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Exhibit Index
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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 28, 1998
_____ 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.)
of 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
Title of each class on 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 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 ____
As of October 6, 1998, 46,427,853 shares of the Registrant's common
stock, $.25 par value, and the accompanying Preferred Stock Purchase Rights were
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
August 28, August 29,
1998 November 28, 1997
(Unaudited) 1997 (Unaudited)
Assets
Current Assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 22,177 $ 41,663 $ 7,606
Short-term investments - 9,417 44,504
Accounts and notes receivable, net 101,796 51,708 85,893
Inventories 108,909 134,728 116,012
Deferred income taxes and
prepaid expenses 33,247 34,135 35,633
-------- ------- -------
Total current assets 266,129 271,651 289,648
Property and equipment, net 56,498 55,395 54,016
Other assets 19,953 16,872 18,791
-------- -------- --------
Total assets $342,580 $343,918 $362,455
======== ======== ========
</TABLE>
Theaccompanying notes are an integral part of the condensed
consolidated financial statements.
2
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
August 28, 1998 August 29, 1997
November 28,
(Unaudited) 1997 (Unaudited)
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of
long-term debt - - $ 833
Short-term debt - - 9,700
<S> <C> <C> <C>
Accounts payable $ 25,375 $ 31,748 20,567
Income taxes payable 24,384 21,445 27,069
Accrued expenses and other
liabilities 29,327 42,195 46,361
-------- -------- --------
Total current liabilities 79,086 95,388 104,530
Deferred income taxes 6,504 6,504 8,796
Stockholders' Equity:
Preferred stock, $1.00 par value
Shares authorized - 1,000,000
Shares issued - none - - -
Common stock, $.25 par value
Shares authorized - 135,000,000
Shares issued - 56,946,544 14,237 14,237 14,237
Capital in excess of par value 21,916 22,289 22,643
Retained earnings 345,973 326,292 328,263
Less cost of 10,051,557 shares of
common stock held in treasury
(9,630,600 on November 28, 1997
and 9,228,150 on August 29, 1997) (125,136) (120,792) (116,014)
--------- --------- ---------
Total stockholders' equity 256,990 242,026 249,129
--------- --------- --------
Total liabilities and
stockholders' equity $342,580 $343,918 $362,455
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the condensed consolidated financial
statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the periods ended August 28, 1998 and August 29, 1997
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
August 28, August 29, August 28, August 29,
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $168,516 $144,463 $440,677 $417,872
-
Cost of sales 105,772 90,419 279,820 266,555
Selling and
administrative expenses 42,973 41,632 122,151 121,996
------ ------ - ------- -------
Operating income 19,771 12,412 38,706 29,321
Other income(expense):
Interest income 1,022 1,111 2,795 2,954
Interest expense (551) (70) (1,494) (151)
Other, net 64 (561) 2,343 (1,742)
-- ----- ----- -------
535 480 3,644 1,061
--- ----- ----- -----
Income before income taxes 20,306 12,892 42,350 30,382
Provision for income taxes 7,540 4,706 15,587 10,999
----- ------- ------ ------
Net income $ 12,766 $ 8,186 $ 26,763 $ 19,383
======== ======== = ======== ========
Net income per common share:
Diluted $ .27 $ .17 $ .56 $ .39
======== ======== = ======== ========
Basic $ .27 $ .17 $ .57 $ .40
======== ======== = ======== ========
Dividends per common share $ .05 $ .05 $ .15 $ .15
======== ======== = ======== ========
Average common shares used in
per share computations:
Diluted 47,707 48,675 47,647 49,287
====== ====== ======= ======
Basic 47,261 48,220 47,275 48,863
====== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements
4
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended August 28, 1998 and August 29, 1997
(Dollars in Thousands)
<TABLE>
August 28, August 29,
1998 1997
------------ ------------
Cash was provided from (used for) Operations:
<S> <C> <C>
Net income $26,763 $19,383
Adjustments to reconcile to net cash provided
from (used for)operations:
Depreciation and amortization 7,054 7,880
Deferred income taxes, net 869 477
Compensation expense related to executive stock plans 248 443
Equity in loss (income) of affiliate (925) 400
Loss(gain)on disposals of property and equipment (3,255) 717
Changes in:
Accounts and notes receivable (50,088) (41,027)
Inventories 25,819 3,075
Prepaid expenses 17 4,706
Accounts payable, income taxes, accrued expenses
and other current liabilities (15,134) 430
-------- ---
Net cash used for operations (8,632) (3,516)
-------- -------
Investments:
Short-term investments 9,417 (9,893)
Additions to property and equipment (13,045) (9,759)
Proceeds from sales of property and equipment 8,342 259
Purchase of noncurrent marketable securities (1,666) (2,464)
Increase in other assets (688) (1,605)
------- -------
Net cash provided from (used for) investments 2,360 (23,462)
------- --------
Financing:
Proceeds from sale of stock under stock plans 1,642 536
Cash dividends paid (7,082) (7,364)
Repurchase of common stock (7,774) (25,557)
Short-term debt - 9,700
-------- --------
Net cash used for financing (13,214) (22,685)
-------- --------
Net decrease in cash and cash equivalents (19,486) (49,663)
Cash and cash equivalents at beginning of period 41,663 57,269
------- -------
Cash and cash equivalents at end of period $22,177 $ 7,606
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements
5
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
The financial information included in this Form 10-Q of The Stride Rite
Corporation (the "Company") for the periods ended August 28, 1998 and August 29,
1997 is unaudited and subject to year-end audit adjustments. 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 nine-month period ended August 28, 1998 are not necessarily
indicative of the results of operations that may be expected for the complete
fiscal year. The year-end condensed balance sheet data was derived from the
Company's audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. For additional
information, reference is made to the Company's financial statements (and the
notes thereto) included in the Company's Form 10-K for the fiscal year ended
November 28, 1997. Certain reclassifications have been made to the 1997
condensed consolidated financial statements to conform to the fiscal 1998
presentation.
