-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bjgk2IbxAYJ/XKoSoKgLVnV2tBeWpKSelQ1ogEJh5A+9BrGclWIWh9RK36Vmn1nw AIbmCkuxSrTK2x6XPHtQMg== 0000094887-04-000142.txt : 20041007 0000094887-04-000142.hdr.sgml : 20041007 20041007152219 ACCESSION NUMBER: 0000094887-04-000142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040827 FILED AS OF DATE: 20041007 DATE AS OF CHANGE: 20041007 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STRIDE RITE CORP CENTRAL INDEX KEY: 0000094887 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 041399290 STATE OF INCORPORATION: MA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04404 FILM NUMBER: 041070209 BUSINESS ADDRESS: STREET 1: 191 SPRING STREET CITY: LEXINGTON STATE: MA ZIP: 02421 BUSINESS PHONE: 6178246000 MAIL ADDRESS: STREET 1: 191 SPRING STREET CITY: LEXINGTON STATE: MA ZIP: 02421 FORMER COMPANY: FORMER CONFORMED NAME: GREEN SHOE MANUFACTURING CO DATE OF NAME CHANGE: 19720606 10-Q 1 form10q.txt FORM 10-Q FOR PERIOD ENDED AUGUST 27, 2004 1 of 34 pages - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 27, 2004 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to . Commission File Number: 1-4404 THE STRIDE RITE CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-1399290 ---------------------------- ------------------------------- (State or other jurisdiction) (I.R.S. Employer Identified No.) 191 Spring Street, Lexington, Massachusetts 02421 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617)824-6000 Indicate by check mark whether the Registrant (1) has filed all reports required 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 report), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) - Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes(X) No ( ) - APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of October 5, 2004, 36,773,352 shares of the Registrant's common stock, $.25 par value, and the accompanying Preferred Stock Purchase Rights were outstanding. PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements THE STRIDE RITE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
August 27, August 29, 2004 November 28, 2003 (Unaudited) 2003 (Unaudited) --------------- -------------- -------------- (In thousands) Assets Current Assets: Cash and cash equivalents $84,906 $103,272 $96,195 Accounts and notes receivable, net 69,998 51,058 69,590 Inventories 80,604 81,925 68,557 Deferred income taxes 15,167 14,393 20,222 Other current assets 10,140 19,452 5,330 -------- -------- -------- Total current assets 260,815 270,100 259,894 Property and equipment, net 56,874 60,802 62,552 Other assets 12,582 14,315 15,022 -------- -------- -------- Total assets $330,271 $345,217 $337,468 ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
August 27, August 29, 2004 November 28, 2003 (Unaudited) 2003 (Unaudited) ------------- -------------- ------------- (In thousands, except for share data) Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $17,450 $23,887 $10,132 Income taxes payable 17,288 16,815 20,458 Accrued expenses and other liabilities 21,164 23,273 21,869 -------- -------- -------- Total current liabilities 55,902 63,975 52,459 Deferred income taxes 844 381 775 Pension obligation 13,145 13,145 11,677 Stockholders' Equity: Preferred stock, $1 par value Shares authorized - 1,000,000 Shares issued - None - - - Common stock, $.25 par value Share authorized - 135,000,000 Shares issued - 56,946,544 14,237 14,237 14,237 Capital in excess of par value 15,288 16,825 16,803 Retained earnings 435,890 415,988 418,914 Accumulated other comprehensive loss (7,796) (7,798) (6,961) Less cost of 19,999,131 shares of common stock held in treasury (17,607,304 on November 28, 2003 and 17,547,650 on August 29, 2003) (197,239) (171,536) (170,436) --------- --------- --------- Total stockholders' equity 260,380 267,716 272,557 --------- --------- --------- Total liabilities and stockholders' equity $330,271 $345,217 $337,468 ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the periods ended August 27, 2004 and August 29, 2003
Three Months Ended Nine Months Ended ------------------ ----------------- (In thousands, except for per share data) August 27, August 29, August 27, August 29, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net sales $140,382 $139,747 $441,525 $446,355 Cost of sales 89,197 87,111 273,825 274,700 ------------ ------------ ------------ ------------ Gross profit 51,185 52,636 167,700 171,655 Selling and administrative expenses 41,831 42,592 127,760 130,970 ------------ ------------ ------------ ------------ Operating income 9,354 10,044 39,940 40,685 Investment income 298 201 1,342 1,807 Interest expense (79) (75) (235) (247) Other expense, net (85) (43) (233) (207) ------------ ------------ ------------ ------------ 134 83 874 1,353 ------------ ------------ ------------ ------------ Income before income taxes 9,488 10,127 40,814 42,038 Provision for income taxes 3,269 3,714 15,211 15,585 ------------ ------------ ------------ ------------ Net income $6,219 $6,413 $25,603 $26,453 ============ ============ ============ ============ Net income per common share: Diluted $ .16 $ .16 $ .65 $ .66 ============ ============ ============ ============ Basic $ .17 $ .16 $ .66 $ .67 ============ ============ ============ ============ Dividends per common share $ .05 $ .05 $ .15 $ .15 ============ ============ ============ ============ Average common shares used in per share computations: Diluted 38,159 40,243 39,311 39,992 ============ ============ ============ ============ Basic 37,467 39,456 38,508 39,415 ============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the nine months ended August 27, 2004 and August 29, 2003
2004 2003 ------------- ------------- Cash flows from operating activities: (In thousands) Net income $25,603 $26,453 Adjustments to reconcile net income to net cash provided from operations: Depreciation and amortization 9,477 10,438 Deferred income taxes (311) 610 Loss on sale of trading security - 6 Gain related to long-term investments - (1,071) Loss on disposals of property and equipment 219 555 Changes in: Accounts and notes receivable (18,940) (21,515) Inventories 1,321 29,656 Other current assets 10,312 9,030 Other current liabilities (7,920) (15,436) Other long-term assets 1,733 (2,108) Contribution to pension plan (1,000) (2,000) ---------- --------- Net cash provided from operating activities 20,494 34,618 ---------- --------- Cash flows from investing activities: Additions to property and equipment (5,768) (5,254) Distributions from long-term investments - 1,071 ---------- --------- Net cash used in investing activities (5,768) (4,183) ---------- --------- Cash flows from financing activities: Proceeds from sale of stock under stock plans 3,981 2,342 Cash dividends paid (5,824) (5,914) Repurchase of common stock (31,249) (3,773) ---------- --------- Net cash used in financing activities (33,092) (7,345) ---------- --------- Net (decrease) increase in cash and cash equivalents (18,366) 23,090 Cash and cash equivalents at beginning of the period 103,272 73,105 --------- --------- Cash and cash equivalents at end of the period $84,906 $96,195 ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Basis of Presentation The financial information included in this Form 10-Q of The Stride Rite Corporation (the "Company") for the periods ended August 27, 2004 and August 29, 2003 is unaudited, however, such information includes all adjustments (including all normal recurring adjustments) which, in the opinion of management, are considered necessary for a fair presentation of the consolidated results for those periods. The results of operations for the periods ended August 27, 2004 and August 29, 2003 are not necessarily indicative of the results of operations that may be expected for the complete fiscal year. