in fiscal 1999. In fiscal
2000, our gross profit was unfavorably impacted by the LIFO provision, reducing
profitability by 0.5 percentage points. In fiscal 2000, LIFO reduced gross
profit by $0.6 million (0.1% of net sales), while product cost reductions in
fiscal 1999 helped to produce a LIFO benefit of $2.3 million (0.4% of net
sales). Increased obsolescence charges, retail markdowns and higher sales
allowances also had a negative effect on gross profit performance in fiscal
2000 with these costs reducing the gross profit percent by an additional 1.7
percentage points. Fiscal 2000 gross profit performance was favorably impacted
by sales increases from Stride Rite-owned retail stores, which generally
produce a higher gross profit percentage than Stride Rite's wholesale brands.
Operating Costs
Selling and administrative expenses (excluding nonrecurring charges) in
fiscal 2001 increased $0.2 million to $161.0 million or 0.1% above the expense
level incurred in fiscal 2000. As a percent of sales, selling and
administrative costs were 30.4% in 2001 compared to 29.3% in fiscal 2000.
Included in expenses for fiscal 2001 were executive termination costs of $2.3
million. Excluding these executive termination costs, selling and
administrative costs would have been lower by $2.1 million, or 1.3% below
fiscal 2000. Retail store expenses in fiscal 2001 increased $5.7 million from
fiscal 2000 as we accelerated our pace of store openings during the year.
Offsetting these higher costs were lower marketing and advertising spending,
down $3.3 million or 10% from fiscal 2000. Most of this decrease occurred in
the Keds and Tommy Hilfiger brands. Marketing and advertising represent 5.7% of
net sales in fiscal 2001, down from the fiscal 2000 spending rate of 6.1% of
sales. Spending on information systems decreased 7.6% from the fiscal 2000
total as we started to benefit from system integration activities completed in
fiscal 2000. During the fourth quarter of fiscal 2001, we initiated a
restructuring which eliminated 120 positions from our administrative staff,
exited the leased department store business and recorded retail system asset
impairment costs. The restructuring actions are expected to reduce operating
costs by approximately $10.0 million annually beginning in the first quarter of
fiscal 2002. The 2001 consolidated statement of income includes pre-tax,
nonrecurring charges of $3.1 million to cover costs associated with these
restructuring efforts. The restructuring amount includes $1.7 million of
severance payments, $0.2 million of other employee benefit related costs, $0.5
million for the write down of leaseholds and retail system asset impairment
costs and $0.7 million of other costs.
Selling and administrative expenses (excluding nonrecurring items) in fiscal
2000 decreased $5.8 million to $160.9 million or 3.5% below fiscal 1999. The
restructuring actions completed in fiscal 1999, resulting in the elimination of
approximately 125 positions, were a major factor contributing to this decrease.
Marketing and advertising costs were $4.1 million or 10.9% below fiscal 1999,
due to lower contractual payments in the Tommy Hilfiger footwear business and
lower expenses related to the Keds brand. Retail store expenses in fiscal 2000
increased $3.4 million from fiscal 1999 as we accelerated our pace of opening
new stores. Spending on information systems increased 4% as we began to
amortize the cost of a new order management system. We recorded a credit to
income of $0.4 million related to the reversal of unused accruals from the 1999
nonrecurring charge.
13
Other Income and Taxes
Non-operating income (expense) increased our pre-tax earnings by $0.5
million in fiscal 2001 compared to $2.1 million in fiscal 2000 and $2.0 million
in fiscal 1999. Investment income decreased by $1.2 million in fiscal 2001, the
result of lower average investments and a lower average rate of return.
Investment income decreased by $0.4 million in fiscal 2000 from fiscal 1999.
Interest expense in fiscal 2001 decreased from fiscal 2000, $0.2 million as a
higher average borrowing level was offset by a lower average interest rate.
Interest expense in fiscal 2000 increased $0.1 million from fiscal 1999 as
higher interest rates during the year offset a 15% reduction in average
borrowings. The average interest rate was 5.3% in fiscal year 2001, 6.9% in
fiscal 2000 and 6.2% in fiscal 1999. In fiscal 2001, other income and expense
items decreased pre-tax income by $0.8 million, compared to a decrease of $0.2
million in fiscal 2000 and a decrease of $0.9 million in fiscal 1999.
In fiscal 2001, the provision for income taxes decreased $7.1 million due to
a reduction in pre-tax income and a lower effective tax rate. The lower tax
rate in fiscal 2001 as compared to fiscal 2000 was due principally to a
reduction in the need for certain tax accruals recorded in prior periods which
were no longer required. Our effective income tax rate was 29.1% in 2001, 37.2%
in 2000 and 38.1% in 1999.
Net Income
We earned $19.0 million in fiscal 2001, $6.2 million or 24.6% below fiscal
2000's net income amount. Excluding the nonrecurring charges in fiscal 2001
related to the restructuring of our administrative staff, the exit of the
leased department store business and retail system asset impairment costs, net
income would have decreased, $4.0 million or 15.9% in fiscal 2001, to $21.2
million as compared to $25.2 million in fiscal 2000. The reduced earnings in
fiscal 2001 resulted from the lower level of net sales and the reduced gross
profit percent during the year somewhat offset by the lower income tax rate. We
earned $25.2 million in fiscal 2000, below fiscal 1999's net income by $1.2
million or 4.7%. Excluding the nonrecurring items related to the restructuring
of our administrative staff in fiscal 1999, net income decreased 12% from the
prior year or $24.9 million in fiscal 2000 compared to $28.4 million in fiscal
1999. The reduced earnings in fiscal 2000 resulted from the lower level of net
sales and the reduced gross profit percent during the year.
Liquidity and Capital Resources
At the end of fiscal 2001, our balance sheet reflected a current ratio of
3.2 with no long-term debt. Our cash and short-term investments totaled $81.2
million at November 30, 2001, up $18.2 million from the total cash and
short-term investments of $63 million at the end of fiscal 2000. Much of this
increase was the result of the reallocation of the intermediate term fixed
income investments to short-term investments, the result of a change in both
investment policy and managers. We place our short-term investments with highly
rated financial institutions and in investment grade instruments with
maturities of less than three months, which limits our credit exposure. In
addition, other assets included $0.5 million in fiscal 2001 and $12.2 million
in fiscal 2000 of investments in intermediate-term, fixed income instruments.
During fiscal 2001, our operations generated $21.4 million, following
operating cash flows of $30.2 million in fiscal 2000 and $60.2 million in
fiscal 1999. Our inventory levels increased as compared to the prior year in
part because of lower sales during the fourth quarter of fiscal 2001, caused by
the general slowdown in the economy. Year-end inventories totaled $112.5
million in fiscal 2001, an increase of $6.6 million or 6.2% from the fiscal
2000 year-end level, with the largest increase occurring in the Keds brand, up
22% from fiscal 2000. Much of the inventory increase occurred in in-line
merchandise and is expected to be sold through during fiscal 2002. The
inventory increase in fiscal 2001 followed a decrease of $15.3 million in
fiscal 2000. During fiscal 2001, our inventory turnover averaged 3.3 times
compared to turnover rates of 3.8 in fiscal 2000 and 3.2 in fiscal 1999. As of
November 30, 2001, accounts receivable totaled $44.7 million, below the fiscal
2000 year-end level by $9.6 million or 17.7%. This decrease followed an
accounts receivable increase of $6.9 million during fiscal 2000. The lower
year-end level of accounts receivable in fiscal 2001 was impacted by the fourth
quarter's lower
14
sales, which were largely the result of lower reorder rates in the department
store sector amid the general economic slowdown. At November 30, 2001, our
average day's sales outstanding (DSO) totaled 65 days, favorable compared to
the fiscal 2000 year-end statistic of 68 days, but less favorable than the DSO
of 57 days in fiscal 1999.
Additions to property and equipment totaled $10.3 million in fiscal 2001
compared with $21.6 million in fiscal 2000 and $19.9 million in fiscal 1999.