NOTE 2
During the first nine months of fiscal 1998, interest payments amounted
to $1,264,000 ($140,000 in 1997). For the first nine months of 1998, payments
for income taxes totaled $11,778,000 ($2,283,000 in 1997).
NOTE 3
Earnings per share information has been restated to conform to SFAS No.
128, "Earnings per Share" which was adopted in the first quarter 1998. 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 third quarter and nine month periods
ended August 28, 1998 and August 29, 1997.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
--------------------------------- -------------------------
Aug. 28, Aug. 29, Aug. 28, Aug. 29,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $12,766 $8,186 $26,763 $19,383
Earnings per common share:
Basic $ .27 $ .17 $ .57 $ .40
Diluted .27 .17 .56 .39
Weighted average common shares
outstanding (basic) 47,261 48,220 47,275 48,863
Dilutive effect of stock options 446 455 372 424
------ ------ ------ ------
Weighted average common shares
outstanding (diluted) 47,707 48,675 47,647 49,287
====== ====== ====== ======
</TABLE>
6
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - continued...
Earnings per share information, restated to conform to SFAS No. 128, for the
three years ended November 28, 1997, is as follows:
1997 1996 1995
----------- ----------- -------------
Basic net income per share $.41 $.05 $(.17)
Diluted net income per share .40 .05 (.17)
NOTE 4
On March 31, 1998, the Company sold two buildings and adjoining land in
Boston which was formerly used as a distribution center for the Company's
wholly-owned subsidiary, Stride Rite Children's Group, Inc. The Boston facility
was closed in December 1997 following the transfer of operations to a new
distribution center in Huntington, Indiana. The transaction resulted in a
one-time pre-tax gain of $3.8 million ($.05 per share, net of income taxes) in
the second quarter of fiscal 1998.
NOTE 5
On October 9, 1998, the Company announced that it was ending its
efforts to market a line of footwear under the "Levi's" brand. The Company
entered into the license agreement with Levi Strauss & Co. in April 1997 and
shipped its first products to retailers in July 1998. The Company has agreed
with Levi Strauss & Co. to end the license agreement after the Fall 1998 season.
In the fourth quarter of fiscal 1998, the Company will record a one-time,
pre-tax, charge of approximately $5 million ($.07 per share) to cover estimated
losses on the disposal of footwear inventory bearing the Levi's brand and
severance costs associated with this decision.
7
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Item 2 are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and are thus prospective. The words "expect", "estimate", and other
similar expressions which do not relate solely to historical matters identify
forward-looking statements. Such forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
differ materially from future resutls expressed, projected or implied by such
forward-looking statements. Readers are referred to Exhibit 99 to the Company's
Quarterly Report on Form 10-Q for the fiscal period ended March 1, 1996 for a
discussion of certain such factors. The Company disclaims any obligation to
update such forward-looking statements.