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The Company filed with the Securities and Exchange Commission audited consolidated financial statements for the year ended November 28, 2003 on Form 10-K, which included all information and footnotes necessary for such presentation. The Company's preparation of the condensed consolidated 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 dates of the financial statements and the reported amounts of revenues and expenses during the respective periods. The most significant estimates included in these financial statements include valuation allowances and reserves for accounts receivable, sales returns allowances, markdowns (which reduce revenues), inventory and income taxes; assumptions related to the defined benefit pension plan; and estimates of future undiscounted cash flows on property and equipment that may be impaired. Actual results could differ from those estimates. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies - (continued) Stock Purchase and Option Plans At August 27, 2004, the Company had three stock-based compensation plans which are described more fully in Note 10 to the Company's consolidated financial statements for the fiscal year ended November 28, 2003 as contained on Form 10-K. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. The following table provides the effect on net income and earnings per share if the Company had applied the fair-value recognition provisions of SFAS No. 148, "Accounting for Stock Based Compensation - - Transition and Disclosure", to stock-based compensation. Three Months Ended Nine Months Ended
August 27, August 29, August 27, August 29, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ (In thousands, except for per share data) Net income, as reported $6,219 $6,413 $25,603 $26,453 Add: Stock based employee compensation expense included in net income, net of related tax effects 3 21 9 30 Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects (492) (361) (1,432) (1,292) --------- --------- -------- -------- Pro forma net income $5,730 $6,073 $24,180 $25,191 ========= ========= ======== ======== Earnings per share: Basic - as reported $ .17 $ .16 $ .66 $ .67 ========= ========= ======== ======== Basic - pro forma $ .15 $ .15 $ .63 $ .64 ========= ========= ======== ======== Diluted - as reported $ .16 $ .16 $ .65 $ .66 ========= ========= ======== ======== Diluted - pro forma $ .15 $ .15 $ .62 $ .63 ========= ========= ======== ========
PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 2 - Earnings Per Share Basic earnings per common share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if options to issue common stock were exercised. The following is a reconciliation of the number of shares used in the basic and diluted earnings per share computations: Three Months Ended Nine Months Ended
Aug. 27, Aug. 29, Aug. 27, Aug. 29, 2004 2003 2004 2003 --------- --------- --------- ---------- (In thousands, except for per share data) Net income $6,219 $6,413 $25,603 $26,453 Calculation of shares: Weighted average common shares outstanding (basic) 37,467 39,456 38,508 39,415 Dilutive effect of stock options 692 787 803 577 ------ ------ ------ ------ Weighted average common shares outstanding (diluted) 38,159 40,243 39,311 39,992 ====== ====== ====== ====== Net income per common share (basic) $.17 $.16 $.66 $.67 ====== ====== ====== ====== Net income per common share (diluted) $.16 $.16 $.65 $.66 ====== ====== ====== ======
The following options were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares: First Nine Third Quarter Months ------------------- ------------------ 2004 2003 2004 2003 -------- --------- -------- -------- (In thousands) Options to purchase shares of common stock 1,130 507 1,043 540 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 3 - Comprehensive Income Comprehensive income is as follows:
Three Months Ended Nine Months Ended ---------------------- ---------------------- Aug. 27, Aug. 29, Aug. 27, Aug, 29, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- (In thousands) Net income $6,219 $6,413 $25,603 $26,453 Other comprehensive income(loss): Foreign currency translation adjustments 131 (191) 2 285 ---------- ---------- ---------- ---------- Total comprehensive income $6,350 $6,222 $25,605 $26,738 ========== ========== ========== ==========
Components of accumulated other comprehensive loss consist of the following:
August 27, November 28, August 29, 2004 2003 2003 ------------- -------------- ------------- (In thousands) Foreign currency translation adjustments $(215) $(217) $(240) Minimum pension liability adjustments, net of taxes (7,581) (7,581) (6,721) --------- --------- --------- Accumulated other comprehensive loss $(7,796) $(7,798) $(6,961) ========= ========= =========
PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Intangible Assets and Goodwill The following table summarizes the Company's intangible assets and goodwill balances: Intangible assets not subject to amortization ------------------------------------------------
Trademark Goodwill Rights Total - ------------------------------------------------------------------------------- August 27, 2004 (In thousands) Gross carrying amount $3,067 $2,980 $6,047 Accumulated amortization $(2,159) $(1,290) $(3,449) November 28, 2003 Gross carrying amount $3,068 $2,980 $6,048 Accumulated amortization $(2,160) $(1,290) $(3,450) August 29, 2003 Gross carrying amount $3,073 $2,980 $6,053 Accumulated amortization $(2,165) $(1,290) $(3,455)
Note 5 - Benefit Plans During the first quarter of fiscal 2004, the Company adopted the interim disclosure provisions of SFAS No. 132 (revised 2003), "Employers' Disclosure about Pensions and Other Postretirement Benefits, an Amendment of FASB Statements No. 87, 88 and 106 and a Revision of FASB Statement No. 132." This statement revises employers' disclosures about pension plans and other post retirement benefit plans. The following table summarizes the components of net periodic benefit cost for the Company: Three Months Ended Nine Months Ended ------------------------ -----------------------
Aug. 27, Aug. 29, Aug. 27, Aug. 29, 2004 2003 2004 2003 ----------- ----------- ---------- ----------- (In thousands) Service cost $431 $303 $1,282 $909 Interest cost 886 763 2,692 2,289 Expected return on assets (994) (704) (2,989) (2,112) Net loss recognized 428 322 1,156 966 Amortization of prior service cost 7 6 17 18 ----------- ----------- ---------- ----------- Net periodic benefit cost $758 $690 $2,158 $2,070 =========== =========== ========== ===========