Capital expenditures in fiscal 2001 included $2.6 million related to computer
systems as we continued our efforts to upgrade information systems
capabilities. As those new systems have become operational, the rate of
spending on information technology has declined. During fiscal 2000,
$9.1 million was expended on computer systems. During fiscal 2000, we expended
$5.5 million to expand our Huntington, Indiana distribution facility. The
additional capacity allowed us to transfer the distribution for our Sperry
brand to the Indiana facility during the fourth quarter of fiscal 2000 and to
terminate a higher-cost outsourcing arrangement. In fiscal 2001, capital
spending related to retail stores totaled $5.5 million compared to retail
expenditures of $4.2 million in fiscal 2000 and $3.0 million in fiscal 1999.
During fiscal 2001, we opened 34 new retail stores compared to 24 store
openings in fiscal 2000. We also closed 10 underperforming retail locations in
fiscal 2001. Going forward, we will continue to focus our efforts on improving
retail profitability by critically evaluating underperforming locations,
analyzing the effectiveness of the test of the Keds retail store concept and
opening new Stride Rite concept stores and manufacturers' outlets, where
appropriate. In fiscal 2002, we expect capital expenditures to be approximately
$17 million. We expect to open approximately 50 new stores in fiscal 2002.
These new stores are expected to offset the closing of 46 leased department
stores as we will be exiting that business during the second quarter of fiscal
2002. Funding for capital expenditures will generally be provided from internal
sources. If business conditions do not allow for the funding of capital
purchases internally, these plans will be re-evaluated.
We returned $8.9 million to shareholders during fiscal 2001 through share
repurchases and cash dividends. We expended $0.6 million in fiscal 2001 to
repurchase 87,900 common shares under our share repurchase program. Over the
three-year period ended November 30, 2001, we repurchased a total of 5.2
million common shares at an aggregate cost of $31.8 million. As of November 30,
2001, we have 2.0 million shares remaining on our share repurchase
authorization that the Board of Directors approved in December 1999. We believe
that share repurchases are an effective means of providing value to
shareholders and will continue to make opportunistic share repurchases. We have
paid a dividend to shareholders each quarter since we became a public company
in 1960. Cash used for dividends decreased to $8.3 million in fiscal 2001
compared to $8.7 million in fiscal 2000 and $9.3 million in fiscal 1999 as a
result of the reduction in outstanding shares. Funds for these stock
repurchases and dividends were provided from internal sources. Under the terms
of our revolving credit agreement, we are not allowed to make annual
distributions to shareholders in excess of $30 million.
During the normal course of business, our financial position and results of
operations are routinely subject to a variety of risks, including market risk
associated with interest rate movements on borrowings and investments.
Additionally, economic conditions in countries where we source our products
could negatively affect future inventory purchase commitments. We purchase
substantially all of our inventory from outside the United States. Because
these purchases are primarily denominated in U.S. dollars, we are not directly
subject to foreign currency exchange rate fluctuations. Accordingly, we do not
engage in forward foreign exchange and other similar contracts because the
associated risk is not considered significant. We utilize cash from operations,
short-term investments and short-term borrowings to fund our working capital
and investment needs.
In addition to internal sources of capital, we maintain a bank line of
credit to satisfy the seasonal borrowing requirements that are imposed by the
sales patterns which are characteristic of Stride Rite and of the footwear
industry. Because of these seasonal demands, there are times during the year
when we are less liquid. During fiscal 2000, we entered into a three-year,
revolving credit agreement with five banks providing for loans of up to $75
million. We will begin discussion with the bank group during fiscal 2002 for
the renewal of this credit agreement. The revolving credit agreement requires
us to meet certain financial ratios and covenants and to maintain a minimum
consolidated tangible net worth. Under the terms of the revolving credit
agreement, we may
15
borrow at interest rates which vary with LIBOR. In addition, the agreement
calls for facility fees of 0.375% per annum on the committed line. At year-end
2001, our borrowings under this credit line totaled $26 million, leaving $49
million available for additional borrowings. During fiscal 2001, our borrowings
averaged $26.5 million compared to the average borrowings of $23.4 million in
fiscal 2000 and $27.7 million in fiscal 1999.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101, as amended, summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements and provides guidance on revenue recognition issues in the
absence of authoritative literature addressing a specific arrangement or a
specific industry. The Company adopted SAB 101 in the first quarter of fiscal
year 2001. Adoption of this guidance did not have a material impact on the
Company's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees". Interpretation 44 clarifies guidance for
certain issues that arose in the application of APB 25. Areas of focus within
Interpretation 44 include repricings, modifications to extend the option term,
change of grantee status, modifications to accelerate vesting and options
exchanged in a purchase business combination. Should these types of
transactions occur, the Company will account for them under APB 25 as clarified
by Interpretation 44.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. In addition,
companies are required to review goodwill and intangible assets reported in
connection with prior acquisitions, possibly disaggregate and report separately
previously identified intangible assets and possibly reclassify certain
intangible assets into goodwill. SFAS No. 142 establishes new guidelines for
accounting for goodwill and other intangible assets. Adoption of these
standards is not expected to have a material effect on the Company's financial
position or results of operations.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after
December 15, 2001. The provisions of this statement provide a single accounting
model for impairment of long-lived assets. We are currently assessing the
effect of this new standard but do not expect it to affect financial reporting
materially.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, our financial position and results of
operations are routinely subject to a variety of risks, including market risk
associated with interest rate movements on borrowings and investments and
currency rate movements on non-U.S. dollar denominated assets, liabilities and
income. We regularly assess these risks and have established policies and
business practices to protect against the adverse effect of these and other
potential exposures.
We utilize cash from operations and short-term borrowings to fund our
working capital and investment needs. Cash balances are normally invested in
high-grade securities with terms shorter than three months. Because of the
short-term nature of these investments, changes in interest rates would not
impact the fair value of these financial instruments.
We have available an unsecured committed revolving line of credit as a
source of financing for our working capital requirements. Borrowings under this
revolving credit agreement bears interest at variable rates based on LIBOR plus
an applicable spread. At November 30, 2001, we had $26 million outstanding
under this credit facility.
16
Assets and liabilities outside the United States are primarily located in
Canada. Our investment in foreign subsidiaries with a functional currency other
than the U.S. dollar, are generally considered long-term. Accordingly, we do
not hedge these net investments.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data required by Item 8 is
included in pages F-1 through F-18 and pages S-1 through S-2 attached to this
report. An index to the Financial Statements appears in Item 14 to this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the Directors and Executive Officers of the
Registrant required by Item 10 shall be included in the Proxy Statement to be
filed relating to the 2002 Annual Meeting of Stockholders and is incorporated
herein by reference.
Item 11. Executive Compensation.
The information concerning Executive Compensation required by Item 11 shall
be included in the Proxy Statement to be filed relating to the 2002 Annual
Meeting of Stockholders and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information concerning Security Ownership of Certain Beneficial Owners
and Management required by Item 12 shall be included in the Proxy Statement to
be filed relating to the 2002 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.
17
PART IV
Item 14. Exhibits, Financial Statements and Schedules, and Reports on Form 8-K.
14(a)1 and 14(a)2. Financial Statements and Schedules. The following
financial statements and financial statement schedules are included as a part
of this report in the pages indicated:
Page
----
Consolidated Balance Sheets as of November 30, 2001 and December 1, 2000................... F-1
Consolidated Statements of Income for the fiscal years ended November 30, 2001, December 1,
2000 and December 3, 1999................................................................ F-2
Consolidated Statements of Cash Flows for the fiscal years ended November 30, 2001,
December 1, 2000 and December 3, 1999.................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended
November 30, 2001, December 1, 2000 and December 3, 1999................................. F-4
Notes to Consolidated Financial Statements................................................. F-5 to F-16
Management's Report on Financial Information............................................... F-17
Report of Independent Accountants.......................................................... F-18
Report of Independent Accountants on Financial Statement Schedule.......................... S-1
Schedule II--Valuation and Qualifying Accounts............................................. S-2
14(a)3. Exhibits. The following exhibits are contained herein or are
incorporated herein by reference:
Exhibit
No. Description of Exhibit
--- ----------------------
3(i) Restated Articles of Organization of the Registrant with amendments thereto through November 28,
1986, incorporated by reference from Exhibit 4(i) to the Registrant's Form S-8 filed on October 25,
1996.