Results of Operations
The following table summarizes the Company's performance for the third
quarter and first nine months of fiscal 1998 as compared to the results for the
same periods in fiscal 1997:
Increase (Decrease) Percent vs. 1997 Results:
<TABLE>
<CAPTION>
Third Quarter Nine Months
<S> <C> <C>
Net sales 16.6% 5.5%
Gross profit 16.1% 6.3%
Selling and administrative expenses 3.2% 0.1%
Operating income 59.3% 32.0%
Income before income taxes 57.5% 39.4%
Net income 55.9% 38.1%
</TABLE>
Operating Ratios as a Percentage to Net Sales:
<TABLE>
<CAPTION>
Third Quarter Nine Months
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Gross profit 37.2% 37.4% 36.5% 36.2%
Selling and administrative expenses 25.5% 28.8% 27.7% 29.2%
Operating income 11.7% 8.6% 8.8% 7.0%
Income before income taxes 12.1% 8.9% 9.6% 7.3%
Net income 7.6% 5.7% 6.1% 4.6%
</TABLE>
8
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Net Sales
Net sales in the third quarter of fiscal 1998 increased $24.1 million or
16.6% over the net sales level for the same period of fiscal 1997. For the first
nine months of fiscal 1998, consolidated net sales were above the same period of
fiscal 1997 by $22.8 million or 5.5%. Revenues from the Company's wholesale
division increased 5.8% during the first nine months of fiscal 1998, and sales
of the Company's retail division increased 3.3% during the same period over the
comparable period in fiscal 1997. In the third quarter of fiscal 1998, wholesale
division revenues increased 19.3% and retail sales increased 2.9% from the same
period in fiscal 1997. With respect to the wholesale division of the Company,
unit shipments of current line merchandise during the first nine months of 1998
were 4.5% above the comparable period in fiscal 1997. During the first nine
months of fiscal 1998 sales of discontinued products were 64% higher than the
comparable period in fiscal 1997 with much of the increase due to the disposal
of Tommy Hilfiger inventory. Excluding the impact of product mix changes, net
sales in the first nine months of fiscal 1998 was decreased by approximately
$4.6 million due to selling price deflation.
In the third quarter of fiscal 1998, Keds, the Company's largest
division, accounted for a significant portion of the increased revenues in the
Company's wholesale businesses. Keds division sales in the third quarter of 1998
increased 49% from 1997. Sales of Keds' new "basics" offerings, including the
Ready to Wear and Relaxed Fit collections, more than offset the continuing sales
decline of the Champion style. For the first nine months, Keds' net sales
increased 16% compared to 1997, with the sales of current line merchandise
higher by 19% and sales of discontinued styles down 38% from the same period of
1997.
The Stride Rite Children's Group achieved a 6% sales increase in the
third quarter of fiscal 1998 with a 3% increase in retail sales and a 8%
increase in sales to independent accounts for the same period in fiscal 1997.
The Children's Group sales in the third quarter of 1998 included $1.6 million in
revenue related to the initial shipments of the Nine West Kids product line.
During the third quarter of 1998, sales at comparable company-owned retail
stores increased 3.6% from 1997. For the first nine months of fiscal 1998, sales
of the Stride Rite Children's Group increased 4% from the same period in 1997,
with sales to independent accounts up 5% and sales at company-owned retail
stores up 3% from the 1997 period. Sales at comparable company-owned retail
stores increased 5.7% during the first nine months of 1998. At the end of the
third quarter of fiscal 1998, the Company operated 198 stores, down 3% from the
204 stores open at the end of the third quarter in fiscal 1997.
9
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Sales of Tommy Hilfiger products in the third quarter of 1998 decreased
6% as compared to the same period in 1997. The launch of the Tommy Hilfiger
women's product line partially offset a 45% sales decline in the Tommy men's
business. Sales of the Tommy Hilfiger men's product line continue to be
adversely affected by the difficult market conditions for athletic footwear and
the brand's disappointing results in the Fall 1997 selling season. Sales for the
first nine months of fiscal 1998 for the Tommy Hilfiger division decreased 1% as
compared to the same period in 1997 as revenues associated with the Tommy
Hilfiger women's launch and the liquidation of discontinued men's styles offset
a 37% decrease in the sales of current line merchandise for the Tommy men's
business. While the comparison to 1997 was difficult, as sales in 1997 included
heavy shipments to retailers to support the initial launch of the brand, the
slowdown in the overall athletic market, particularly men's, continued to have a
negative effect on Tommy Hilfiger division sales in 1998. Additionally, product
line changes away from higher priced basketball styles and more competitive
market conditions resulted in an average selling price in 1998 which was 23%
lower than the first nine months of 1997.
Compared to the same period in fiscal 1997, sales of the Sperry
Top-Sider division increased 6% in the third quarter of fiscal 1998. However,
Sperry sales declined 9% for the first nine months of fiscal 1998 as the brand
experienced heavy cancellations of future orders and soft reorders due to
increased competition in the men's boat shoe market during the Spring season of
1998. International revenues in the third quarter of 1998 were below the
comparable period of 1997 by $1.9 million or 19%, which was principally the
result of a restructuring of the Company's international operations that
converted distribution arrangements to license agreements in certain countries.
For the first nine months of 1998, International revenues declined $5.6 million
or 18% from the comparable period of fiscal 1997.
During the third quarter of fiscal 1998 the Company began shipping
Levi's men's and boys' products under a license agreement with Levi Strauss &
Co. Sales of Levi's footwear for the third quarter of 1998 were $4 million,
significantly below the Company's expectations. After evaluating the initial
retail results and assessing the general strength of the Levi's brand and the
current competitive conditions in the young men's footwear market, the Company
and Levi Strauss & Co. mutually agreed to discontinue its line of footwear under
the Levi's brand after the Fall 1998 season. The Company will record a one-time,
pre-tax charge of approximately $5 million ($.07 per share) in the fourth
quarter of fiscal 1998 to cover estimated losses on the disposal of inventory
and severance costs associated with this decision.
