MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION (Continued)

A substantial portion of inventory sourced from foreign countries is purchased in United States dollars and, accordingly, is not subject to exchange rate fluctuations. However, where the purchase price is to be paid in a foreign currency, the Company enters into foreign exchange contracts or option contracts, with maturity periods normally less than one year, to reduce its exposure to foreign exchange risk. The level of outstanding contracts during the year is dependent on the seasonality of the Company’s business and demand for footwear from various locations throughout the world. The changes in market value of foreign exchange contracts have a high correlation to the price changes in the currency of the related hedged transactions. The potential loss in fair value of the Company’s net currency positions at February 3, 2001 resulting from a hypothetical 10% adverse change in all foreign currency exchange rates would not be material.

Assets and liabilities outside the United States are primarily located in Canada and Hong Kong. The Company’s investments in foreign subsidiaries with a functional currency other than the United States dollar are generally considered long-term, and thus are not hedged. The net investment in foreign subsidiaries translated into dollars using the year-end exchange rates was approximately $36 million at February 3, 2001.The potential loss in fair value resulting from a hypothetical 10% adverse change in foreign exchange rates would be approximately $3.6 million. Any loss in fair value would be reflected as a cumulative translation adjustment in Other Comprehensive Income and would not impact earnings.

INTEREST RATES

The Company’s financing arrangements include both fixed and variable rate debt in which changes in interest rates will impact the fixed and variable rate debt differently. A change in the interest rate on fixed rate debt will only impact the fair value of the debt, whereas a change in the interest rates on variable rate debt will impact interest expense and cash flows. The Company had no interest rate derivative instruments outstanding at year-end and has not elected to enter into derivative instruments based on cost/ benefit considerations.

Under the revolving bank Credit Agreement, the Company’s only variable rate debt, outstanding borrowings as of February 3, 2001 totaled $66.5 million. A hypothetical 10% adverse change in interest rates on the average outstanding borrowings during fiscal 2000 would not be material to the Company’s net earnings and cash flows.

At February 3, 2001, the fair value of the Company’s long-term debt is estimated at approximately $157 million, based upon the borrowing rate currently available to the Company for financing arrangements with similar terms and maturities. Market risk is viewed as the potential change in fair value of the Company’s debt resulting from a hypothetical 10% adverse change in interest rates and would be approximately $4 million at February 3, 2001.

ENVIRONMENTAL MATTERS

The Company is involved in environmental remediation and ongoing maintenance at several sites, including its closed New York tannery and its owned facility in Colorado. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain landfills from the sale or disposal of solvents and other by-products from the closed tannery. While the Company currently operates no domestic manufacturing facilities, prior operations included numerous manufacturing and other facilities for which the Company may have responsibility under various environmental laws for the remediation of conditions that may be identified in the future. In fiscal 2000, a class-action lawsuit was filed against the Company related to the Colorado site. The Company does not believe that the ultimate outcome of this lawsuit will have a materially adverse effect on its results of operations or financial condition. At February 3, 2001, the accrued environmental liabilities for all sites total approximately $5.3 million. See Note 12 to the consolidated financial statements for a further description of specific properties.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected as they are subject to various risks and uncertainties. These include general economic conditions, competition, consumer apparel and footwear trends, and political and economic conditions in Brazil and China, which are significant footwear sourcing countries. These factors are listed and further discussed in the Company’s Annual Report on Form 10-K.