3(ii) Articles of Amendment dated April 7, 1987 to Restated Articles of Organization, incorporated by
reference from Exhibit 4(i) to the Registrant's Form S-8 filed on October 25, 1996.
3(iii) Articles of Amendment dated December 16, 1987 to Restated Articles of Organization of the
Registrant, incorporated by reference from Exhibit 4(i) to the Registrant's Form S-8 filed on
October 25, 1996.
3(iv) Articles of Amendment dated December 3, 1991 to the Restated Articles of Organization of the
Registrant, incorporated by reference from Exhibit 4(i) to the Registrant's Form S-8 filed on
October 25, 1996.
3(v) Certificate of Vote of Directors establishing a series of a Class of Stock dated as of June 18, 1997.
3(vi) By-laws of the Registrant, as amended. This document was filed as Exhibit 3 of the Registrant's Form
10-Q for the fiscal period ended June 1, 1990 and is incorporated herein by reference.
4(i) Reference is made to Exhibits 3(i), (ii), (iii) and (iv) referred to above, which are expressly
incorporated herein by reference.
4(ii) Rights Agreement dated June 18, 1997 between the Registrant and BankBoston, N.A. This document
was filed as Exhibit 1 to the Registrant's Form 8-A dated July 1, 1997 and is incorporated herein by
reference.
10(i)* 1975 Executive Incentive Stock Purchase Plan of the Registrant. This document was filed as
Appendix A to the Registrant's Prospectus relating to such Plan, dated April 18, 1986, which was
filed with the Commission pursuant to Rule 424(b) promulgated under the Securities Act of 1933,
as amended, and is incorporated herein by reference.
18
Exhibit
No. Description of Exhibit
--- ----------------------
10(ii)* 1995 Long-Term Growth Incentive Plan of the Registrant. This document was filed as Exhibit 10(vi)
to the Registrant's Form 10-K for the year ended December 2, 1994 and is incorporated herein by
reference.
10(iii)* Form of executive termination agreement dated as of February 12, 1998. This document was filed as
Exhibit 10(iii) to the Registrant's Form 10-K for the year ended November 28, 1997 and is
incorporated herein by reference.
10(iv)* Form of executive termination agreement dated as of February 12, 1998. This document was filed as
Exhibit 10(iv) to the Registrant's Form 10-K for the year ended November 28, 1997 and is
incorporated herein by reference.
10(v)* Form of severance agreement dated February 22, 1995. This document was filed as Exhibit 10(vi) to
the Registrant's Form 10-K for the year ended November 28, 1997 and is incorporated herein by
reference.
10(vi)* Annual Incentive Compensation Plan amended and restated as of December 11, 1997. This document
was filed as Exhibit 10(viii) to the Registrant's Form 10-K for the year ended November 28, 1997
and is incorporated herein by reference.
10(vii)* 1998 Stock Option Plan of the Registrant (as amended). This document was filed as Exhibit 10(xi) to
the Registrant's Form 10-K for the year ended November 27, 1998 and is incorporated herein by
reference.
10(viii)* 1998 Non-Employee Director Stock Ownership Plan of the Registrant (as amended). This document
was filed as Exhibit 10(xii) to the Registrant's Form 10-K for the year ended November 27, 1998
and is incorporated herein by reference.
10(ix)* Senior Executive Annual Incentive Compensation Plan of the Registrant. This document was filed as
Exhibit 10(xi) to the Registrant's Form 10-K for the year ended November 28, 1997 and is
incorporated herein by reference.
10(x)* 1999 Executive Long Term Bonus Plan of the Registrant. This document was filed as Exhibit 10(xiv)
to the Registrant's Form 10-K for the year ended November 27, 1998 and is incorporated herein by
reference.
10(xi)* Employment Agreement between the Registrant and David M. Chamberlain dated November 4, 1999.
This document was filed as Exhibit 10(xi) to the Registrant's Form 10-K for the year ended
December 3, 1999 and is incorporated herein by reference.
10(xii) Revolving Credit Agreement between the Registrant and BankBoston, N.A., Bank of America, N.A.,
Bank One, NA, SunTrust Bank and The Bank of New York, with BankBoston, N.A. and with
BancBoston Robertson Stephens Inc., dated as of January 19, 2000. This document was filed as
Exhibit 10(xii) to the Registrant's Form 10-K for the year ended December 3, 1999 and is
incorporated herein by reference.
10(xiii) Amended and Restated License Agreement between Registrant and Tommy Hilfiger Licensing, Inc.
This document was field as Exhibit 10(i) to the Registrant's Form 10-Q for the quarter ended
August 31, 2001 and is incorporated herein by reference.
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
- --------
* Denotes a management contract or compensatory plan or arrangement.
14(b). Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended November 30, 2001.
14(c). Exhibits. See Item 14(a)3 above.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Stride Rite has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE STRIDE RITE CORPORATION
By: /s/ DAVID M. CHAMBERLAIN
-----------------------------
David M. Chamberlain
Chairman of the Board of
Directors
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ FRANK A. CARUSO
-----------------------------
Frank A. Caruso
Chief Financial Officer
(Principal Financial Officer
and
Principal Accounting Officer)
Date: February 7, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Stride Rite
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ DAVID M. CHAMBERLAIN Chairman of the Board of February 7, 2002
- ----------------------------- Directors and Chief
David M. Chamberlain Executive Officer
/s/ CHRISTINE COURNOYER Director February 7, 2002
- -----------------------------
Christine Cournoyer
/s/ DONALD R. GANT Director February 7, 2002
- -----------------------------
Donald R. Gant
/s/ FRANK R. MORI Director February 7, 2002
- -----------------------------
Frank R. Mori
/s/ MYLES J. SLOSBERG Director February 7, 2002
- -----------------------------
Myles J. Slosberg
/s/ BRUCE VAN SAUN Director February 7, 2002
- -----------------------------
Bruce Van Saun
20
THE STRIDE RITE CORPORATION CONSOLIDATED BALANCE SHEETS
2001 2000
--------- ---------
(In thousands, except for
share data)
ASSETS
Current Assets:
Cash and cash equivalents............................................................ $ 81,159 $ 62,976
Accounts and notes receivable, less allowances of $11,115 in 2001 and $12,665 in 2000 44,739 54,375
Inventories.......................................................................... 112,481 105,917
Deferred income taxes................................................................ 24,245 25,494
Prepaid expenses..................................................................... 5,344 6,365
--------- ---------
Total current assets.............................................................. 267,968 255,127
Property and equipment, net.......................................................... 72,244 76,240
Other assets, net.................................................................... 8,891 20,250
Goodwill, net........................................................................ 717 856
--------- ---------
Total assets...................................................................... $ 349,820 $ 352,473
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt...................................................................... 26,000 24,000
Accounts payable..................................................................... 23,000 32,570
Income taxes payable................................................................. 11,682 18,716
Accrued expenses and other liabilities............................................... 22,041 21,666
--------- ---------
Total current liabilities......................................................... 82,723 96,952
Deferred income taxes................................................................ 4,858 5,929
Stockholders' Equity:
Preferred stock, $1 par value--1,000,000 shares authorized; Issued--none............. -- --
Common stock, $.25 par value--135,000,000 shares authorized; Issued--56,946,544...... 14,237 14,237
Capital in excess of par value....................................................... 19,209 20,276
Retained earnings.................................................................... 382,460 371,821
--------- ---------
415,906 406,334
Less cost of 15,087,646 shares of common stock held in treasury (15,355,693 in 2000). (153,667) (156,742)
--------- ---------
Total stockholders' equity........................................................ 262,239 249,592
--------- ---------
Total liabilities and stockholders' equity........................................ $ 349,820 $ 352,473
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
THE STRIDE RITE CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Years Ended
---------------------------
2001 2000 1999
- -------- -------- --------
(In thousands,
except for per share data)
Net sales.......................... $529,147 $548,334 $572,696
Cost of sales...................... 338,753 349,891 362,108
Selling and administrative expenses 161,046 160,854 166,689
Nonrecurring charges (income)...... 3,059 (396) 3,254