10
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Gross Profit
During the first nine months of fiscal 1998, gross profit increased $9.5
million, a gain of 6.3% compared to the net sales increase of 5.5% for the same
period. The consolidated gross profit percent for the first nine months of 1998
increased 0.3 percentage points, finishing at 36.5% in 1998 compared to 36.2% in
1997. The gross profit performance in the third quarter of 1998 was slightly
lower than the same period in fiscal 1997, 37.2% in 1998 compared to 37.4% in
the 1997 third quarter. The Company's LIFO provision had a favorable impact on
gross profit comparisons for the first nine months of 1998, with LIFO increasing
gross profit by $2.7 million (0.6% of net sales) in 1998 compared to $1.4
million (0.3% of net sales) in 1997. The primary reason for the favorable LIFO
impact was the reduction of certain manufactured inventory quantities which were
valued at costs prevailing in prior years. Gross profit performance in the first
nine months of 1998 was impacted negatively by increased inventory obsolescence
charges and sales allowances, particularly in the Tommy Hilfiger division, and
higher retail markdowns. The Company's nine month gross profit performance in
1998 was also negatively affected by $1.7 million in start-up costs related to
new licensed product lines, all of which began shipping in the third quarter of
this year.
In the third quarter, the LIFO provision had a favorable impact on gross
profit comparisons, with LIFO increasing gross profit by $1.2 million (0.7% of
net sales) in 1998 compared to an increase of $1.3 million (0.9% of net sales)
in 1997. The favorable sales results at Keds, which has a higher gross profit
rate than the Company's other wholesale businesses, in the third quarter of 1998
helped the Company's overall gross profit performance in the period. The gross
profit percent in the third quarter of 1998 was reduced by 0.9 percentage points
due to the accrual of sales allowances related to the Levi's product line.
Operating Costs
Selling and administrative expenses in the first nine months of fiscal
1998 were flat with the comparable period of the prior year, despite the overall
increase in net sales of 5.5% during the same period. Operating costs as a
percentage of sales decreased from last year by 1.5 percentage points in the
first nine months (27.7% in 1998 compared to 29.2% in 1997). The operating cost
comparison between the 1998 and 1997 third quarter periods was also favorable,
as expenses increased by only 3.2% compared to the sales gain of 16.6%. In the
third quarter of 1998, the relationship of selling and administrative expenses
to net sales declined by 3.3 percentage points as compared to the comparable
period of 1997. Operating costs in the first nine months of 1998 included $3
million of product development and other selling and administrative costs
related to the launch of the Levi's, Tommy Hilfiger women's and Nine West Kids
product lines which began shipping in the third quarter of 1998.
11
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Advertising costs increased by $4.2 million or 18% in the first nine
months of fiscal 1998, principally related to the Keds 1998 national television
campaign supporting the introduction of the Ready to Wear and Relaxed Fit
collections. As a percentage of net sales, advertising expense represented 6.3%
of sales in the first nine months of 1998, which was higher than the spending
rate of 5.7% of sales in the comparable period in 1997. Offsetting these
spending increases was a $3.1 million decrease in distribution expenses due to
efficiencies at the Company's Kentucky distribution center and the lower costs
of the new Huntington, Indiana facility which commenced operations in October
1997. Expenses in the 1997 nine month period had included $1.4 million of
start-up costs related to the new Huntington, Indiana facility. Distribution
expenses represented 1.8% of net sales in the first nine months of 1998 compared
to 2.6% in 1997. In addition, the elimination of certain International division
overhead costs of $2.3 million and various other administrative expense
decreases contributed to the overall reduction in operating expenses in fiscal
1998.
Other Income and Taxes
Other income (expense) increased pre-tax income by $3.6 million in the
first nine months of fiscal 1998 compared to an increase of $1.1 million in the
comparable period of 1997. In the first nine months of fiscal 1998, other income
included a pre-tax gain of $3.8 million from the March 1998 sale of real estate
formerly used as a distribution center for the Company's wholly-owned
subsidiary, Stride Rite Children's Group, Inc. (See Note 4 above). Interest
income in 1998 decreased $0.2 million for the first nine months of 1998 versus
the comparable period in 1997. Interest expense in the first nine months of 1998
increased to $1.5 million compared to $0.2 million in 1997, as the Company
maintained higher borrowings than in 1997 due to increased inventory levels and
cash expenditures related to the Company's share repurchase program. Average
short-term borrowings in the first nine months of 1998 were $30.8 million, up
from the average borrowings of $1.7 million in the comparable period of 1997.