During the first quarter of fiscal 2004, the Company contributed $1.0 million to its defined benefit pension plan. The Company does not intend to make any further contributions to its defined benefit pension plan during fiscal year 2004. During the third quarter of fiscal 2003, $2.0 million was contributed to the Company's defined benefit pension plan. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 6 - Contingencies The sale of Tommy Hilfiger branded footwear is a significant portion of our business. The Tommy Hilfiger footwear sales are contingent on our licensing agreement with Tommy Hilfiger Licensing, Inc. During fiscal 2003, we negotiated the renewal of the agreement for an additional term. In early January 2004, we finalized the terms of the license agreement, which will expire in March 2007. We expect to meet our obligations under the Tommy Hilfiger license agreement and accordingly, we believe that no provision is currently required for costs related to the potential loss of this license. If we lose the Tommy Hilfiger license, our business would be materially and adversely affected. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview - -------- The following discusses The Stride Rite Corporation's results of operations and liquidity and capital resources. The discussion, including known trends and uncertainties identified by management, should be read in conjunction with the condensed consolidated financial statements and related notes. This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 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 "anticipate", "believe", "expect", "intend", "may", "plan", "estimate", "project", "should", "will be" and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update forward-looking statements. Accordingly, past results and trends should not be used by investors to anticipate future results or trends. Risks and uncertainties that may affect future performance are detailed from time to time in reports filed by the Company with the SEC, including Forms 10-Q and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall footwear and general retail market; intense competition among designers, marketers, distributors and sellers of footwear; demographic changes; changes in consumer fashion trends that may shift to footwear styling not currently included in our product lines; popularity of particular designs and categories of products; seasonal and geographic demand for the Company's products; difficulties in anticipating or forecasting changes in consumer preferences; delays in the opening of new stores; difficulties in implementing, operating and maintaining the Company's complex information systems and controls, including, without limitation, the systems related to the Company's retail stores, systems related to demand and supply planning, and inventory control; interruptions in data and communications systems; fluctuations and difficulty in forecasting operating results; the ability of the Company to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of the Company's products; the underperformance or delay of new products; the possible failure to retain the Tommy Hilfiger footwear license; the ability to secure and protect trademarks, patents and other intellectual property; performance and reliability of products; customer service; adverse publicity; the loss of significant suppliers or customers, such as department stores and specialty retailers, the PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS consolidation or restructuring of such customers, including large chain and department stores, which may result in unexpected store closings; dependence on China manufacturing; the ability to secure raw materials; delays and increased costs of freight and transportation to meet delivery deadlines; the impact on product development or manufacturing as a result of health risks; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, import duties, tariffs, quotas and political and economic instability; acts of war or terrorism; labor disputes; changes in government regulations; liability and other claims asserted against the Company; the ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this report and other reports. The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect the Company's business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also be aware that while the Company does communicate with securities analysts from time to time, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Therefore, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company. The Company discussed a number of significant trends and specific factors affecting the footwear industry in general and our business in particular in "Management's Discussion and Analysis of Financial Condition and Results of Operations", Item 7 of our Annual Report on Form 10-K for the fiscal year 2003. Those trends and factors continue to be relevant to the Company's performance and financial condition. Critical Accounting Estimates - ----------------------------- The preparation of the condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. Please refer to the discussion of critical accounting estimates in the Company's Annual Report on Form 10--K for the fiscal year ended November 28, 2003 for additional information. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Contingencies - ------------- The sale of Tommy Hilfiger branded footwear is a significant portion of our business. The Tommy Hilfiger footwear sales are contingent on our licensing agreement with Tommy Hilfiger Licensing, Inc. During fiscal 2003, we negotiated the renewal of the agreement for an additional term. In early January 2004, we finalized the terms of the license agreement, which will expire in March 2007. We expect to meet our obligations under the Tommy Hilfiger license agreement and accordingly, we believe that no provision is currently required for costs related to the potential loss of this license. If we lose the Tommy Hilfiger license, our business would be materially and adversely affected. Results of Operations - --------------------- The following table summarizes the Company's performance for the third quarter and first nine months of fiscal 2004 as compared to the results for the same periods in fiscal 2003: Increase (Decrease) Percent vs. 2003 Results: - ---------------------------------------------
Third Quarter Nine Months ------------- ----------- Net sales 0.5% (1.1)% Gross profit (2.8)% (2.3)% Selling and administrative expenses (1.8)% (2.5)% Operating income (6.9)% (1.8)% Income before income taxes (6.3)% (2.9)% Net income (3.0)% (3.2)%
Operating Ratios as a Percent of Net Sales:
Third Quarter Nine Months ----------------- ------------------- 2004 2003 2004 2003 -------- ------- --------- --------- Gross profit 36.5% 37.7% 38.0% 38.5% Selling and administrative expenses 29.8% 30.5% 28.9% 29.3% Operating income 6.7% 7.2% 9.0% 9.1% Income before income taxes 6.8% 7.2% 9.2% 9.4% Net income 4.4% 4.6% 5.8% 5.9%
PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Third Quarter 2004 Compared to Third Quarter 2003 - ------------------------------------------------- Net Sales - --------- The third quarter breakdown of net sales is as follows: Percent Change 2004 vs.