-------- -------- --------
Operating income................... 26,289 37,985 40,645
Investment income.................. 3,008 4,242 4,657
Interest expense................... 1,685 1,881 1,760
Other expense, net................. 808 244 886
-------- -------- --------
Income before income taxes......... 26,804 40,102 42,656
Provision for income taxes......... 7,807 14,909 16,232
-------- -------- --------
Net income......................... $ 18,997 $ 25,193 $ 26,424
======== ======== ========
Net income per common share:
Diluted......................... $ .45 $ .58 $ .57
======== ======== ========
Basic........................... $ .45 $ .59 $ .57
======== ======== ========
Average common shares used
in per share computations:
Diluted......................... 42,114 43,154 46,414
======== ======== ========
Basic........................... 41,757 42,991 46,214
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
THE STRIDE RITE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
----------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
CASH PROVIDED FROM (USED FOR):
OPERATIONS:
Net income......................................................... $ 18,997 $ 25,193 $ 26,424
Adjustments to reconcile to net cash provided from operations:
Depreciation and amortization...................................... 14,342 12,252 10,061
Deferred income taxes.............................................. 178 1,519 (2,368)
Compensation expense (income) related to stock plans............... 140 (549) 621
Equity in loss of affiliate........................................ -- 978 1,449
Gain related to long-term investments.............................. (451) (138) (265)
Loss on disposals of property and equipment........................ 188 831 1,072
Changes in:
Accounts and notes receivable.................................. 9,636 (6,897) 8,997
Inventories.................................................... (6,564) 15,250 7,305
Prepaid expenses............................................... 1,021 (1,470) 1,202
Long-term notes receivable..................................... (175) 31 120
Accounts payable, income taxes, accrued expenses and other
current liabilities.......................................... (15,914) (16,757) 5,603
-------- -------- --------
Net cash provided from operations.............................. 21,398 30,243 60,221
-------- -------- --------
INVESTMENTS:
Additions to property and equipment................................ (10,274) (21,595) (19,951)
Distributions from long-term investments........................... 451 138 230
Sales and (purchases) of noncurrent marketable securities.......... 11,632 (977) (755)
Decrease (increase) in other assets................................ (236) 337 (3,858)
-------- -------- --------
Net cash provided from (used for) investments.................. 1,573 (22,097) (24,334)
-------- -------- --------
FINANCING:
Short-term borrowings.............................................. 2,000 24,000 --
Proceeds from sale of stock under stock plans...................... 1,988 390 1,328
Tax benefit in connection with stock plans......................... 127 -- 9
Repurchase of common stock......................................... (558) (18,049) (13,182)
Cash dividends paid................................................ (8,345) (8,697) (9,283)
-------- -------- --------
Net cash used for financing.................................... (4,788) (2,356) (21,128)
-------- -------- --------
Net increase in cash and cash equivalents............................. 18,183 5,790 14,759
Cash and cash equivalents at beginning of the year.................... 62,976 57,186 42,427
-------- -------- --------
Cash and cash equivalents at end of the year.......................... $ 81,159 $ 62,976 $ 57,186
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
THE STRIDE RITE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Capital in
Common Excess of Retained Treasury
Stock Par Value Earnings Stock
------- ---------- -------- ---------
(In thousands, except for share data)
Balance, November 27, 1998................................. $14,237 $22,063 $337,943 $(129,516)
Net income................................................. 26,424
Issuance of 83,720 common shares under stock plans......... (230) 1,021
Issuance of 177,745 common shares under employee stock plan (1,104) 2,039
Tax benefit in connection with stock plans................. 9
Repurchase of 2,008,400 shares of common stock............. (13,182)
Cash dividends on common stock $.20 per share.............. (9,209)
------- ------- -------- ---------
Balance, December 3, 1999.................................. 14,237 20,738 355,158 (139,638)
Net income................................................. 25,193
Issuance of 10,735 common shares under stock plans......... (23) 116
Issuance of 77,133 common shares under employee stock plan. (439) 829
Repurchase of 3,131,100 shares of common stock............. (18,049)
Cash dividends on common stock, $.20 per share............. (8,530)
------- ------- -------- ---------
Balance, December 1, 2000.................................. 14,237 20,276 371,821 (156,742)
Net income................................................. 18,997
Issuance of 251,188 common shares under stock plans........ (695) 2,564
Issuance of 104,759 common shares under employee stock plan (499) 1,069
Tax benefit in connection with stock plans................. 127
Repurchase of 87,900 shares of common stock................ (558)
Cash dividends on common stock, $.20 per share............. (8,358)
------- ------- -------- ---------
Balance, November 30, 2001................................. $14,237 $19,209 $382,460 $(153,667)
======= ======= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
THE STRIDE RITE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements of The
Stride Rite Corporation (the "Company") include the accounts of the Company and
all its wholly-owned subsidiaries. Intercompany transactions between the
Company and its consolidated subsidiaries have been eliminated. The Company's
investment in an unconsolidated, 49.5% owned affiliate is accounted for in the
consolidated financial statements using the equity method of accounting. Under
this method, the Company's share of the affiliate's income or loss is included
in the consolidated statement of income. Earnings related to transactions
between the affiliate and the Company's consolidated subsidiaries are deferred
until merchandise is resold by those subsidiaries to an independent third party.
Fiscal Year -- The Company's fiscal year ends on the Friday closest to
November 30 in each year. Fiscal years 2001, 2000, and 1999 ended on November
30, 2001, December 1, 2000 and December 3, 1999, respectively. The Company's
1999 fiscal year included 53 weeks.
Cash Equivalents, Short-Term Investments and Marketable Securities -- Cash
equivalents represent highly liquid investments, with a maturity of three
months or less at the time of purchase. Short-term investments, representing
commercial paper with a high investment grade, bank certificates of deposit and
tax-exempt debt instruments with a maturity of between three months and one
year, are stated at cost, which, due to their short-term nature, approximates
fair value. Noncurrent marketable securities, representing funds invested in
intermediate-term, fixed income instruments with maturities greater than one
year, are stated at fair value and are considered available for sale.
Financial Instruments -- Financial instruments consist principally of cash,
short-term investments, intermediate-term investments and trade receivables and
payables. The Company places its investments with highly rated financial
institutions and investment grade, short-term financial instruments, which
limits the amount of credit exposure. The Company sells footwear to numerous
retailers. Historically, the Company has not experienced significant losses
related to investments or trade receivables. The Company's exposure to foreign
exchange risk is limited through U.S. dollar denominated transactions. The
Company does not enter into derivative financial instruments such as futures,
forward or option contracts. The Company calculates the fair value of all
financial instruments and includes this additional information in the
consolidated financial statements when the fair value is different from book
value. The Company uses quoted market prices, when available, to calculate
these fair values.
Inventory Valuation -- Inventories are stated at the lower of cost or market.
The cost of inventories is determined on the last-in, first-out (LIFO) basis.
Property and Equipment -- Property and equipment are stated at cost. The cost
of equipment includes the capitalization of certain associated computer
software costs. Depreciation, which is calculated primarily on the
straight-line method, is provided by periodic charges to expense over the
estimated useful lives of the assets. Leaseholds and leasehold improvements are
amortized over the terms of the related leases or their estimated useful lives,
whichever is shorter, using the straight-line method.