The provision for income taxes increased $4.6 million in the first nine
months of fiscal 1998 as compared to the similar period in fiscal 1997 primarily
due to the higher pre-tax income earned in the 1998 period. The 1998 effective
income tax rate was also higher, 36.8% compared to 36.2% in 1997, due to reduced
tax savings related to a company-owned life insurance program.
12
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Net Income
Net income for the first nine months of fiscal 1998 increased $7.4
million, up 38% from the income earned in the comparable period of fiscal 1997.
The higher net income was the result of increased net sales improved gross
profit performance and the one-time gain from the sale of real estate. The
Company's after-tax return on net sales in the first nine months of fiscal 1998
improved by 1.5 percentage points (6.1% of sales in 1998 compared to 4.6% in
1997).
Liquidity and Capital Resources
At August 28, 1998, the Company's balance sheet reflects a current ratio
of 3.4 to 1 with no long-term debt. The Company's cash and short-term
investments totaled $22.2 million at the end of the latest quarter, below the
cash and investments total of $52.1 million at the end of the third quarter of
fiscal 1997. This lower cash and short-term investment balance was principally
the result of cash used in the company's stock repurchase program and increased
working capital needs. In 1998, other assets also included $10.8 million of
investments in intermediate-term, fixed income instruments compared to $9.6
million in similar investments at the end of third quarter 1997. During the
first nine months of 1998, the Company's operations used $8.6 million of cash,
compared to the $3.5 million of operating cash used in the comparable period in
1997.
At August 28, 1998, receivable and inventory levels totaled $210.7
million, an increase of $8.8 million or 4.4% from the $201.9 million asset
amount at the end of the first nine months of fiscal 1997. Accounts receivable
of $101.8 million at the end of the third quarter of 1998 increased 18.5% from
the 1997 amount, slightly above the sales increase of 16.6% in the quarter as
shipments were heavier than last year in the August timeframe. Inventories were
lower at the end of the first nine months of 1998, down $7.1 million or 6.1%
from the 1997 level, as additional inventory associated with the Tommy Hilfiger
women's and Levi's product lines were more than offset by reduced inventory
balances in the other divisions.
13
<PAGE>
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Additions to property and equipment totaled $13 million in the first
nine months of fiscal 1998 compared to $9.8 million in the same 1997 period.
Capital expenditures in the first nine months of 1998 included a $3.2 million
expenditure related to the Company's purchase of its Huntington, Indiana
distribution facility. A large portion of the Company's capital expenditures
over the next two years will be related to upgrading its information systems in
order to prepare for the Year 2000 transition. During fiscal 1997, the Company
formulated a plan to implement system changes designed to handle the transition
in the Company's systems. In most areas, the Company plans to implement new
computer systems, which will be Year 2000 compliant, as part of its continuing
efforts to upgrade systems capabilities and to effect the transition from
mainframe computer processing to lower cost, midrange computers. As previously
disclosed, the Company expects to spend approximately $15 million in capital
expenditures during the 1997 to 1999 period as part of this effort to upgrade
system capabilities and to deal with the Year 2000 transition. As a further step
to minimize business interruptions related to the Year 2000 issue, the Company
is in the process of executing a plan to remediate certain elements of its
existing business software. The Company anticipates that the installation of its
new information systems and remediation of its remaining information systems in
order to make them Year 2000 compliant will be substantially completed by the
first half of 1999. The cost of this remediation effort, which is expected to be
approximately $1 million, will be charged to expense as the costs are incurred.
Operating expenses in the first nine months of fiscal 1998 included $0.4 million
related to the remediation of these systems.
During the first nine months of fiscal 1998, the Company repurchased
695,000 shares of stock for an aggregate cost of $7.8 million. This brings the
cumulative number of shares repurchased under the authorization approved by the
Company's Board of Directors in October 1997 to 1,220,000 shares, leaving
780,000 shares as of August 28, 1998 authorized for future repurchases. Since
the end of the third quarter, the Company repurchased an additional 488,000
shares for an aggregate cost of $4.3 million further reducing to 292,000 shares
available for repurchase under the current authorization.
The Company uses bank lines of credit to fund seasonal working capital
needs. There were no borrowings outstanding under these arrangements at August
28, 1998 and $9.7 million outstanding at August 29, 1997.
14
<PAGE>
Part II - OTHER INFORMATION
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Description of Exhibit
Exhibit No.
10(i) Amendment to Employment Agreement
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any current reports on Form 8-K
during the most recent quarterly period.
15
<PAGE>
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 9, 1998 By: /s/ John M. Kelliher
--------------------
John M. Kelliher
Chief Financial Officer
16
<PAGE>
THE STRIDE RITE CORPORATION
INDEX TO EXHIBITS
Exhibit No.
Sequential Page No.