2004 2003 2003 --------- --------- ---------- (In millions, except percentages) Stride Rite Children's Group - Wholesale $30.9 $29.4 5.1% Stride Rite Children's Group - Retail 40.3 38.5 4.5% --------- --------- ---------- Stride Rite Children's Group 71.2 67.9 4.8% Keds 27.6 30.6 (10.0)% Tommy Hilfiger Footwear 25.0 26.5 (5.5)% Sperry Top-Sider 11.8 11.4 3.8% Stride Rite International 7.7 6.5 17.8% Elimination of intercompany sales (2.9) (3.2) N/A --------- --------- ---------- Total net sales $140.4 $139.7 0.5% ====== ====== ======
During the third quarter of fiscal 2004, consolidated net sales increased $0.7 million to $140.4 million, or 0.5% above the sales level achieved in the third quarter of fiscal 2003. Wholesale net revenues decreased 1.3% for the third quarter of 2004, while overall retail sales increased $1.9 million or 4.9% when compared to the same period in the prior year. Unit shipments of current line merchandise for the wholesale brands during the third quarter decreased 5.0% when compared with the same period in 2003. The Company's average first quality wholesale selling price increased 1.9% from the third quarter of 2003. In addition, closeout sales decreased 11.4% during the third quarter of fiscal 2004 as compared to the prior year. Royalty revenues at $1.7 million were 24.6% higher in the third quarter of fiscal 2004 versus the same quarter last year. Net sales of the Stride Rite Children's Group increased 4.8% for the third quarter of fiscal 2004, compared to the same period of fiscal 2003. Sales of the Children's Group to independent retailers increased 5.1% during the third quarter of 2004 as compared to the same quarter last year. This increase was primarily attributable to increased sales of promotional and closeout products as well as fewer returns and allowances. Increased sales of the Children's Group's company-owned retail stores, which were up 4.5% from the same quarter last year contributed to the overall Stride Rite Children's Group sales improvement. Sales at comparable Children's Group retail stores (stores open for 52 weeks in each fiscal year) increased 1.3% during the third fiscal quarter of 2004. The third quarter company-owned retail store sales were somewhat negatively impacted by the later Labor Day holiday this year. At the end of the third quarter of fiscal 2004, the Stride Rite Children's Group operated 243 stores. This is an increase of 13 stores, or 6% from the end of PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the same period in the prior year. Current plans call for the opening of approximately 17 retail stores and the closing of 4 underperforming locations during the 2004 fiscal year. During the third quarter of 2004 the Company opened 3 new stores and had no store closings. Keds sales decreased in the third quarter of fiscal 2004 due primarily to decreased sales of closeouts and promotional products, which is consistent with our strategy to upgrade the brand's positioning. In addition, Grasshopper sales declined. Partially offsetting these declines were increases in sales of the core women's and children's product lines. In particular both the Microstretch(TM) and Microstretch Sport(TM) basic programs continued to be strong performers. The decrease in sales of the Tommy Hilfiger Footwear brand in the third quarter of fiscal 2004 was primarily attributable to a decline in the men's first quality business. Offsetting this decline was the introduction of both the "H" Hilfiger and the Tommy Girl lines, as well as an increase in closeout sales. The increase in the sales of Sperry Top-Sider products during the third quarter of the 2004 fiscal year was primarily attributable to the strong sales of men's performance boat shoes. Sales declines in basic boat shoes and canvas casual product categories along with a decrease in closeout sales in the third quarter offset a portion of the gain. The Stride Rite International division had a 17.8% increase in net sales during the third quarter of fiscal 2004 in comparison to the same period in the prior year. This sales growth was largely the result of the addition of new distributors in Asia and the Middle East as well as continued strong sales of Tommy Hilfiger footwear in Asia and Latin America. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profit - ------------ During the third quarter of fiscal 2004, the Company's gross profit of $51.2 million decreased $1.5 million or 2.8% below the amount recorded in the third quarter of 2003. The lower level of wholesale sales and increased inventory obsolescence costs contributed to the reduction in gross profit. The gross profit rate in the third quarter of fiscal 2004 decreased 1.2 percentage points to 36.5% as compared to the 37.7% rate achieved in the prior year's third quarter. The reduction in gross profit percentage was primarily attributable to increased discounted product sales, certain higher product costs and greater inventory obsolescence costs. These reductions were partially offset by the higher relative percentage of retail sales, fewer closeout sales and decreased returns and allowances. Operating Costs - --------------- During the third quarter of fiscal 2004, selling and administrative expenses were $41.8 million, a decrease of $0.8 million or 1.8% as compared to the third quarter of fiscal 2003. As a percent of sales, operating costs were 29.8% in the third quarter of fiscal 2004 compared to 30.5% in the third quarter of fiscal 2003. This decrease in operating costs as a percentage of net sales resulted from leveraging cost containment with the slight increase in net sales for the 2004 third quarter. Advertising costs were up during the third quarter of fiscal 2004 at 4.5% of net sales versus 4.2% in fiscal 2003. The primary reasons for the third quarter's decrease in operating costs were reductions in bad debt reserves, outbound freight costs, salary related expenses and various other administrative items. Other Income and Taxes - ---------------------- Other income (expense) increased pre-tax income by $0.1 million in both the third quarter of fiscal 2004 and fiscal 2003. Investment income related to the Company's cash equivalents increased $0.1 million in the third fiscal quarter of 2004. Higher average interest rates were sufficient to offset lower average investment balances. Interest expense was flat in the third quarter of fiscal 2004 as compared to the third quarter of fiscal 2003. No short-term borrowings were made during the third quarters of either fiscal year 2004 or 2003. The provision for income taxes decreased $0.4 million in the third quarter of fiscal 2004 as compared to the similar period in fiscal 2003. This decrease was primarily due to the lower pre-tax income amount, combined with a lower effective income tax rate. Our effective tax rate was 34.4% in the third quarter of fiscal 2004 as compared to 36.7% in the third quarter of fiscal 2003. The lower tax rate in the third quarter of fiscal 2004 reflects a decrease in certain state tax accruals that were no longer necessary. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Income - ---------- Net income for the third quarter of fiscal 2004 was $6.2 million, a decrease of $0.2 million, or 3.0% as compared to the same period in the prior year. The drop in gross profit dollars was partially offset by the decrease in operating costs and the lower effective income tax rate and resulted in the decline in the third quarter's net income versus last year. The Company's return on net sales of 4.4% in the third fiscal quarter of 2004 declined versus the 4.6% return on sales recorded for the third fiscal quarter of 2003. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Nine Months of 2004 Compared to the First Nine Months of 2003 - ------------------------------------------------------------------- Net Sales - --------- The first nine months breakdown of net sales is as follows: Percent Change 2004 vs.
2004 2003 2003 ---------------------------------- (In millions, except percentages) Stride Rite Children's Group - Wholesale $76.5 $77.3 (1.1)% Stride Rite Children's Group - Retail 112.5 103.4 8.8% ------- ------- ------- Stride Rite Children's Group 189.0 180.7 4.6% Keds 118.7 136.4 (13.0)% Tommy Hilfiger Footwear 73.9 75.4 (1.9)% Sperry Top-Sider 46.3 44.3 4.5% Stride Rite International 21.4 18.3 17.0% Elimination of intercompany sales (7.8) (8.7) N/A ------- ------- ------ Total net sales $441.5 $446.4 (1.1)% ====== ====== =====
During the first nine months of fiscal 2004, consolidated net sales decreased $4.9 million to $441.5 million, or 1.1% below the sales level recorded in the first nine months of fiscal 2003. Wholesale net revenues decreased 4.2% for the first nine months of 2004, while overall retail sales increased $9.5 million or 9.0% when compared to the same period last year. Unit shipments of current line merchandise for the wholesale brands during the first nine months of 2004 decreased 1.8% when compared to last year's first nine months. The Company's average first quality wholesale selling price declined 1.7% from the first nine months of 2003. In addition, closeout sales decreased 11.8% in the first nine months of fiscal 2004 as compared to the prior year. Royalty revenues at $5.3 million were 12.7% higher in the first nine months of 2004 than in the same period in the prior year. Net sales of the Stride Rite Children's Group increased 4.6% for the first nine months of fiscal 2004, compared to the same period of fiscal 2003. Sales to independent retailers decreased 1.1% during the first nine months of 2004 versus the same period last year. The decrease in sales to independent retailers was principally the result of difficulties during the Spring selling season related to the Footstar bankruptcy and weaknesses with the Munchkin and Tommy Hilfiger Kids product lines caused by the loss of business at certain mid-tier accounts. Partially offsetting these declines were increases in closeout sales and promotional products, as well as a reduction in returns and allowances. As compared to the first nine months of last year, the Children's Group has seen a shift in sales of the Tommy Hilfiger Kids products from the department store channel to the mid-tier channel. Offsetting the decrease in the wholesale side of the division, were the increased sales of the Children's Group's company-owned retail stores, which were up 8.8% during the first nine months of fiscal 2004 versus the same period last year. Sales at comparable Children's Group retail stores (stores open for 52 weeks in each fiscal year) PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS increased 6.4% for the first nine months of fiscal 2004. A major reason for the increase in the comparable store sales results was the addition of a number of newer stores, which have generally recorded better sales performance than many of the more mature stores. Keds sales decreased in the first nine months of fiscal 2004 due in part to continued retailer caution in ordering Keds products, based on poor performance at retail in the comparable period of 2003. In addition, lower sales to the promotional channels and less closeouts further reduced the Keds sales volume. Sales of Grasshoppers, which are included in the Keds results, were also down as compared to the same period last year, due principally to the loss of certain key retailers. Partially offsetting the disappointing performance of their seasonal styles, Keds has experienced strong sales with its core styles, specifically the newly introduced Microstretch(TM) products. The Tommy Hilfiger footwear sales decreased 1.9% during the first nine months of fiscal 2004 due to continued weakness in the men's product category as well as an increase in women's product returns. Offsetting these decreases were higher sales of the women's product and the sales related to the introduction of both the "H" Hilfiger and the Tommy Girl lines. Sales of Sperry Top-Sider products increased 4.5% for the first nine months of fiscal 2004. This increase was primarily the result of strong sales in the men's product lines, particularly in the performance category, as well as increased sales of promotional products. This strong showing was partially offset by weaknesses in the women's line, principally in the canvas category and a reduction in closeout sales. Sales were also adversely affected by the acquisition of Boat U.S. retail operations by West Marine, two key retail accounts for the brand. The Stride Rite International division had a 17.0% increase in net sales for the first nine months of 2004, versus the same period in the prior year. The addition of new distributors of the Company's brands in Asia and the Middle East and increased sales of Tommy Hilfiger and Sperry Top-Sider products in Latin America and Asia were the primary reasons for the increase. Gross Profit - ------------ During the first nine months of fiscal 2004, the Company's gross profit of $167.7 million decreased $4.0 million or 2.3% below the amount recorded during the same period last year. The gross profit rate for the first nine months of fiscal 2004 decreased slightly as compared to the same period last year, 38.0% to 38.5%. The decline in the gross profit percentage versus last year was primarily due to certain product costs, increased inbound freight and inventory obsolescence costs. This was offset somewhat by the gross profit percentage impact of the greater percentage of retail sales. The decrease in the first nine months gross profit was primarily the result of the lower level of wholesale sales during the period and increased inventory and obsolescence costs. The additional gross profit that was generated by the higher levels of retail sales was insufficient to offset the impact from the decline in gross profit resulting from these other factors. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Costs - --------------- Operating expenses for the first nine months of fiscal 2004 were $127.8 million, a decrease of $3.2 million or 2.5% as compared to the same period in fiscal 2003. As a percent to sales, operating costs were 28.9% in the first nine months of fiscal 2004 versus 29.3% in the first nine months of last year. During the first nine months of fiscal 2004, advertising expenses as a percent of net sales were 4.9% versus 5.0% in the same period last year. Advertising spending decreased as well as salary related and other administrative expenses in the first nine months of fiscal 2004. Somewhat offsetting these decreases were higher retail store expenses due to the increased number of company-owned stores. Other Income and Taxes - ---------------------- Other income (expense) increased pre-tax income by $0.9 million in the first nine months of fiscal 2004 and by $1.4 million in the first nine months of fiscal 2003. Investment income in the first nine months of fiscal 2004 was $0.5 million below the same period of fiscal 2003. Comparisons of investment income to last year are negatively impacted by the receipt in fiscal year 2003 of $0.7 million related to Stride Rite's sale of its interest in a joint venture footwear manufacturing facility. Interest expense in the first nine months of fiscal 2004 was slightly below the level recorded in the prior year. There were no short-term borrowings during the first nine months of both fiscal 2004 and 2003. The provision for income taxes decreased $0.4 million in the first nine months of fiscal 2004 as compared to the same period in fiscal 2003. This decrease was primarily due to the lower pre-tax income amount offset slightly by the higher effective income tax rate. During the first nine months of fiscal 2004, the effective tax rate was 37.3% as compared to the 37.1% rate during last year's first nine months. The higher tax rate during the first nine months of fiscal 2004 is the result of fewer tax saving items this year as compared to fiscal 2003. Net Income - ---------- Net income for the first nine months of fiscal 2004 was $25.6 million, a decrease of $0.9 million, or 3.2% below that of the same period in the prior year. Decreased net sales and the resulting reduction in gross profit dollars were offset by lower operating expenses. However, lower other income (expense) combined with our slightly higher effective income tax rate led to the reduction in net income during the first nine months of fiscal 2004 versus the same period last year. The Company's return on net sales of 5.8% in the first nine months of 2004 declined slightly as compared to the 5.9% return on net sales realized in the first nine months of fiscal 2003. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources - ------------------------------- At the end of the third fiscal quarter of 2004, our balance sheet reflected a current ratio of 4.7 to 1 with no debt. Our cash and cash equivalents totaled $84.9 million at August 27, 2004, a decrease of $11.3 million from the total cash and cash equivalents of $96.2 million at the end of the third quarter of fiscal 2003. The Company maintains a $75 million revolving credit facility to fund any seasonal working capital needs. No borrowings under this line of credit were outstanding as of August 27, 2004 or August 29, 2003. The Company's seasonal cash flow patterns typically provide cash from operations during the third quarter of the fiscal year. During the first nine months of fiscal 2004, the Company generated $20.5 million of cash from operations. This positive cash flow was below the $34.6 million cash flow generated during the first nine months of fiscal 2003. The primary reasons for the lower level of cash flow were lower reductions of current liability balances and inventory levels this year versus the first nine months of fiscal 2003. Inventory levels at the end of the third quarter of fiscal 2004 increased $12.0 million, or 17.6% from the levels recorded at the end of the prior year's third quarter. This increase was primarily attributable to the timing of product receipts and the increase in the number of retail stores from the third quarter of 2003. Accounts receivable at August 27, 2004 were $0.4 million or 0.6% higher than the amount at the end of last year's third quarter. Days sales outstanding, which is a measure of the length of the collection period of accounts receivable, was 43 days and 42 days at the end of the third fiscal quarters of both 2004 and 2003, respectively. Accounts payable at the end of the third quarter of fiscal 2004 increased $7.3 million from the level recorded at the end of the prior year's third quarter. This difference was primarily the result of an increase in inventory in-transit at the end of the third quarter of fiscal 2004. During the first fiscal quarter of 2004, the Company contributed $1.0 million to its defined benefit pension plan. The Company does not intend to make any additional contributions to its defined benefit pension plan this year. Other current assets at August 27, 2004 were $10.1 million or $4.8 million higher than the amount at the end of last year's third quarter. This difference was primarily caused by an increase in prepaid pension expense, largely due to the $6.0 million of pension contributions that have occurred since the end of last year's third quarter. Additions to property and equipment totaled $5.8 million in the first nine months of 2004, which was greater than the $5.3 million in the first nine months of 2003. During the first nine months of fiscal 2004, as compared to the same period last year, the Company increased its spending on