Goodwill and Trademarks -- Goodwill represents the excess of the amount paid
over the fair value of net assets acquired. Trademark rights are stated at
acquisition cost. These assets are amortized on a straight-line basis primarily
over a 25-year period. The carrying value of these intangible assets is
periodically reviewed by the Company and, if necessary, impairments of values
are recognized. If there is a permanent impairment in the carrying value of
goodwill, trademarks or other intangible assets, the amount of such impairment
is computed by comparing the anticipated discounted future operating income of
the acquired business or trademark to the
F-5
carrying value of the assets. In performing this analysis, the Company
considers current results and trends, future prospects and other economic
factors.
Income Taxes -- Deferred income taxes are provided for temporary
differences between financial and taxable income. Deferred taxes are also
provided on undistributed earnings of subsidiaries and affiliates located
outside the United States at rates expected to be applicable at the time of
repatriation.
Advertising -- The Company expenses advertising costs as incurred. Total
advertising expense amounted to $29,897,000, $33,197,000 and $37,270,000 for
2001, 2000, and 1999, respectively.
Estimates Included in Financial Statements -- The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The most significant estimates
included in these financial statements include valuation allowances and
reserves for accounts receivable, markdowns (which reduce revenues), inventory
and income taxes. Actual results could differ from those estimates.
Net Income per Common Share -- Basic earnings per common share is calculated
by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated by
dividing net income by the sum of the weighted average number of shares plus
additional common shares that would have been outstanding if potential dilutive
common shares had been issued for stock options granted. The following table
reconciles the number of shares for the basic and dilutive computations for the
fiscal years presented in the consolidated statements of income:
2001 2000 1999
------- ------- -------
(In thousands, except for per
share date)
Net income.......................................... $18,997 $25,193 $26,424
Weighted average common shares outstanding (basic).. 41,757 42,991 46,214
Dilutive effect of stock options.................... 357 163 200
------- ------- -------
Weighted average common shares outstanding (diluted) 42,114 43,154 46,414
======= ======= =======
Earnings per common share:
Basic............................................ $ .45 $ .59 $ .57
Diluted.......................................... $ .45 $ .58 $ .57
2. INVENTORIES
The cost of inventories, which consist primarily of finished product, at
November 30, 2001 and December 1, 2000 was determined on a last-in, first-out
(LIFO) basis. During 2001, the LIFO reserve increased by $314,000 to
$13,243,000 at November 30, 2001. If all inventories had been valued on a
first-in, first-out (FIFO) basis, net income would have been higher by $223,000
(less than $.01 per share) in 2001. The LIFO reserve increased in 2000 and
decreased in 1999, by $575,000 and $2,252,000, respectively. If all inventories
had been valued on a FIFO basis, net income would have been higher by $362,000
(less than $.01 per share) in 2000 and lower by $1,420,000 ($.03 per share) in
1999.
During 2001 and 2000, reductions in certain inventory quantities resulted in
the sale of products carried at costs prevailing in prior years which were
different from current costs. As a result of these inventory reductions, net
income was decreased by $373,000 (less than $.01 per share) and increased by
$235,000 (less than $.01 per share) in 2001 and 2000, respectively.
F-6
3. PROPERTY AND EQUIPMENT
The components of property and equipment at November 30, 2001 and December
1, 2000 and the range of asset lives used in depreciation calculations for each
asset category are as follows:
Range of
Useful Lives 2001 2000
------------ -------- --------
(In thousands)
Land and improvements............................... 10 years $ 2,791 $ 2,635
Buildings and improvements.......................... 10-40 years 15,605 16,573
Machinery, equipment, computer software and fixtures 3-12 years 98,028 92,161
Leaseholds and leasehold improvements............... 5-15 years 23,714 19,470
-------- --------
140,138 130,839
Less accumulated depreciation and amortization...... (67,894) (54,599)
-------- --------
$ 72,244 $ 76,240
======== ========
4. OTHER ASSETS
As of November 30, 2001 and December 1, 2000, other assets includes the
following:
2001 2000
------ -------
(In thousands)
Marketable securities............................. $ 545 $12,177
Investment in joint venture manufacturing facility 394 394
Trademark rights and other intangible assets, net. 1,827 1,965
Other............................................. 6,125 5,714
------ -------
$8,891 $20,250
====== =======
Marketable securities represent the noncurrent portion of intermediate-term,
fixed income securities investments. The cost basis of these investments was
$529,000 in 2001 and $12,211,000 in 2000. Cash equivalents and short-term
investments include $569,000 in 2001 and $203,000 in 2000 representing the
current portion of this investment. During 1988 and 1989, the Company invested
a total of $1,948,000 in a joint venture, which is accounted for under the
equity method, with a foreign manufacturer to construct and operate a footwear
manufacturing facility in Thailand. The consolidated statements of income
include losses of $0 in 2001, $978,000 in 2000 and $1,449,000 in 1999,
representing the Company's share of the joint venture's operating results in
those years.
5. DEBT
The Company utilizes borrowings under available lines of credit to finance
seasonal working capital requirements. In January 2000, the Company replaced
its previously uncommitted credit facility by entering into a new, three-year
revolving credit agreement with five banks providing for loans of up to $75
million. Under the revolving credit agreement, the Company may borrow at
interest rates which vary with LIBOR. In addition, the agreement calls for
facility fees of .375% per annum on the committed line. The revolving credit
agreement requires the Company to meet certain financial ratios and covenants
and to maintain a minimum consolidated tangible net worth. The interest rates
and facility fees in the agreement also vary somewhat dependent on the
Company's financial performance ranging from LIBOR plus 0.75% up to LIBOR plus
1.25%. The revolving credit agreement also contains other covenants, which
restrict the payment of dividends and common stock repurchases to $30 million
per year. During fiscal 2001, 2000 and 1999, borrowings under the revolving
credit facility and uncommitted lines averaged $26,456,000, $23,437,000 and
$27,695,000, respectively, with a maximum amount outstanding of $40,000,000 in
2001, $64,000,000 in 2000 and $68,400,000 in 1999.
F-7
The weighted average interest rate paid on these borrowings during the year was
5.3% in 2001, 6.9% in 2000 and 6.2% in 1999. Short-term borrowings totaling $26
million and $24 million were outstanding on November 30, 2001 and December 1,
2000, respectively. Interest payments amounted to $1,402,000, $1,617,000 and
$1,720,000 in 2001, 2000 and 1999, respectively.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at November 30, 2001 and
December 1, 2000 consist of the following:
2001 2000
------- -------
(In thousands)
Salaries, wages and commissions $ 4,503 $ 4,508
Advertising.................... 2,144 1,952
Pensions....................... 2,440 2,258
Dividends...................... 2,093 2,080
Nonrecurring charges........... 2,262 --
Other liabilities.............. 8,599 10,868
------- -------
$22,041 $21,666
======= =======
7. NONRECURRING CHARGES
In the fourth quarter of fiscal 2001, the Company recorded pre-tax
nonrecurring charges of $3,059,000 ($.05 per share after tax) related to a
restructuring of its administrative staff, the exit of the leased department
store segment and retail system asset impairment costs. The restructuring
included streamlining certain corporate and divisional operations reducing the
administrative workforce by approximately 20% or 120 positions. Expenses for
the restructuring included $1,730,000 related to severance payments, $164,000
of employee benefit costs, $437,000 related to the consolidation of the
Wilmington, MA returns and product sample facility into the Huntington, Indiana
distribution center and $194,000 of other costs associated with the
restructuring. Exiting the leased department stores of our business resulted in
a write down of leaseholds and other assets of $120,000 and the impairment cost
associated with the existing retail system totaled $414,000. During fiscal
2001, the Company paid $797,000 of costs related to these restructuring
actions. Included in cost of sales is a provision of $1.8 million for the loss
of inventory in leased children's shoe departments that are scheduled to close
in April 2002.
In the third quarter of fiscal 1999, the Company recorded pre-tax
nonrecurring charges of $3,254,000 ($.04 per share after tax) related to a
restructuring of its administrative staff that was implemented to competitively
position itself for future expansion and increased profitability. Certain
merchandising, finance and operations functions were shifted from divisional to
centralized responsibility, resulting in termination of 75 associates and the
elimination of 50 unfilled positions from the Company's administrative staff.