10(i) Amendment to Employment Agreement Page 18 of 25
11 Computation of Per Share Earnings Page 24 of 25
27 Financial Data Schedule Page 25
17
<PAGE>
Exhibit 10(i)
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment dated June 5, 1998 (the "Amendment") modifies the
Employment Agreement dated November 4, 1997 (the "Employment Agreement")
between The Stride Rite Corporation (the "Company") and Robert C. Siegel
("Executive").
WHEREAS, Executive has advised the Company that Executive will voluntarily
retire as an officer of the Company effective December 31, 1998; and
WHEREAS, in order to insure a smooth transition, the Board of Directors of the
Company will seek to name Executive's successor prior to the effective date of
Executive's retirement;
NOW THEREFORE, in consideration of the promises contained herein and for other
good and valuable consideration, the sufficiency of which is hereby
acknowledged, Executive and the Company agree as follows:
1. Amendment Controls.
Notwithstanding anything to the contrary contained in the Employment
Agreement, the terms and conditions of this Amendment shall control.
2. Retirement.
Executive will retire and Executive's employment with the Company will
terminate effective December 31, 1998 (the "Retirement Date"). Executive resigns
as of the Retirement Date (or such earlier date as the Board of Directors of the
Company may request as provided below) as Chairman of the Board, President and
Chief Executive Officer of the Company and from any and all offices or other
positions Executive may hold with the Company or any of its related or
affiliated entities. Executive agrees to execute, from time to time, such
documents requested by the Company evidencing such resignation(s).
3. Interim Period
For purposes of this Amendment, the period of June 5, 1998 through
December 31, 1998 is referred to herein as the "Interim Period".
a. Search Committee. The Board of Directors has designated the
members of the Compensation Committee as the Committee responsible to search for
Executive's successor. Executive shall serve as an "ad hoc" member of such
Committee.
b. Employment Period. The "Employment Period" as defined in
Section 2 of the Employment Agreement is extended to the close of business on
December 31, 1998.
c. Early Resignation. In the event the Company names
Executive's successor prior to the expiration of the Interim Period, Executive
agrees to resign at such earlier date as the Board of Directors may request.
Executive's compensation shall continue through the Interim Period as if
Executive had not resigned.
<PAGE>
d. Residence Requirement. Section 8 of the Employment
Agreement is deleted. During the Interim Period, Executive shall work a minimum
of three (3) weeks per month at the Company's headquarters in Lexington, MA or
traveling on Company business. In the event of Early Resignation as provided in
3c, above, after a reasonable transition period, Executive shall only be
required to spend such time in Lexington, MA as the Company deems reasonably
necessary.
e. Travel Reimbursement. During the Interim Period, the
Company shall reimburse Executive for one coach class round trip airfare per
month between Boston, MA and Charleston, SC.
4. Post Interim Period.
After the Interim Period or, if applicable, Executive's earlier
resignation, the following terms shall apply:
a. Stock Options. Any stock options which Executive has been
granted and which are vested on December 31, 1998, may be exercised by Executive
within one (1) year of the Retirement Date. Any shares that are not vested by
December 31, 1998 shall be forfeited. As of June 5, 1998, Executive has been
granted options to purchase a total of 645,000 shares of the Company's common
stock. Of such 645,000 shares: (i) Executive has exercised options to purchase
90,000 shares, (ii) 331,667 shares are currently vested and exercisable; (iii)
on December 13, 1998 an additional 131,666 shares will vest and become
exercisable; and (iv) 91,667 shares shall not be vested and will be forfeited on
the Retirement Date.
b. Bonus. The Compensation Committee of the Board of Directors
shall determine the amount of Fiscal Year 1998 Bonus which may be payable to
Executive pursuant to the provisions of the Company's Annual Incentive
Compensation Plan.
c. Life Insurance. Executive's group term life insurance
policy will end January 30, 1999. Executive may, if eligible, convert to an
individual policy issued by John Hancock at Executive's expense.
d. Perquisites. All perquisites set forth in Section 6 of the
Employment Agreement shall terminate as of the close of business on December 31,
1998 and Executive shall return to the Company the Vehicle leased on behalf of
the Executive.
e. Medical and Dental Benefits. Executive's medical and dental
coverage with CIGNA HealthCare will end on January 30, 1999. Executive may elect
to extend Executive's coverage through COBRA for an additional 18 months as
provided by COBRA law.
f. Disability. Executive's short and long-term disability
coverage will end on December 31, 1998.
<PAGE>
g. 401(k) Employee Savings and Investment Plan. Company
records indicate that Executive is participating in the Employee Savings and
Investment Plan. Executive will receive a package of information from Putnam
Investments within the first two weeks of the month following the effective date
of Executive's retirement. This package will outline Executive's distribution
options for funds currently in Executive's Putnam account. Please be aware that
Executive has 60 days from the date the package is mailed from Putnam to choose
a distribution option. If Executive wishes to receive the information from
Putnam earlier, Executive may call Putnam at 1-800-685-6401 to request a
package.
h. Retirement Income Plan. Company records indicate Executive
has completed at least five years of service with Stride Rite and is therefore
is vested in a pension benefit in accordance with the provisions of The Stride
Rite Retirement Income Plan. Please remember to contact The Stride Rite
Corporation at least three months prior to Executive's retirement date to
initiate benefit payments.
i. Other Benefits. Pursuant to applicable benefit plan terms
and benefit practices, Executive's eligibility to participate in any of the
Company's other employee benefit plans and programs ceases effective on the
Retirement Date. Executive's rights to benefits, if any, are governed by the
terms of those benefit plans and programs.
5. Director/Advisor. Following Executive's resignation as Chairman,
President and CEO of the Company, Executive may continue to serve as a director
of the Company for the balance of the term under which Executive was elected a
director at the Company's annual stockholders meeting held in 1997. Executive
agrees that he will resign as a director of the Company at the request of the
majority of the Board of Directors. In the event Executive resigns at the
request of the Board of Directors prior to December 31, 1999, the Company shall
retain Executive as an advisor for the calendar year 1999. Executive's annual
compensation for acting as an advisor for the Company shall be at an annual rate
of $50,000, payable in equal monthly installments, pro-rated if such advisory
services are provided for less than a full year. The Company shall reimburse
Executive for travel and expenses incurred by Executive in performing his duties
under this Section 5.
6. General Release of Claims
Except for Executive's rights and benefits under the Employment
Agreement, as amended, Executive voluntarily releases and discharges the Company
and its affiliates, subsidiaries, and the predecessors, successors, and assigns
of each of them, and the current and former officers, directors, shareholders,
employees, and agents of each of the foregoing (any and all of which are
referred to as the "Releasees") generally from all charges, complaints, claims,
promises, agreements, causes of action, damages, and debts of any nature
whatsoever, known or unknown ("Claims"), which Executive has, claims to have,
ever had, or ever claimed to have had against the Company. This general release
of Claims includes, without implication of limitation,
<PAGE>
all Claims related to Executive's employment with the Company, the compensation
provided to Executive by the Company, or Executive's activities on behalf of the
Company, including, without implication of limitation, any Claims of breach of
contract, breach of an implied covenant of good faith and fair dealing, tortious
interference with advantageous relations, deceit or any intentional or negligent
misrepresentation, and unlawful discrimination under the common law or any
statute (including, without implication of limitation, Mass. Gen. Laws ch. 151B,
Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss. 2000e, et seq., the Age
Discrimination in Employment Act of 1967, 29 U.S.C. ss.621, et seq., and the
Americans with Disabilities Act of 1990, 42 U.S.C. ss. 12101, et seq.).
Executive also waives any Claim for reinstatement, severance pay, attorney's
fees, or costs.
Except for the Company's rights and benefits under the Employment
Agreement, as amended, the Company voluntarily releases and discharges Executive
generally from all charges, complaints, claims, promises, agreements, causes of
action, damages, and debts of any nature whatsoever, known or unknown
("Claims"), which the Company has, claims to have, ever had, or ever claimed to
have had against Executive. This general release of Claims includes, without
implication of limitation, all Claims related to Executive's employment with the
Company, Executive's activities on behalf of the Company, except any activity
involving deceit or any intentional misrepresentation by Executive. The Company
also waives any Claim for attorney's fees and costs.
Executive and the Company agree that they will not hereafter pursue any
claim against the other by filing a lawsuit in any local, state or federal court
for or on account of anything which has occurred up to the present time, and
Executive shall not seek reinstatement with, or damages of any nature, severance
pay, attorney's fees, or costs from any Releasee as a result of Executive's
employment; provided, however, that nothing in this general release shall be
construed to bar or limit either party's rights to enforce the Employment
Agreement, as amended, or to release Executive's right to indemnification under
and in accordance with applicable by-laws.
Executive and the Company represent to the other that they have not
heretofore assigned or transferred, or purported to assign or transfer, to any
person or entity, any respective Claim against the other or the Releasees or any
portion thereof or interest therein.
7. Confidentiality of Agreement.
Except as may be required by law, Executive agrees to keep the terms of
this Amendment in the strictest confidence and not reveal the terms of this
Amendment to any persons except Executive's immediate family, Executive's
attorney, and Executive's financial advisors, and to them only provided that
they also agree to keep the information completely confidential.
8. Return of Property
All documents, records, materials, software, equipment, and other
physical property, and all copies of any of the foregoing, whether or not
pertaining to Confidential Information, that have come into Executive's
possession or been produced by Executive in connection with Executive's
<PAGE>
employment ("Property") have been and remain the sole property of the Company.
Executive confirms that Executive will return to the Company all Property on or
before the Retirement Date.