information technology, e-commerce and new retail stores with lower spending on store renovations and at its distribution centers. Funding of our capital expenditures was provided from internal sources. We expect that all capital purchases during fiscal 2004 will be provided for internally, however if business conditions change and do not allow for internal funding, we will re-evaluate our plans. PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During the first nine months of fiscal 2004 we returned $37.1 million to shareholders through share repurchases and cash dividends. We spent $8.8 million in the third quarter to repurchase 847,300 common shares under our share repurchase program. As of August 27, 2004, 5.5 million shares were remaining on our share repurchase authorization. On June 24, 2004 the Company's Board of Directors increased the authorization under our on-going share repurchase program by 5 million shares. Under the terms of our credit agreement, as amended on July 13, 2004, we are not allowed to make distributions to stockholders in excess of $50 million during fiscal year 2004. The previous limit on distribution to stockholders during the 2004 fiscal year was $40 million. We expect to continue to purchase shares opportunistically through the remainder of the fiscal year. At the end of the third quarter of fiscal 2004, there were no borrowings outstanding under the Company's $75.0 million revolving credit facility. This is consistent with the third quarter of fiscal 2003. We did not utilize any available credit under the revolving credit line during the first nine months of fiscal 2004. Borrowings were not required during this time primarily because we entered the year with no outstanding debt and a significant cash and cash equivalents balance. As of August 27 2004, letters of credit totaling $25.1 million were outstanding for the purchase of inventories. All letters of credit generally expire within one year. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. (b) Changes in internal controls. None. PART II - OTHER INFORMATION THE STRIDE RITE CORPORATION ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES Our repurchases of equity securities for the third quarter of fiscal 2004 were as follows:
Total Number Of Maximum Shares Number Purchased Of Shares As Part That May Total Average Of Yet Be Number Price Publicly Purchased Of Paid Announced Under The Shares Per Plans Or Plans Or Period Purchased Share Programs Programs - --------------------------------------------------------------------------------- May 29, 2004 - June 25, 2004 - - - 6,394,700 June 26, 2004 - July 30, 2004 490,200 $10.55 490,200 5,904,500 July 31, 2004 - August 27, 2004 357,100 $10.14 357,100 5,547,400 --------- ------ --------- --------- Total 847,300 $10.38 847,300 5,547,400 ========= ====== ========= =========
In September 2002, the Board of Directors authorized a stock repurchase program allowing the repurchase of up to five million shares of our outstanding common stock. In June 2004, the Board of Directors increased the authorization under the existing stock repurchase program by 5 million shares. Under the authorization, the Company can repurchase shares in the open market or through privately negotiated transactions. The repurchase program does not have an expiration date. All shares repurchased during the period covered by this report were purchased under a publicly announced plan. PART II - OTHER INFORMATION THE STRIDE RITE CORPORATION ITEM 6. EXHIBITS (a) Exhibits. The following exhibits are contained in this report: --------- Exhibit Number Description -------------- ----------- 10.1 Second Amendment to Revolving Credit Agreement between the Registrant and Fleet National Bank, Bank of America National Association, The Bank of New York and SunTrust Bank dated as of July 13, 2004. 31.1 Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002. THE STRIDE RITE CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized. THE STRIDE RITE CORPORATION (Registrant) Date: October 7, 2004 By: /s/ Frank A. Caruso --------------------------- Frank A. Caruso Chief Financial Officer EX-10 2 exhibit101.txt SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT Exhibit 10.1 SECOND AMENDMENT to REVOLVING CREDIT AGREEMENT THIS AMENDMENT AGREEMENT (this "Second Amendment"), dated as of July 13, 2004, to become effective as of the Amendment Effective Date as defined in Section 4 hereof upon satisfaction of the conditions specified therein, is by and among The Stride Rite Corporation, a Massachusetts corporation (the "Borrower"), Fleet National Bank ("Fleet"), Bank of America National Association ("BOA"), The Bank of New York ("BONY"), and SunTrust Bank ("ST") (Fleet, BOA, BONY and ST being referred to, collectively, as the "Banks"), Fleet as Administrative Agent for the Banks, BOA, BONY and ST as Documentation Agents. Whereas, the Borrower, the Banks and the Administrative Agent are parties to that certain Revolving Credit Agreement dated as of January 19, 2000, as amended by a First Amendment dated as of October 31, 2002 (as so amended, the "Credit Agreement"), pursuant to which the Banks, upon the terms and conditions specified therein, have agreed to make Loans to the Borrower; Whereas, the Borrower has requested that the Banks and the Administrative Agent agree, and the Banks and the Administrative Agent have agreed, on the terms and subject to the conditions set forth herein, to amend certain of the provisions of the Credit Agreement; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Defined Terms. Capitalized terms which are used herein without definition and which are defined in the Credit Agreement shall have the same meanings herein as in the Credit Agreement. 2. Amendments to the Credit Agreement. (a) "Banc of America Securities LLC" shall be substituted for all references in the Credit Agreement to "Fleet Securities, Inc." as the Arranger. (b) Section 8.4 of the Credit Agreement is amended in its entirety to read as follows: "8.4. Distributions. The Borrower will not make any Distributions; provided that the Borrower may make distributions ("Permitted Distributions") which satisfy the following tests: (i) the aggregate amount of such Distribution and all other Distributions during the same fiscal year of the Borrower does not exceed (x) for fiscal year 2004, $50,000,000, and (y), for any fiscal year thereafter, $40,000,000, and (ii) at the time of such Distribution, no Default or Event of Default has occurred and is continuing or would exist after giving effect to such Distribution." 