The nonrecurring charges during 1999 included $2,358,000 related to severance
payments, $637,000 of other employee related costs and $259,000 of other costs
associated with the restructuring. During fiscal 2000, the Company paid
$1,121,000 of costs related to the restructuring actions taken in fiscal 1999.
In the fourth quarter of fiscal 2000, the Company recorded income of $396,000
($249,000 after tax or less than $.01 per share) related to the reversal of
unused prior year restructuring accruals.
The following table summarizes activity during the three years ended
November 30, 2001 with respect to nonrecurring charges:
2001 2000 1999
------ ------- -------
(In thousands)
Balance at beginning of year... -- $ 1,517 --
Nonrecurring charges (income).. 3,059 (396) 3,254
Amounts charged against accrual (797) (1,121) (1,737)
------ ------- -------
Balance at end of year......... $2,262 -- $ 1,517
====== ======= =======
F-8
8. LEASES
The Company leases office and retail store space and certain equipment. A
portion of the retail store space is sublet. Some of the leases have provisions
for additional rentals based on increased property taxes and the leases for
retail store space generally require additional rentals based on sales volume
in excess of certain levels. Some leases have renewal options.
Rent expense for operating leases for the three years in the period ended
November 30, 2001 was as follows:
2001 2000 1999
------- ------- -------
(In thousands)
Base rent................. $20,365 $19,535 $18,011
Additional rent........... 1,050 1,321 1,364
Less rental from subleases (567) (570) (826)
------- ------- -------
$20,848 $20,286 $18,549
======= ======= =======
The future minimum rental payments for all non-cancelable operating leases
and the amounts due from tenants on related subleases at November 30, 2001 are
as follows:
(In thousands)
--------------
2002................................ $16,243
2003................................ 15,487
2004................................ 14,029
2005................................ 12,108
2006................................ 9,056
Later years......................... 18,765
-------
85,688
Less rental due from subleases...... (2,011)
-------
Total future minimum rental payments $83,677
=======
9. BENEFIT PLANS
The Company has a non-contributory defined benefit pension plan covering
eligible associates. Pension costs are determined actuarially and are funded to
the extent that deductions are allowable under the United States Internal
Revenue Code. During 2001 and 2000, approximately 68% and 65%, respectively, of
the defined benefit plan's assets were invested in equity investments with the
remaining 32% and 35% invested in fixed income securities. Salaried,
management, sales and non-production hourly associates accrued pension benefits
based on the associate's service and compensation. Production associates
accrued pension benefits at a fixed unit rate based on service.
Pension expense, including amortization of prior service costs over the
remaining service periods of active associates and the remaining lives of
vested and retired associates, for the three years in the period ended November
30, 2001, consists of the following:
2001 2000 1999
------- ------- -------
(In thousands)
Service cost...................... $ 1,417 $ 1,403 $ 2,014
Interest cost..................... 3,063 2,918 2,800
Expected return on assets......... (4,072) (4,366) (4,002)
Net gain recognized............... (287) (622) (59)
Amortization of prior service cost 61 61 61
Transition asset recognized....... -- (284) (287)
------- ------- -------
Net periodic benefit cost (income) $ 182 $ (890) $ 527
======= ======= =======
F-9
The following provides a reconciliation of benefit obligations, plan assets,
the funded status, and various assumptions related to the Company's defined
benefit pension plan:
2001 2000
------- -------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year............. $40,638 $40,610
Service cost........................................ 1,417 1,403
Interest cost....................................... 3,063 2,918
Actuarial loss, (gain).............................. 452 (2,035)
Benefits paid....................................... (2,271) (2,258)
------- -------
Benefit obligation at end of year................... $43,299 $40,638
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year...... 46,367 49,599
Actual return on plan assets........................ (3,443) (973)
Employer contributions.............................. -- --
Benefits paid....................................... (2,271) (2,258)
------- -------
Fair value of plan assets at end of year............ $40,653 $46,368
======= =======
Funded status:
Excess, (deficit) of assets over benefit obligation. (2,646) 5,729
Unrecognized net loss, (gain)....................... 102 (8,152)
Unrecognized prior service costs.................... 104 165
------- -------
Accrued pension cost................................ $(2,440) $(2,258)
======= =======
Assumptions:
Discount rate....................................... 7.25% 7.75%
Expected long-term return on assets................. 9.00% 9.00%
Compensation increase rate.......................... 4.50% 4.50%
The Company also provides defined contribution plans for its associates. The
Company's defined contribution plans, which are qualified under Section 401(k)
of the Internal Revenue Code of 1986, as amended, enable eligible associates to
defer a portion of their salary to be held by the trustees of the plans. The
Company makes an additional contribution to the plans equal to a maximum of 50%
of the first 6% of savings by each participant. During fiscal 2001, 2000, and
1999 the Company's contribution to the plans amounted to $813,000, $769,000 and
$800,000, respectively.
10. STOCK PURCHASE AND OPTION PLANS
The Company's Employee Stock Purchase Plan permits eligible associates to
elect to subscribe for an aggregate of 5,640,000 shares of common stock of the
Company. Under the Plan, participating associates can authorize the Company to
withhold up to 10% of their earnings during consecutive six month payment
periods for the purchase of shares. At the conclusion of the period, associates
can purchase shares at the lesser of 85% of the market value of the Company's
common stock on either their entry date into the Plan or the last day of the
payment period. For the payment periods which ended in December 2000 and June
2001, a total of 104,759 shares were issued under the Plan for an aggregate
amount of $570,000. At November 30, 2001, a total of 5,422,968 shares had been
purchased under the Plan and 217,032 shares were available for purchase by
participating associates.
During 1998, the Company's shareholders approved The Stride Rite Corporation
1998 Non-Employee Director Stock Ownership Plan. Under the 1998 Director's
Plan, awards of common stock and options to purchase common stock are granted
to any director who is not an employee of the Company in accordance with
F-10
the provisions of the Plan. An aggregate of 300,000 shares is authorized for
issuance under the Plan. Options to purchase common stock are granted at a
price equal to the closing price of the Company's common stock on the date the
option is granted. Directors receive an annual grant of options to purchase
5,000 shares of common stock under the Plan. Options have a term of ten years
and are non-transferable. Under the Plan, options become exercisable over a
three-year period and must be paid for in full at the time of exercise. In
April 1999, the shareholders approved an amendment to the Plan which allowed
directors to receive their annual retainer either entirely in shares of common
stock or one-half in shares of common stock and one-half in cash at the
election of each director. Under the terms of the Plan, the Company awarded
30,589, 7,935 and 2,959 shares of common stock during 2001, 2000 and 1999,
respectively. In addition, directors may defer receipt of the stock and/or cash
portion of their annual retainer by electing to participate in the Company's
Deferred Compensation Plan for Directors. At November 30, 2001, the issuance of
74,895 shares has been deferred by participating directors.
During 2001, the Company's shareholders approved the 2001 Stock Option and
Incentive Plan. The 2001 Stock Option and Incentive Plan, which expires in
April 2011, replaced a similar long-term incentive plan which had been approved
by the shareholders in 1998. Under the Plan, as amended, options to purchase
common stock and stock awards of up to an aggregate of 2,000,000 shares of the
Company's common stock, plus up to an additional 1,000,000 shares which would
be available for issuance under the 1998 Stock Option Plan but for its
expiration, may be granted to officers and other key associates. The option
price of the shares may not be less than the fair market value of the Company's
common stock at the date of grant. Options under the Plan generally vest over a
three-year period and the rights to purchase common shares expire ten years
following the date of grant. Stock awards, which are limited to 1,000,000
shares in the Plan, generally vest over a five-year period. During 1999, stock
awards of 10,750 shares, having an average fair market value of $8.58, were
made under the prior, 1998 Stock Option Plan and was expensed during that year.