9. Nondisparagement
Executive agrees not to take any action or make any statement, written
or oral, to any current or former employee of the Company or to any other person
which disparages or could reasonably be interpreted to be in any way harmful to
the interest of the Company, its officers, directors, management, business
practices, or which disrupts or impairs its normal operations, including actions
or statements that would (a) harm the reputation of the Company with its
customers, suppliers, or the public; or (b) interfere with existing contractual
or employment relationships with customers, suppliers or Company employees.
The Company agrees not to take any action or make any statement,
written or oral, to any third party which disparages or could reasonably be
interpreted to be in any way harmful to the interest of Executive.
10. Notices and Acknowledgments
Executive is advised to consult with an attorney before signing this
Amendment. By signing this Amendment, Executive acknowledges that Executive is
doing so voluntarily. Executive understands that Executive is giving up
Executive's right to bring all possible legal claims against the Company, among
others, including claims relating to Executive's employment and separation from
employment. Executive also acknowledges that Executive is not relying on any
representations by any representative of the Company concerning the meaning of
any aspect of this Amendment.
11. Other Terms
All terms of the Employment Agreement not modified herein shall remain
in full force and effect, including, without limitation, Section 10 and 11 of
the Employment Agreement. The Employment Agreement, as amended by this
Amendment, is the entire agreement between Executive and the Company, and all
previous agreements or promises between Executive and the Company relating to
the subject matter of the Employment Agreement, as amended, are superseded,
null, and void.
The Employment Agreement, as amended, shall be binding upon and shall
inure to the benefit of each of the parties and upon their respective heirs,
administrators, representatives, executors, successors and assigns.
In the event of any dispute, the Employment Agreement, as amended, will
be construed as a whole, will be interpreted in accordance with its fair
meaning, and will not be construed strictly for or against either Executive or
the Company. The law of Massachusetts will govern any dispute about this
Agreement, including any interpretation or enforcement of this Amendment,
without giving effect to the conflict of laws provisions of Massachusetts law.
In the event that any provision or portion of a provision of the Employment
Agreement, as amended, shall be determined to be unenforceable, the remainder
<PAGE>
of this Amendment shall be enforced to the fullest extent possible as if such
provision or portion of a provision were not included. The Employment Agreement,
as amended, may be modified only by a written agreement signed by Executive and
an authorized representative of the Company.
Agreed and accepted this 5th day of June, 1998.
EXECUTIVE THE STRIDE RITE CORPORATION
___/s/ Robert C. Siegel______ By: __/s/ Frank Mori_______________
Robert C. Siegel, an individual Frank Mori, Chairman of the
Compensation Committee of the
Board of Directors
<PAGE>
Exhibit 11
THE STRIDE RITE CORPORATION
COMPUTATION OF PER SHARE EARNINGS
(In Thousands except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 28, August 29, August 28, August 29,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net income applicable to common
<S> <C> <C> <C> <C>
shares $12,766 $ 8,186 $26,763 $19,383
======= ======= ======= =======
Calculation of shares:
Weighted average number of common
shares outstanding(basic) 47,261 48,220 47,275 48,863
Common shares attributable to
assumed exercise of dilutive
stock options and stock
purchase rights using the
treasury stock method 446 455 372 424
------- ------- ------- -------
Average common shares and common
equivalents outstanding during
the period (diluted) 47,707 48,675 47,647 49,287
====== ======= ======= ======
Net income per common share (basic) $ .27 $ .17 $ .57 $ .40
======= ======= ======= =======
Net income per common share (diluted) $ .27 $ .17 $ .56 $ .39
======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The notes to the condensed consolidated financial statements are an integral
part of such statements and the condensed consolidated financial information in
this schedule. Figures below are inthousands, except per-share data.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> NOV-27-1998 NOV-27-1998
<PERIOD-END> AUG-28-1998 AUG-28-1998
<CASH> 22,177 22,177
<SECURITIES> 0 0
<RECEIVABLES> 106,511 106,511
<ALLOWANCES> 4,715 4,715
<INVENTORY> 108,909 108,909
<CURRENT-ASSETS> 266,129 266,129
<PP&E> 90,497 90,497
<DEPRECIATION> 33,999 33,999
<TOTAL-ASSETS> 342,580 342,580
<CURRENT-LIABILITIES> 79,086 79,086
<BONDS> 0 0
0 0
0 0
<COMMON> 14,237 14,237
<OTHER-SE> 242,753 242,753
<TOTAL-LIABILITY-AND-EQUITY> 342,580 342,580
<SALES> 168,516 440,677
<TOTAL-REVENUES> 168,516 440,677
<CGS> 105,772 279,820
<TOTAL-COSTS> 105,772 279,820
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 124 1,010
<INTEREST-EXPENSE> 551 1,494
<INCOME-PRETAX> 20,306 42,350
<INCOME-TAX> 7,540 15,587
<INCOME-CONTINUING> 12,766 26,763
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,766 26,763
<EPS-PRIMARY> .27 .57
<EPS-DILUTED> .27 .56
</TABLE>