3. Representations and Warranties. The Borrower hereby represents and warrants to the Banks that: (a) The execution and delivery by the Borrower, and the performance by the Borrower, of its obligations and agreements under this Second Amendment, and the Credit Agreement as amended hereby, (i) are within the corporate authority of the Borrower, have been duly authorized by all necessary corporate proceedings, (ii) do not and will not contravene any requirement of law applicable to or binding upon the Borrower or any of its Significant Subsidiaries, nor any contractual obligation of the Borrower or any of its Significant Subsidiaries, and (iii) will not result in or require the creation or imposition of any lien on any of the Borrower's or its Significant Subsidiaries' respective properties or revenues, except in the case of clauses (ii) and (iii) any violations and/or liens which in the aggregate would not be reasonably likely to have a material adverse effect on the business or financial condition of the Borrower or any of its Significant Subsidiaries and would not be reasonably likely to have a material adverse effect on the ability of the Borrower to perform its obligations under the Credit Agreement and the Notes. (b) This Second Amendment and the Credit Agreement as amended hereby constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (c) The representations and warranties of the Borrower contained in the Credit Agreement, as amended hereby, are true and correct on the date hereof (except to the extent of changes resulting from transactions contemplated or permitted by the Credit Agreement and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and except to the extent that such representations and warranties relate expressly to an earlier date); and no Default or Event of Default has occurred and is continuing, or will occur after execution and delivery by the Borrower of this Second Amendment. 4. Effectiveness. This Second Amendment shall be deemed to be effective as of the date the following conditions precedent are satisfied: (a) The Administrative Agent shall have received counterparts of this Second Amendment signed by the Borrower and the Majority Banks. (b) The Borrower shall have paid the reasonable legal fees and disbursements of Bingham McCutchen LLP, as counsel to the Administrative Agent and the Banks, in connection with this Second Amendment (for which an invoice shall have been presented). (c) The Administrative Agent shall have received copies of such certificates and other documents as the Administrative Agent may reasonably request, and such documents and all legal matters in connection with this Second Amendment shall be satisfactory in form and substance to the Administrative Agent and its counsel. 5. Miscellaneous Provisions. (a) Except as otherwise expressly provided by this Second Amendment, all of the terms, conditions and provisions of the Credit Agreement shall remain the same; and the Credit Agreement as amended hereby shall continue in full force and effect. (b) This Second Amendment is intended to take effect as an instrument executed under seal and shall be construed according to and governed by the laws (excluding the laws applicable to conflicts or choice of law) of the Commonwealth of Massachusetts. (c) This Second Amendment may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. In making proof of this Second Amendment, it shall not be necessary to produce or account for more than one counterpart signed by the Borrower and the Majority Banks. IN WITNESS WHEREOF, the undersigned parties have caused this Amendment Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. THE STRIDE RITE CORPORATION By: /s/ Frank A. Caruso -------------------------------------- Name: Frank A. Caruso Title: C.F.O. FLEET NATIONAL BANK, individually and as Administrative Agent By: /s/ Casey Cosgrove --------------------------------------- Name: Casey Cosgrove Title: Vice President BANK OF AMERICA NATIONAL ASSOCIATION individually and as Documentation Agent By: /s/ Casey Cosgrove -------------------------------------- Name: Casey Cosgrove Title: Vice President SUNTRUST BANK individually and as Documentation Agent By: /s/ E. Donald Besch, Jr. -------------------------------------- Name: E. Donald Besch, Jr. Title: Managing Director THE BANK OF NEW YORK individually and as Documentation Agent By: /s/ Johna M. Fidanza -------------------------------------- Name: Johna M. Fidanza Title: Vice President EX-31 3 exhibit311.txt CERTIFICATION OF CHAIRMAN AND CEO Exhibit 31.1 I, David M. Chamberlain, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the period ending August 27, 2004 of The Stride Rite Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 7, 2004 /s/ David M. Chamberlain --------------- --------------------------------------- David M. Chamberlain, Chairman and CEO EX-31 4 exhibit312.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 I, Frank A. Caruso, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the period ending August 27, 2004 of The Stride Rite Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 7, 2004 /s/ Frank A. Caruso --------------- --------------------------------------- Frank A. Caruso, Chief Financial Officer EX-32 5 exhibit321.txt CERTIFICATION OF CHAIRMAN AND CEO Exhibit 32.1 The undersigned officer of The Stride Rite Corporation (the "Company") hereby certifies that the Company's quarterly report on Form 10-Q for the quarterly period ended August 27, 2004 (the "Report"), as filed with the Securities and Exchange Commission of the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be a part of the Report or "filed" for any purpose whatsoever. Date: October 7, 2004 Name: /s/ David M. Chamberlain ------------------ ------------------------------------ Title: Chairman and CEO ----------------------------------- EX-32 6 exhibit322.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 32.2 The undersigned officer of The Stride Rite Corporation (the "Company") hereby certifies that the Company's quarterly report on Form 10-Q for the quarterly period ended August 27, 2004 (the "Report"), as filed with the Securities and Exchange Commission of the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be a part of the Report or "filed" for any purpose whatsoever. Date: October 7, 2004 Name: /s/ Frank A. Caruso ------------------------ ------------------------------------ Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----