A summary of the activity in stock options with respect to all plans for the
three years in the period ended November 30, 2001 is as follows:
Number of Weighted Average
Options Exercise Price
---------- ----------------
Outstanding at November 27, 1998 2,807,030 $10.90
Granted......................... 2,135,050 8.53
Exercised....................... (70,011) 5.63
Canceled........................ (1,224,616) 10.23
---------- ------
Outstanding at December 3, 1999. 3,647,453 9.84
Granted......................... 1,089,500 5.62
Exercised....................... (2,800) 0.25
Canceled........................ (1,116,032) 10.74
---------- ------
Outstanding at December 1, 2000. 3,618,121 8.30
Granted......................... 1,132,750 6.54
Exercised....................... (220,599) 6.43
Canceled........................ (805,309) 8.53
---------- ------
Outstanding at November 30, 2001 3,724,963 $ 7.82
========== ======
F-11
The following table summarizes information about stock options outstanding
at November 30, 2001:
Weighted Average
Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
$0.25-$6.25........ 1,541,929 8.5 years $ 5.84 209,896 $ 5.00
$6.375-$9.68....... 1,254,684 7.6 years 7.54 757,300 7.46
$10.375-$14.50..... 928,350 5.3 years 11.49 880,018 11.52
--------- --------- ------ --------- ------
3,724,963 7.4 years $ 7.82 1,847,214 $ 9.12
========= ========= ====== ========= ======
At December 1, 2000, options to purchase 1,710,679 shares at an average
price of $9.71 per share were exercisable (1,742,396 shares at $10.81 per share
at December 3, 1999). On a cumulative basis through November 30, 2001, stock
awards, options to purchase shares and shares reserved for issuance under
deferred compensation plans totaling 8,116,049 shares had been granted under
all plans. Rights to purchase an additional 2,796,045 shares at November 30,
2001 (1,300,114 shares at December 1, 2000) could be granted under the plans.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), defines a fair-value method of accounting
for employee stock options or similar equity instruments and encouraged
companies to adopt that method of accounting. SFAS 123 also allows companies to
continue to use the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and to make proforma disclosures of the impact on net
income and earnings per share of applying SFAS 123. The Company has elected to
continue to account for stock options in accordance with APB 25 and related
interpretations. Accordingly, no compensation expense has been recorded in
connection with fair market value stock option grants under the Company's stock
option plans and its employee stock purchase plan.
Proforma net income and earnings per share information, included in the
table below, has been calculated as if the Company had accounted for stock
options and other stock-based compensation under the fair value method. The
fair value was estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
2001 2000 1999
---- ---- ----
Risk-free interest rate.......................... 5.00% 6.21% 5.01%
Dividend yield................................... 2.5% 3.2% 2.2%
Volatility factor................................ 40% 41% 40%
Weighted average expected life of options (years) 4.5 4.5 4.5
Accordingly, the weighted average grant date fair values of stock options
granted during 2001, 2000 and 1999 were estimated at $2.30, $1.87 and $2.66,
respectively. For purposes of proforma disclosure, the estimated fair value is
amortized to expense on a straight-line basis over the options vesting periods.
A comparison of reported and proforma earnings is as follows for the three
years in the period ended November 30, 2001:
2001 2000 1999
------- ------- -------
(In thousands except for
per share data)
Net income
As reported.............................. $18,997 $25,193 $26,424
Proforma................................. 17,769 23,562 24,642
Net income per diluted share of common stock
As reported.............................. .45 .58 .57
Proforma................................. .42 .55 .53
F-12
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option pricing models require the use of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options and other stock-based
compensation.
11. PREFERRED STOCK PURCHASE RIGHTS
In June 1997, the Company's Board of Directors adopted a Stockholder Rights
Plan to replace a similar plan which was due to expire in July 1997. In
connection with the Plan, the Board declared a dividend of one Preferred Share
Purchase Right for each outstanding share of common stock of the Company,
payable to stockholders of record on July 17, 1997.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's Board of Directors, except pursuant to
an offer conditioned on a substantial number of Rights being acquired. The
Rights should not interfere with any merger or other business combination
approved by the Board of Directors. The Rights may be redeemed by the Company
at a price of $.01 per Right prior to the time that a person or group has
acquired beneficial ownership of 10% or more of the common shares.
Each Right entitles the holder to purchase from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock at a
price of $68 per one one-hundredth of a Preferred Share. Each preferred share
is entitled to minimum quarterly dividends of $1.00 per share, a minimum
preferential liquidation payment of $100 per share and each preferred share
will have 100 votes, voting together with the common shares. The Rights, which
may be amended by the Board of Directors of the Company under most
circumstances, become exercisable at the earlier of ten days following a public
announcement that a person or group ("Acquiring Person") has acquired
beneficial ownership of 10% or more of the Company's outstanding common stock
or ten business days following the commencement of, or announcement of an
intention to make, a tender or exchange offer which would result in the
beneficial ownership by an Acquiring Person of 10% or more of the outstanding
common shares. In the event that the Company is acquired in a merger or other
business combination transaction, or 50% or more of its assets or earnings
power are sold after a person has acquired beneficial ownership of 10% or more
of the Company's outstanding common stock, the holders of the Rights will have
the right to receive upon exercise that number of shares of common stock of the
Acquiring Person having a market value of two times the exercise price of the
Right. In the event that any person or group becomes an Acquiring Person, the
holders of the Rights, other than the Acquiring Person, will have the right to
receive on exercise that number of shares of Company common stock having a
market value of two times the exercise price of the Right. The Board of
Directors of the Company may also exchange the Rights, in whole or in part, at
an exchange ratio of one common share or one one-hundredth of a preferred
share, at any time after a person or group becomes an Acquiring Person and
prior to the acquisition of 50% or more of the Company's common stock by such
Acquiring Person. The Rights, which have no voting power, expire on July 17,
2007. Preferred Stock Purchase Rights outstanding under the Plan totaled
41,858,898 and 41,590,851 as of November 30, 2001 and December 1, 2000,
respectively.
12. LITIGATION AND CONTINGENCIES
The Company is a party to various litigation arising in the normal course of
business. Having considered available facts and opinions of counsel handling
these matters, management of the Company does not believe the ultimate
resolution of such litigation will have a material adverse effect on the
Company's financial position or results of operations.
F-13
The Company's exclusive licensing arrangement with Tommy Hilfiger Licensing,
Inc. to produce and sell Hilfiger branded footwear was amended and renewed for
a three-year term expiring March 31, 2004. Management believes that no
provision is required for the potential loss of this license.
13. INCOME TAXES
The provision for income taxes consists of the following for the three years
in the period ended November 30, 2001:
2001 2000 1999
------ ------- -------
(In thousands)
Current:
Federal........................ $7,156 $11,995 $16,965
State.......................... 473 1,395 1,635
------ ------- -------
Total current provision........... 7,629 13,390 18,600
------ ------- -------
Deferred:
Federal........................ 114 1,711 (2,013)
State.......................... 64 (192) (355)
------ ------- -------
Total deferred provision (benefit) 178 1,519 (2,368)
------ ------- -------
Provision for income taxes........ $7,807 $14,909 $16,232
====== ======= =======
Net deferred tax assets as of November 30, 2001 and December 1, 2000 have
the following significant components:
2001 2000
------- -------
(In thousands)
Deferred tax assets:
Inventory valuation reserves........... $ 4,643 $ 6,868
Accounts receivable allowances......... 4,445 5,142
Compensation and pension accruals...... 1,722 3,070
Nonrecurring charges................... 978 --
Other accounting reserves and accruals. 12,457 10,414
------- -------
Total deferred tax assets................. 24,245 25,494
------- -------
Deferred tax liabilities:
Depreciation and amortization.......... 4,444 5,563
Other items............................ 414 366
------- -------
Total deferred tax liabilities............ 4,858 5,929
------- -------
Net deferred tax assets................... $19,387 $19,565
======= =======
A valuation allowance has not been assigned to the Company's deferred tax
assets since management believes it is more likely than not that the Company
will fully realize the benefits of such tax assets.
F-14
The effective income tax rate differs from the statutory federal income tax
rate as follows:
2001 2000 1999
---- ---- ----
Statutory federal tax rate................................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit............... 1.3 2.0 2.0
Tax provision related to company-owned life insurance program 0.5 0.5 2.2
Reduction in tax accruals recorded in prior years............ (8.1) -- --
Other........................................................ 0.4 (0.3) (1.1)
---- ---- ----
Effective income tax rate.................................... 29.1% 37.2% 38.1%
==== ==== ====
In 2001, 2000 and 1999, the Company paid income taxes of $13,587,000,
$18,587,000 and $12,681,000, respectively.
14. OPERATING SEGMENTS AND RELATED INFORMATION
The Company operates in one industry segment, the footwear industry.
Operating segments of the Company are based on, among other things, the way the
Company's management organizes the components of the Company's business for the
purposes of allocating resources and assessing performance. The Company designs
and markets footwear under various brand names, which represent the operating
segments of the Company. Products for all of the Company's brands are generally
manufactured using similar processes. The Company's products also share similar
distribution methods and are marketed and sold to the same customer types.
Operating results are assessed on an aggregate basis to make decisions about
resources to be allocated among the brands. Consequently, because the brands
have similar product, distribution, marketing and economic conditions, the
Company's operating segments have been aggregated into one reportable segment
for financial statement purposes as permitted by the provisions of SFAS 131.
The Company presently focuses its brands on the domestic footwear market. No
individual country other than the United States accounted for more than 10% of
consolidated net sales or assets. The Company's largest customer accounted for
approximately 9% of consolidated net sales.
15. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101, as amended, summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements and provides guidance on revenue recognition issues in the
absence of authoritative literature addressing a specific arrangement or a
specific industry. The Company adopted SAB 101 in the first quarter of fiscal
year 2001. Adoption of this guidance did not have a material impact on the
Company's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees". Interpretation 44 clarifies guidance for
certain issues that arose in the application of APB 25. Areas of focus within
Interpretation 44 include repricings, modifications to extend the option term,
change of grantee status, modifications to accelerate vesting and options
exchanged in a purchase business combination. Should these types of
transactions occur, the Company will account for them under APB 25 as clarified
by Interpretation 44.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. In addition,
companies are required to review goodwill and intangible assets reported in
connection with prior acquisitions, possibly disaggregate and report separately
previously identified intangible assets and possibly reclassify certain
F-15
intangible assets into goodwill. SFAS No. 142 establishes new guidelines for
accounting for goodwill and other intangible assets. Adoption of these
standards is not expected to have a material effect on the Company's financial
position or results of operations.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after
December 15, 2001. The provisions of this statement provide a single accounting
model for impairment of long-lived assets. We are currently assessing the
effect of this new standard but do not expect it to affect financial reporting
materially.
16. QUARTERLY DATA (UNAUDITED)
The following table provides quarterly data for the fiscal years ended
November 30, 2001 and December 1, 2000.
First Second Third Fourth
-------- -------- -------- -------
(In thousands, except for per share data)
2001
Net Sales................ $151,093 $153,660 $135,368 $89,026
Gross profit............. 54,924 58,800 48,204 28,466
Net income (loss)........ 7,818 10,049 7,153 (6,023)
Per diluted common share:
Net income (loss)..... .19 .24 .17 (.14)
Dividends............. .05 .05 .05 .05
First Second Third Fourth
-------- -------- -------- -------
2000
Net sales................ $151,663 $156,533 $144,760 $95,378
Gross profit............. 54,897 57,864 52,060 33,622
Net income (loss)........ 7,487 10,609 7,782 (685)
Per diluted common share:
Net income (loss)..... .17 .24 .18 (.02)
Dividends............. .05 .05 .05 .05
In the fourth quarter of fiscal 2001, the Company recorded pre-tax,
nonrecurring charges of $3,059,000 ($.04 per share after tax), associated with
its decision to restructure the Company's administrative staff, the exit of the
leased department store segment and retail system asset impairment costs.
F-16
MANAGEMENT'S REPORT ON FINANCIAL INFORMATION
To Our Stockholders:
Management of The Stride Rite Corporation is responsible for the preparation
and integrity of the financial information included in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles. Where required, the financial statements reflect our
best estimates and judgments.
It is the Company's policy to maintain a control-conscious environment
through an effective system of internal accounting controls supported by formal
policies and procedures communicated throughout the Company. These controls are
adequate to provide reasonable assurance that assets are safeguarded against
loss or unauthorized use and to produce the records necessary for the
preparation of financial information. There are limits inherent in all systems
of internal control based on the recognition that the costs of such systems
should be related to the benefits to be derived. We believe the Company's
systems provide this appropriate balance.
The control environment is complemented by the Company's internal audit
function which performs audits and evaluates the adequacy of and the adherence
to these controls, policies and procedures. In addition, the Company's
independent accountants have developed an understanding of our accounting and
financial controls and have conducted such tests as they consider necessary to
support their report on the Company's financial statements.
The Board of Directors pursues its oversight role for the financial
statements through the Audit Committee, which consists solely of independent
directors who are financially literate. In accordance with its Charter, the
Audit Committee meets regularly with management, the corporate internal
auditors and the Company's independent accountants, PricewaterhouseCoopers LLP,
to review management's process of implementation and administration of internal
accounting controls, the independence of the auditors and auditing and
financial reporting matters. The independent and internal auditors have
unrestricted access to the Audit Committee.
The Company maintains high standards in selecting, training and developing
personnel to help ensure that management's objectives of maintaining strong,
effective internal controls and unbiased, uniform reporting standards are
attained. We believe it is essential for the Company to conduct its business
affairs in accordance with the highest ethical standards as expressed in The
Stride Rite Corporation's Code of Ethics.
/s/ David M. Chamberlain /s/ FRANK A. CARUSO
- ---------------------------------- ------------------------
David M. Chamberlain Frank A. Caruso
Chairman of the Board of Directors Chief Financial Officer
and Chief Executive Officer
F-17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
The Stride Rite Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of The Stride
Rite Corporation and its subsidiaries at November 30, 2001 and December 1,
2000, and the results of their operations and their cash flows for each of the
three years in the period ended November 30, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of The Stride Rite Corporation's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
------------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 9, 2002
F-18
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Directors of
The Stride Rite Corporation:
Our audits of the consolidated financial statements referred to in our report
dated January 9, 2002 appearing on page F-18 of the 2001 Annual Report on Form
10-K of The Stride Rite Corporation also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------------
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 9, 2002
S-1
THE STRIDE RITE CORPORATION
Schedule II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description Period Expenses Deductions Period
- ----------- ---------- ---------- ---------- ----------
Fiscal year ended
December 3, 1999:
Deducted from assets:
Allowance for doubtful accounts..... $ 3,898 $1,125 $1,336(a) $ 3,687
Allowance for sales discounts....... 5,673 2,490 1,899(b) 6,264
------- ------ ------ -------
$ 9,571 $3,615 $3,235 $ 9,951
======= ====== ====== =======
Fiscal year ended
December 1, 2000:
Deducted from assets:
Allowance for doubtful accounts..... 3,687 1,040 1,638(a) 3,089
Allowance for sales discounts....... 6,264 4,685 1,373(b) 9,576
------- ------ ------ -------
$ 9,951 $5,725 $3,011 $12,665
======= ====== ====== =======
Fiscal year ended
November 30, 2001:
Deducted from assets:
Allowance for doubtful accounts..... 3,089 898 291(a) 3,696
Allowance for sales discounts....... 9,576 442 2,599(b) 7,419
------- ------ ------ -------
$12,665 $1,340 $2,890 $11,115
======= ====== ====== =======
- --------
(a) Amounts written off as uncollectible.
(b) Amounts charged against the reserve.
S-2
THE STRIDE RITE CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2001
Index to Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants